UK investment policy Contents

Conclusions and recommendations

Defining and measuring overseas investment

1.Appropriate and effective Government policies in respect of Foreign Direct Investment can only be formulated on the basis of reliable information on the nature and extent of such investment, and how it varies over time. However, there are significant limitations in the data which the Government collects and publishes in this regard. (Paragraph 42)

2.Figures published by the Department for International Trade relating to numbers of new projects, and of jobs associated with them, are of limited usefulness, given that the Department does not monitor closures of companies associated with inward investment, or downsizing by such companies. We recommend that the Department should consider what steps it can take to make good these deficiencies in its data and report to us on this by the end of this year. (Paragraph 43)

3.The Department also relies in part on data from private-sector databases, which can be opaque and may be of limited reliability. Where the Department does draw on any private-sector datasets in constructing its own statistics, we recommend that, so far as possible, it should seek and publish information about the sources and methodology employed by the bodies concerned. (Paragraph 44)

4.The Office for National Statistics publishes data on the capital value of inward Foreign Direct Investment—but it does not separate out greenfield investment from mergers and acquisitions, or from investment through Special Purpose Entities. We note the Office’s desire to generate better data in this regard, possibly by finding ways of reconciling its “top-down” figures (derived from the Balance of Payments) with the “bottom-up” data (relating to specific investment projects) that is gathered by the Department for International Trade. We recommend that the two departments report to us, by the end of this year, on what they are doing to develop such collaboration. We also recommend evaluation of the methodology employed by the US Bureau of Economic Analysis as a possible model for generating a reliable dataset on the capital value of the different categories of inward Foreign Direct Investment. (Paragraph 45)

5.The Government regularly cites statistics on Foreign Direct Investment from various sources; in doing so, it needs to be careful not to risk giving the impression of cherry-picking figures so as to convey the most favourable impression possible. In the presentation of investment data, care must be taken always to give the full picture, with clear distinctions made between: stocks and flows of investment, greenfield investment, and mergers and acquisitions; and year-on-year changes and multi-year trends. We recommend that the Department for International Trade should consider commissioning the Office for National Statistics, or some other appropriate body at arm’s length from the Government, to publish on a regular basis a comparison and synthesis of the various statistical data-sources on UK Foreign Direct Investment, to give the fullest possible picture of trends and developments. (Paragraph 46)

Investment liberalisation and investment protection

6.While we appreciate that International Investment Agreements fall within the portfolio of the Trade Policy Minister, we were disappointed by the limited amount that the Investment Minister said to us on this topic. Although we did take evidence from the senior official responsible for International Investment Agreements, the Director General for Trade Policy, he too was only able to provide us with limited information. Regarding the Government’s plans on post-Brexit UK International Investment Agreements neither the Minister nor the Director General for Trade Policy was able to set out even basic lines of policy. The Minister argued that the duty of sincere cooperation, which the UK is currently under as an EU Member State, prevents the Government from formulating such a policy until after Brexit. However, we find it hard to discern any credible legal basis for this claim. Furthermore, we note that the Government is already taking steps to develop a post-Brexit trade policy, through its consultation on a number of prospective trade agreements; and that Trade Working Groups are conducting scoping talks with several prospective trade agreement partners. The Government 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. (Paragraph 112)

7.In formulating its policy on International Investment Agreements, the UK cannot just go back to the approach it used before 2009 (when negotiating such treaties became a formal EU competence), given how hugely controversial international investment policy has since become and how significantly the policy environment has, in consequence, changed. We recommend that 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 Investor-State Dispute Settlement provisions—including the EU’s Investment Court System and its proposal for a Multilateral Investment Court. The Government should also consider the compatibility of investment liberalisation and investment protection provisions in International Investment Agreements with UK policies in the areas of development, climate and human rights. (Paragraph 113)

8.Another area the Government must consider is that of potentially including provisions in International Investment Agreements to counterbalance investor rights, such as enshrining investor obligations, allowing for state counterclaims or “carve-outs” from investment protection. If the Government chooses not to adopt any such provisions, it must explain the reasoning behind that decision. (Paragraph 114)

9.As well as failing to develop a policy in respect of International Investment Agreements, the Government has little to say in respect of its policy at the multilateral and plurilateral levels in relation to investment liberalisation and investment protection. We recommend that the Government set out, in its response to this Report, what approaches it plans to take at these levels. (Paragraph 115)

Investment promotion and investment facilitation

10.In conducting our inquiry, 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. There is no single summary and we have had to piece together information from various sources. We recommend that the Department for International Trade should publish an overarching strategy (in a similar format to that of the 2018 Export Strategy), summarising the different aspects of its work in this area and explaining clearly how they fit together in a coherent and unified way. This should include outlining how the Government’s approach in respect of unilateral measures to promote and facilitate investment relates to its policy regarding investment provisions within the framework of international agreements. The Government also needs to set out clearly how exactly its investment strategy links to the cross-departmental Industrial Strategy and how in this regard the Department for International Trade relates to the Department for Business, Energy & Industrial Strategy and other relevant departments. (Paragraph 186)

11.We recommend that, as part of its suite of services to inward investors, the Government must develop a one-stop shop for business registration and a “single electronic window”. Such services are desirable because they enhance transparency about the requirements that foreign investors must meet, as well as streamlining bureaucracy, so that it forms less of a barrier to investors. (Paragraph 187)

12.We welcome the liaison that already goes on between the Department for International Trade and 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 in this respect. Adequate attention must be paid to involving partner agencies at all levels in both outbound and inbound trade missions, so as to maximise their impact. The Government should show, as part of its investment strategy, that it is working closely with the university sector in attracting inward investment, given the crucial role of higher education institutions play in the investment “ecosystems” of their local areas. (Paragraph 188)

13.We recommend that the Government spell out more clearly the role being played by HM Trade Commissioners, the Prime Minister’s Trade Envoys and UK Business Ambassadors in relation to investment and show how exactly their work is making a difference. (Paragraph 189)

14.The Government must acknowledge fully the importance of the work done by staff on the ground in overseas posts in relation to promoting both inward and outward investment. There is clear evidence that cuts in overseas representation have had a negative impact and we recommend that the Government should ensure sufficient resources are dedicated to this area. The UK faces significant competition from some other European nations in promoting UK investment abroad and must not fall behind. The Government must study how competitor nations work in this regard with a view to learning from their approach. The Government should also review the skill-set of staff in overseas postings, to ensure that they are able to work in concert with business to recognise and tackle adequately barriers and sources of friction in relation to market entry. The Government should in addition consider whether regular rotation of staff around overseas posts might not be the most effective approach and whether more prolonged postings would be more appropriate, in so far as this could facilitate the accumulation of in-depth local knowledge. (Paragraph 190)

15.Outward investment, as well as inward investment, can bring many economic and other benefits to the UK. We recommend that the promotion and facilitation of outward investment should continue to form a key part of Government’s investment strategy. This should include emphasis on pursuing other goals, such as those related to sustainable development, human rights, and climate, through outward investment. (Paragraph 191)

16.We are not convinced of the adequacy of the performance metric currently employed by the Department for International Trade regarding involvement in inward investment successes, measured in project numbers. We recommend that the Government should do more to demonstrate that its efforts are directly responsible for those investment successes for which it seeks to claim credit. We heard about the work that the Department is undertaking on gauging the impact of Foreign Direct Investment in terms of Gross Value Added, as an aid to targeting its efforts. This is potentially welcome, provided that the measure of Gross Value Added that is used is sufficiently robust. The Government should also go further than developing this measure. Data are needed on the impact of the different types of Foreign Direct Investment; and the Government should, in concert with partner organisations, 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. We recommend examining the targets used in the Republic of Ireland as a possible model. In terms of targeting its efforts, the Government should also be much more strategic about promoting inward investment, with greater emphasis in its investment strategy on attracting investment in high value-added sectors. In particular, the UK must actively seek to maintain its pre-eminent position as a location for European and global headquarters of international businesses. (Paragraph 192)

17.We welcome the Government’s support for an Investment Facilitation Agreement through the World Trade Organization (along the lines of the existing Trade Facilitation Agreement)—but this must be supportive of sustainable development, human rights and climate goals. We recommend that the Government consider the potential inclusion of investment facilitation provisions in bilateral International Investment Agreements (as in the model developed by Brazil) and report back to us on this. (Paragraph 193)

Regulation of UK inward investment

18.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. (Paragraph 206)

19.We note that, while the 2017 Conservative Manifesto expressed opposition to inward investment “driven by aggressive asset-stripping or tax avoidance”, there has been no indication that the Government is taking any action to implement this. We recommend that the Government should set out clear policy on what it considers to constitute economically harmful investment—and state how it plans to act against it. (Paragraph 207)

20.Regarding investment screening, 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. In particular, the Government must set out in some detail what the role of the Department for International Trade will be in the envisaged new investment screening regime—as well as which Cabinet minister will take the ultimate decision on whether or not to block an investment. This information should be provided in the Government’s response to the White Paper on National Security and Investment. (Paragraph 208)

Published: 30 July 2019