UK faces tough battle for foreign investment funds

Not everything in the garden is as rosy as the DTI would have us believe, says Paul Wallace

The Invest in Britain Bureau's annual scorecard on inward investment is usually the occasion for much tub-thumping by the Department of Trade and Industry, but of little interest on the part of the press.

Yesterday was different, however, with a bevy of television cameramen and photographers waiting outside the Queen Elizabeth II centre for the man-in-waiting, Michael Heseltine.

He let them down, pleading another engagement - at No 10 Downing Street with the Prime Minister.

Without the President of the Board of Trade's leonine presence, this was Hamlet without the Prince of Denmark. Not that the DTI was anxious to present the latest figures for inward investment as remotely tragic. The number of projects in 1994/5 by 30 to a record 434. These had created 37,000 new jobs, up by 8,000 on last year.

The results were hailed by an absent Mr Heseltine as "proof of the effectiveness of our competitiveness agenda". They were hailed by Tim Eggar, Minister for Industry, as evidence that Britain was "the number one location" for inward investment. Japanese and US investments in the UK accounted for over 40 per cent of their total direct investments in the EU.

Glowing testimonials from international business leaders about the UK's attractions were much in order. Jan Timmer, president of Philips, was quoted as saying that "the most competitive country in Europe today is the UK. The factories we have in the UK are the most changed factories in the world. For manufacturing, Britain is the most competitive country in the world today."

Those attractions include the English language, a pro-business climate with low corporate tax rates, cheap labour and the size of the market.

But the key attraction billed by the DTI was Britain's position as a production base for the European market.

It is, of course, precisely this attribute that may be threatened by the Tories' internecine strife over their attitude to Europe, particularly over monetary union. But, according to Mr Eggar, investors make the assumption that "the UK is a committed member of the European Union", and were "very sophisticated at separating out political rhetoric" from the steps that would be needed to achieve a single currency.

However, there is evidence that Britain's most highly favoured status as a recipient of foreign direct investment may already be faltering, despite the DTI's bullish presentation. As the charts show, there is little direct tally between the investment projects counted by the Bureau and commitment of hard cash.

Since 1991, inward FDI has been running at half the peak level notched up in 1989-90. This decline in inward investment reflects a more general downturn worldwide, but the rebound that occurred within the OECD in 1994 was not matched in the UK. While it is true that the first quarter of 1995 saw a big increase in inward investment, it is too early to say whether this reverses the downward trend.

The importance of this to the UK economy cannot be underestimated. According to the DTI, 40 per cent of manufacturing exports come from foreign-owned enterprises.

Overseas companies account for 18 per cent of all manufacturing jobs and a third of net capital expenditure.

The problem Britain faces is one of increasing competition. Other countries in the EU "are all out to cut our lead", Mr Eggar acknowledged. And the EU itself is facing competition from central and Eastern countries. According to Regions of the New Europe, a new study by Ernst & Young, 20 per cent of investment in Europe is being directed to countries of the former eastern bloc.