Diane Coyle: Foreign investors drill out of Britain

Black & Decker, the US-owned tool maker, announced last week it was moving some of its operations from the north-east of England to the Czech Republic. It was the latest in a line of announcements by foreign multinationals abandoning plants in the UK. Black & Decker blamed the intensity of global competition, forcing it to a country with cheaper (but still skilled) labour. Other culprits for past closures have included the strength of the pound and the allure of being inside the euro area rather than a lukewarm "maybe" country.

The important question for the future of the UK economy is if such high-profile departures signal a worrying long-term trend. It's hardly news that manufacturing is in relative decline: its share of the economy has been falling since the late 1960s. And while the UK sends more direct investment overseas than comes in from abroad, we remain one of the world's biggest recipients of inward foreign direct investment (FDI).

So to know how much to worry means taking a closer look at trends in the figures, and at companies' motives for investing across borders. Two publications from the OECD (International Investment Perspectives and FDI for Development, www.oecd.org) sum up the evidence.

The first point is that cross-border investment is one of the defining features of economic change and globalisation over the past decade or two. The world stock of FDI is about $4 trillion. The annual flow rose from $200bn (£127bn) in 1993 (and next to nothing a decade before that) to a record $1.3trn in 2001, though it has fallen sharply since.

Most FDI takes place between the member states of the OECD – ie, the richer economies (including the Czech Republic). In other words, the motive can't just be finding the cheapest labour, or the developing world would attract more, and the US, UK and Netherlands would not be consistently the biggest recipients.

The biggest changes in the patterns of investment flows have not been in the countries on the receiving end but in the industry mix and the character of the investment. During the late 1990s manufacturing lost its place as the main sector involved in FDI; services have overtaken it in importance. Second, companies are increasingly thinking of their markets as international. Rather than set up plants that are replicas of each other in several countries to serve each national market, they now operate specialist plants that supply each other. The result shows up in international trade figures: more than a third of trade in manufactures now consists of components rather than finished goods.

This process takes the increasing specialisation which has been at the heart of economic growth for more than 200 years to the global level. Falling transport and communication costs and declining trade barriers account for it. Globalisation is shaking up production patterns, an upheaval that will ultimately bring much greater efficiency.

Still, it's a disruptive process, and for the UK there is a genuine fear over whether investors think this is still a sensible location given the way the market for their products is developing. The single currency has made it obvious that the main continental markets are where that action is. Britain is distinct from the euro areas, which have become more integrated. This is a process that could snowball. The relocation of production to the core will reinforce itself.

Just one example does not prove this is happening. But in 2000-2001 the biggest rises in FDI went to the continental economies. The straws in the wind are ominous.

Diane Coyle's new book, 'Sex, Drugs and Economics' (Texere), is out next week.

Diane@enlightenmenteconomics.com