UK's lead in foreign investment challenged by Brexit and 'Macron effect'

Paris has overtaken London for the first time to become Europe’s second-most attractive destination for foreign investors.

According to the latest EY UK Attractiveness Survey, the UK still accounts for the most foreign direct investment (FDI) projects in Europe, but its advantage is narrowing in the aftermath of the Brexit vote, as foreign investors shy away, and as other countries, such as France, have begun doing their 'homework', boosting the attractiveness of their economies.

"Unsurprisingly, 'access to the European market' and the 'UK’s domestic growth' are areas of concern cited by investors given the Brexit process. But there has also been a striking decline in the UK’s qualitative appeal, which takes into account a country’s social climate, quality of life, diversity and the political environment," said EY chief economist Mark Gregory.

Britain’s attractiveness in terms of investors' preferences fell to third place, behind Germany (1st) and France (2nd), with FDI projects in the latter surging by 31% in 2017 thanks to the so-called 'Macron effect'

The UK attracted 6% more FDI projects in 2017 (1,205 investments) than in the year before and in absolute terms continues to outpace Germany and France as a destination for investment.

However, with FDI into Europe running at 10%, that means that the UK lost market share for a second consecutive year, from 21% in 2015 to 18%.

British tech businesses attracted $7.8bn in funding last year, almost double the amount received in 2016.

Regarding regional performance, Scotland, the North West, the East and South East all performed strongly in 2017 with a growing number of digital projects.

Although the number of projects in London also rose in 2017, the rate of growth was slightly lower than the UK average, with declines in financial services and business services projects playing a big hand in the region's underperformance.

In order to boost FDI, the think-tank recommends the UK government clearly articulate its vision for post-Brexit Britain including its stance on immigration, public services and its approach towards foreign investment.

The researchers also encouraged Westminster to develop a focused trade strategy.

Steve Varley, EY’s UK chairman, said: "At a time when investor sentiment towards the UK as an attractive destination is weakening, opportunity arises in the shape of digital.

"An urgent digital drive is needed with a renewed focus on digital skills, infrastructure, and investment in research and development will help to shape the UK as an attractive environment, to maintain its competitiveness in a post-Brexit world," he added.