Foreign investment in the UK has fallen 92% since 2016. Why? Foreign investment into the UK dropped dramatically between 2016 and 2017. This might sound like something obscure, of interest only […]

Foreign investment into the UK dropped dramatically between 2016 and 2017.

This might sound like something obscure, of interest only to bankers – but it has real knock-on effects for all of us.

Here, we set out what the drop means, what might have caused it, and how far investment has fallen.

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What is foreign investment, and why does it matter?

Foreign investment (usually called “foreign direct investment”, or FDI) is a measurement of how much money overseas companies or governments invest in the UK.

This means that if a company which is ultimately, for example, US-owned decides to invest in the UK and build a new factory, that would count as FDI. It also counts as FDI if an overseas company buys up a British firm, or if an overseas-owned company decides to reinvest the profits from its UK business, instead of taking it as a dividend.

That means that for anyone who is concerned about foreign countries or governments owning British industry, a drop in FDI represents less foreign ownership in the UK – which they might think is a good thing.

However, it also means less investment from overseas in fields that could create jobs, such as construction jobs building a new factory, jobs for people then working in it, and other roles. Less investment can mean our economy grows slower, and there are fewer new jobs created.

How much has UK FDI fallen?

The latest investment figures were published this week by the OECD, a grouping of 35 major world economies. The headline figure of how much investment into the UK looks absolutely startling: in 2016, FDI coming into the UK totalled $196 billion – but in 2017 that had dropped to $15 billion. On paper that’s a drop of 92%, which seems absolutely catastrophic, but the reality is a little bit more complicated.

The 2016 UK figure is much, much higher than it would usually be because of a huge merger of two of the world’s biggest alcohol companies, and as one of the companies is headquartered in London (despite selling globally) that figure counted as FDI, meaning the UK figure was hugely inflated versus its usual level.

That could mean that everything was fine, and things had just got back to usual: but they haven’t. The UK’s $15 billion investment is only around a third of its average level since 2011 – a figure which represents the lowest investment into the UK since 2005. That’s a bad sign.

Why has investment into the UK fallen?

We really have no way of knowing for certain why investment has fallen, but it would generally be taken by economists to be a sign that confidence in the UK has fallen, or that businesses around the world aren’t feeling confident, and so have scaled back their investment and merger activity.

The OECD says that FDI has fallen across the world, suggesting that the UK is not the only factor – but it does note that the UK is one of the big drivers of the fall. That could signal that businesses were initially nervous of the Trump presidency and decided to delay big spending decisions. That would suggest it wasn’t a UK problem, but rather something affecting most of the world.

Except that’s not the full story. There is one obvious reason why businesses might hesitate before investing in the UK right now: Brexit. FDI into the UK fell more than it did in other countries, and the OECD cited the UK drop as a big reason why the global figure fell.

As ever with Brexit, though, this won’t prove definitive to either side of the argument. Brexiteers can say either that this is just a temporary pause that will be recovered once the UK actually leaves and has certainty again, or that the drop is a result of Remainers talking the economy down. Remainers can point to the figures and say this is early solid evidence of negative consequences of Brexit.

We’ll have to wait for more evidence to know which side is right for sure (though Remain likely has the better case) – but even that may not persuade anyone.