Foreign direct investment (FDI) in the United Kingdom

FDI in Figures

According to the World Investment Report 2022 published by UNCTAD, after the declining trend observed during the last years, FDI inflows increased in 2021, reaching USD 27.6 billion, compared to USD 18.2 billion in 2020 (+51.5%). Equity investment more than doubled, together with cross-border M&A values. Large deals included the merger of Fiat Chrysler Automobiles with Peugeot for USD 22 billion and the purchase of GW Pharmaceuticals by Jazz Pharmaceuticals for USD 6.8 billion (UNCTAD). The stock of FDI in 2021 was about USD 2.6 trillion. The UK was the 14th-largest recipient of global FDI flows, winning three positions from the previous year (UNCTAD). The Brexit process has raised many concerns from some investors about increased trade costs with Europe and the volatility of the pound sterling. The main investment partners of the United Kingdom (in terms of FDI stocks) are the United States, the Netherlands, the British offshore islands (Channel Islands and Isle of Man), Luxembourg and France. In 2021 most FDI flows were directed to the scientific and technical services, information and communication, financial services, petrochemicals, and transportation and storage (ONS). According to the latest figures from OECD, in the first half of 2022 FDI inflows to the UK totalled USD 24.2 billion, compared to USD 29.4 billion recorded in the same period one year earlier.

The UK has amended the legal grounds on which the government can intervene in certain mergers under the Enterprise Act. The changes lowered the jurisdictional thresholds for merger review in three specific sectors: artificial intelligence, cryptographic authentication technology and advanced materials. The UK’s National Security and Investment Act 2021 (“NSIA 2021”) entered into force on 4 January 2022. The new law introduced a distinct investment screening regime for companies seeking to gain control of a company or asset in 17 sectors of the economy deemed relevant to the UK’s national security interests (e.g. energy, robotics, defence, AI, transport, communications, etc.). The process for notification will involve an electronic submission to the Investment Security Unit (“ISU”) at the Department for Business, Energy & Industrial Strategy (“BEIS”), which has the power to impose conditions on transactions and even to unwind or block them. Despite the Brexit process, the British economy is resisting: London remains the financial capital of Europe, home to the European headquarters of almost 60% of companies on the Fortune 500 ranking. Furthermore, Great Britain maintains a strong currency, and the country remains one of the most important European consumer markets. According to the latest The Economist’s Business Environment ranking, the United Kingdom occupies the 15th position out of 82 countries.

What to consider if you invest in the United Kingdom

Strong Points

One of the main strengths of the UK economy in attracting FDI is that its economy is one of the most liberal in Europe and its business environment is extremely favourable to FDI :

• The country is ranked 8th in the World Bank's 2020 Doing Business guide.
• The speed of launching a business is, for example, a very good indicator: setting up a business takes on average 13 days in the United Kingdom while the European average is 32 days. According to this indicator, the country is ranked first in Europe and sixth in the world.
• London has many strengths: it is a world leader in the financial services sector, its banking sector is healthy and robust
• Exports are structurally competitive and diversified
• The legal framework is among the most flexible in the world
• The unemployment rate is one of the lowest in Western economies.

Weak Points

The main weaknesses of the UK's economy are:

• Too much contribution of the financial sector to the GDP
• Lack of investment in infrastructure
• An industrial sector that sometimes suffers from the high level of competitiveness and competition from the many foreign companies in the country
• Productivity growth is very low
• High government and household debt (131% of disposable income), high trade deficit
• GDP per capita has stagnated for some years
• The prospects for improving the British economy are difficult to measure in the post-Brexit context

Government Measures to Motivate or Restrict FDI

The U.K. government attempts to facilitate investment by providing foreign companies with access to largely integrated markets.  Proactive policies foster international investment through administrative efficiency in order to promote innovation and achieve sustainable growth. The UK government is a strong advocate for the rights of all UK companies, regardless of their nationality or that of their owners.

A number of grants and other forms of business support are available in the United Kingdom, particularly in connection with qualifying research and development activities carried out by companies. If the qualifying expenses are incurred by small and medium-sized companies, the tax relief is generally an additional 130% deduction.
100% capital allowances are available to companies that incur capital expenditures for plant or equipment to conduct research and development.
Patent Box relief allows companies with qualifying patent income to be taxed on that income at an effective rate of 10% through a deduction against profits.
There is also a rate relief for businesses moving into an enterprise zone (up to £55,000 per annum for five years). In addition, 100% capital allowances are available for the first year for certain types of expenditure by businesses and companies based in certain enterprise zones.

The UK offers a welcoming environment to foreign investors, with foreign equity ownership restrictions in only a limited number of sectors covered by the Investing Across Sectors indicators. The Industry Act (1975) allows the U.K. government to prohibit the transfer of 30 percent or more of major British manufacturing companies to foreign owners if such a transfer is contrary to the interests of the country.
A new Bill to modernise the government’s powers to investigate and intervene in potentially hostile foreign direct investment that threatens UK national security entered into force in May 2021. The National Security and Investment Bill will strengthen the UK’s ability to investigate and intervene in mergers, acquisitions and other types of deals that could threaten our national security. Investments resulting in foreign control exceeding 15% of companies in 17 sectors pertaining to national security require mandatory notifications to the UK government.

For more information, please visit the website of Invest in Great Britain and Northern Ireland.

Bilateral investment conventions signed by the United Kingdom

The UK has concluded several Bilateral Investment Treaties (BITs) with other countries. More information is available on the website of UNCTAD.