Euro 'no' threatens factory cash

Nissan has voiced concerns about the UK's refusal to adopt the euro

The UK's refusal to adopt the European single currency risks driving carmakers abroad, economic analysts have warned.

But the researchers dismissed claims that foreign investment in the country will collapse if the UK continues to remain outside the eurozone.

While outside investment in manufacturing may switch to countries that have adopted the euro, "to reduce exposure to exchange rate uncertainty", cash flows into sectors such as biotechnology and banking would remain immune to the UK's stance on the currency.

"The UK will remain an attractive host for foreign direct investment outside [the eurozone] and will continue to attract more inflows than any other EU country," researchers at the Economist Intelligence Unit said.

The analysis follows threats by carmakers and other manufacturers to switch production to the 12-country eurozone unless the UK adopts the single currency.

The issue of euro membership is expected to play a big role in the general election campaign in the UK, with pundits saying that voters could be called to the polls in May.

Transport fears

The UK will retain its position as Europe's top ranking inward investment destination, in absolute terms, until at least 2005 - despite the shoddiness of its transportation network, the EIU said in its report on "World Investment Prospects".

"The UK owes its regional ranking to its stable political regime, strong record on liberalisation, openness towards foreign investment and highly-developed capital markets," the report said.

And the presence of knowledge and technology clusters in sectors such as pharmaceuticals "will continue to act as a magnet to foreign investors".

"These advantages, however, are partly offset by the continued congestion and unreliability of a transport network which has suffered years of under-investment," researchers added.

They predict that the reliability of Dutch transport systems, plus the country's educated workforce, would make the Netherlands Europe's top inward investment destination, relative to economic size, over the next five years.

Investment slide

Inward investment into Europe will recover strongly from a slide in world investment flows, which are expected to drop to $771bn this year from $1,140bn in 2000 as the slowdown in global economic growth takes hold.

The rebound will be driven by a revival in the number cross-border mergers as national barriers break down.

"Merger and acquisition activity is clearly sensitive to the business cycle," the report said.

"But pressures for regional consolidation will continue to grow in most sectors over the next five years as deregulation opens previously protected national markets to competition."

The boom will see the EU close the gap with the top-ranking US in the foreign direct investment league.

Hong Kong downgraded

In Asia, China's accession to the World Trade Organisation will underpin its status as the region's top-ranking inward investment destination.

But the EIU downgraded its rating of Hong Kong as a business centre over fears of interference from Beijing.

"The decline in Hong Kong's business environment score reflects the assumption that Hong Kong's political environment, labour market and policy towards private enterprise will deteriorate over the next five years as links with China become stronger," EIU said.