Foreign investors turn away from UK

Ford is investing in a diesel engine plant in the UK

By Emma Clark BBC News Online business reporter

Foreign investment in Europe has shrunk sharply during the past year, and the UK was one of the biggest losers, with investment down by a third.

When Tony Blair managed to persuade the Japanese car company Nissan to build its new Micra in the UK, he scored brownie points all round.

The Prime Minister's personal involvement in securing Nissan's £235m commitment highlighted the importance attached to inward investment by the British government.

The deal, which was struck at the beginning of last year, created 500 jobs in the North East of England and helped turn the factory into one of Europe's most productive.

On Thursday, however, Ernst & Young's European Investment Monitor (EIM) released figures to show that inward investment fell by 12% across Europe last year.

In the UK alone, investment slipped by 34%.

Foreign interests

Inward investment is basically when companies invest in their operations abroad.

It can take the form of expanding existing plants, starting new projects or establishing new factories.

Mr Hughes says inward investment held up quite well in the broader context

Like so many other economic statistics, inward investment in Europe has suffered from the slowdown in trade across the world, particularly in the US.

EIM's data shows that the US is the largest investor in Europe and the UK, accounting for 37% of all the projects in 2001.

However, this level of investment declined by a substantial 26% last year. This particularly hurt the UK, which receives the lion's share of US investment.

"I don't know whether [inward investment in Europe] will recover this year because the US is such a motor for growth," Mark Hughes, author of the report and lead advisor at Ernst & Young, told BBC News Online.

Investment bounties

The key benefit of such investment is the creation or safeguarding of jobs for people in that particular country, as well as passing on new skills and technologies.

It is almost inevitable that the UK will begin to have a lower market share of inward investment, more akin to its overall economic weight in Europe

Mark Hughes
Ernst & Young

For example, other companies in the North East of the England can learn from Nissan's high level of productivity.

"There is a spillover effect," explains Mr Hughes. "Inward investment can also create jobs outside the company in the local economy."

This kind of investment is especially welcomed by the manufacturing sector, which has struggled to head off a decline in recent months.

During 2001, Ernst & Young identified 803 projects in the manufacturing sector, accounting for 41% of the total projects in Europe.

Jobs under threat

Inevitably, the decline in inward investment across Europe saw a 9% decrease in the number of jobs created or protected by new projects.

This amounted to 340,000 new or protected jobs in 2001, compared with 370,000 in 2000.

Despite the overall decline of 12%, Mr Hughes says that inward investment has "held up pretty well in the broader context".

For example, merger and acquisition-related activity - which is not counted in inward investment figures - declined by a third last year in Europe.

Winners and losers

There have also been some winners in Europe in the form of countries that have managed to increase their share of the inward investment pie.

Countries that are close to joining the European Union, such as Hungary and the Czech Republic, have benefited from having laws that are seen by investors to be EU-compliant.

"At the same time, they offer lower costs and still have less burdensome regulations for employers," says Mr Hughes.

Turkey and Romania have also done well, following efforts to introduce new laws to encourage investment.

"Two years ago they were considered high risk," adds Mr Hughes. "Now they are seen as medium risk."

On the flipside, the UK has suffered from the interest in other countries. The British share of projects in Europe fell from 26% in 2000 to 19% in 2001.

"It is almost inevitable that the UK will begin to have a lower market share, more akin to its overall economic weight in Europe, which is about 15%," says Mr Hughes.

Big spenders

Nevertheless, the UK does still enjoy a disproportionate amount of investment for its size.

Mr Harvey says Ford is attracting new skills to Dagenham

The top investor in Europe during 2001 was the US car company, Ford, which continues to invest in the UK.

Although Ford closed down car production in Dagenham this year, shifting much of it to Valencia, it has invested £40m in a diesel engine plant.

The new plant, also at Dagenham, is set to employ 5,000 people by 2004.

Earlier this year, Mike Harvey, manager of the diesel engine plant, told BBC News Online: "It will bring better skills into the area."

Car companies are forced to invest heavily in their operations to remain competitive.

German electronics giant Siemens ranked as the second biggest investor in Europe, despite the fall-out from the tech slowdown. In 2000, it was the top investor.

Keeping Europe on its toes

Overall, Ernst & Young's EIM does not feel too negative about the decline in inward investment across Europe.

Growth in investment is expected to return by the end of 2002, even though the first quarter has not shown any evidence of a dramatic bounce-back, says Mr Hughes.

He also believes the regional agencies across Europe need to think more carefully about how they target potential investors.

For example, he thinks the UK spends too much time seeking investment from the US, which is "going to happen anyway".

Far better, he says, to target companies in other countries.

So, as in any slowdown, companies and even countries are being forced to think more strategically about their ultimate goals.

Certainly, the UK cannot always count on Mr Blair to lend a hand.