The UK has long been both a leading source and destination for overseas investment. Foreign-owned companies in the UK are more productive and more likely to export than UK-owned firms; and foreign take-overs of UK firms can provide a range of benefits. Successive British governments have recognised the importance for the UK economy of international investment. Primary responsibility for international investment policy now rests with the Department for International Trade (DIT).
Foreign Direct Investment (FDI) involves acquiring assets that allow for control and ownership of a firm; such investment takes place over the longer term and is seen as “productive”. The measurement of FDI is usually seen as being of primary importance and a number of datasets are produced in this respect, by both official and unofficial bodies. Despite the importance of reliable information on such investment, there are significant limitations in the available data.
DIT’s figures relating to numbers of new FDI projects are of limited usefulness; and private-sector databases, which the Department partly relies on, can be opaque and may be of limited reliability. The Office for National Statistics (ONS) publishes data on the capital value of inward FDI—but does not separate out greenfield FDI (new investment) from mergers and acquisitions. ONS does wish to generate better statistics, possibly by reconciling its data with DIT’s. We recommend evaluation of the methodology employed by the US Bureau of Economic Analysis. The Government needs to be careful not to risk giving the impression of cherry-picking figures on trends in FDI. DIT should consider commissioning ONS to publish a regular comparison and synthesis of the various statistical data-sources on UK FDI.
Investment liberalisation means eliminating restrictions on the right of foreign investors to invest in a country; investment protection, by contrast, relates to provisions designed to guard against political risks faced by investors in host countries. Government policy in this regard comes under the portfolio of the Minister of State for Trade Policy.
Investment liberalisation provisions feature in multilateral and plurilateral agreements (involving multiple countries). Investment liberalisation and investment protection provisions are both found in International Investment Agreements (IIAs), which include: Bilateral Investment Treaties (BITs); and Treaties with Investment Provisions, including Free Trade Agreements. Investment protection provisions often grant investors the right to raise disputes on their own behalf against host states in cases of alleged violation of protection provisions (known as Investor-State Dispute Settlement—ISDS); this has proved hugely controversial.
The Government was unable to set out even basic lines of policy on post-Brexit UK IIAs. It needs to have a policy in place for the eventuality of a Brexit scenario in which there is no transition period—which could occur on 31 October 2019. We are alarmed that no such policy seems yet to have been formulated. The UK cannot just go back to the approach it used before 2009 (when negotiating such treaties became a formal EU competence). The Government should clarify where it stands on investment protection standards and dispute resolution mechanisms for investors. It must carefully consider and fully evaluate specific alternatives to conventional ISDS provisions and consider including in IIAs provisions to counterbalance investor rights.
Investment promotion involves marketing a particular location or industry in a host country as a destination for inward investment; investment facilitation, by contrast, involves measures to make it easier for investors to invest. DIT has a reputation as one of the world’s leading investment promotion agencies. However, it has been very difficult to form a coherent overall picture of all the facets of the Government’s approach to investment promotion and investment facilitation. DIT should publish an overarching strategy (in a similar format to that of the 2018 Export Strategy), explaining clearly how all the different aspects fit together.
The Government must develop a one-stop shop for business registration and a “single electronic window” (to enable investors to send documentation to several government bodies in one submission). DIT works together with partner organisations at the devolved and local levels in respect of investment promotion and investment facilitation, but there needs to be more joined-up governance. The Government should also show that it is working closely with the university sector in attracting inward investment.
The roles of HM Trade Commissioners, the Prime Minister’s Trade Envoys and UK Business Ambassadors in relation to investment must be spelled out. There is clear evidence that cuts in DIT’s overseas representation have had a negative impact and the Government should ensure that sufficient resources are available for this purpose. In addition, the promotion and facilitation of outward investment should continue to form a key part of the Government’s investment strategy.
DIT partly measures its performance by the number of successful inward investment projects with which it is involved. The Government should do more to demonstrate that its efforts are directly responsible for those investment successes for which it seeks to claim credit. Work by DIT to gauge the impact of FDI in terms of Gross Value Added (GVA), as an aid to targeting its efforts, is potentially welcome—provided the measure of GVA used is sufficiently robust. The Government should also go further than developing this measure, to produce data on the impact of different types of FDI, and develop devolved-nation and regional targets for investment, as well as net targets for the capital value of investment flows and numbers of associated jobs. The targets used in the Republic of Ireland are a possible model. The Government should also place greater emphasis on attracting investment in high-value sectors.
We welcome the Government’s support for an Investment Facilitation Agreement through the World Trade Organization. It must also consider the potential inclusion of investment facilitation provisions in bilateral IIAs.
While the UK has one of the most liberalised investment regimes in the developed world, there is still a need for some degree of regulation in respect of inward investment. Although the 2017 Conservative Manifesto expressed opposition to inward investment “driven by aggressive asset-stripping or tax avoidance”, there has been no indication of action to implement this. The Government should set out what it considers to constitute economically harmful investment—and state how it plans to act against it.
We recommend that the Government provide more clarity on how the balance will be struck between promoting and facilitating inward investment, on the one hand; and safeguarding national security, on the other. It must set out what the role of DIT will be in the envisaged new investment screening regime—as well as which Cabinet minister will take the ultimate decision on blocking an investment.
Published: 30 July 2019