Foreign Direct Investment (FDI) is important to an economy for a variety of reasons – it is key for economic growth and provides finance for capital investments. In more practical terms it creates jobs, builds new factories, improves skills for the workforce and increases international trade. For these reasons, the Scottish Government and Scottish Development International strive to attract as much FDI as possible. It seems as if their efforts have been working, with Scotland experiencing several record-breaking years in terms of FDI.
Ernst & Young’s (EY) annual Attractiveness Survey Scotland, which examines both performance and perceptions of Scotland as a destination for FDI, found that Scotland has retained its status as the most attractive region to invest in outside of London, which it has held since 2014. However, in the ‘year of Brexit’, there are worrying signs for the future of FDI.
Scotland’s membership of the EU is important for the growth of investment. One of the key reasons foreign investors chose the UK is because of its access to the European Single Market. Once a subsidiary is established within the borders of the Single Market it allows them to operate without being subject to the barriers non-member states face. It is partly the reason why nations such as Ireland have seen such an influx of multinational companies in recent years, such as Apple, Google and Facebook. While Scotland does not have the same number of multinational companies establishing themselves within its borders – it is still an important aspect of the Scottish economy.
Scotland saw more than 2,000 jobs in 2018 created as a result of FDI. However, this valuable job creation engine is under threat from Brexit. In 2017, the Scottish Trade Union Congress (STUC) provided written evidence to the Scottish Parliament stating that Scotland’s membership of the EU is a key reason for its attractiveness for investment. They go on to state that without access to the Single Market, FDI will decline heavily and potentially disappear. It appears that this is already occurring even before the UK has left the EU.
EY’s report found that in the UK as a whole, from 2017 to 2018 there was a 13% drop in FDI projects. Even more concerning is the impact of Brexit on Scotland’s FDI with a 19% drop in FDI projects from 2017-2018. Additionally 15% of companies that took part in the survey reported that they had put investments on hold due to Brexit. While there were over 2,000 jobs created as the result of FDI projects in Scotland in 2018, it is a steep decline from over 6,000 jobs created the previous year. This appears to confirm what the STUC had stated in their evidence to the parliament with investment falling significantly, not just in Scotland but across the UK. The most worrying aspect is that the 19% drop in FDI in Scotland has occurred before the formal departure from the EU has even occurred, implicating that the UK’s eventual exit from the EU will impact Scotland (who voted to remain in the EU) and its FDI far more than the UK as a whole.
There is also the issue of competition, Ireland which can be viewed as a nation similar to that of Scotland due to the make-up of its economy and close geographical location, can provide an additional challenge in the face of Brexit.
From 2017 to 2018, Ireland’s FDI increased by 52%, the largest increase in Europe. This is almost certainly a result of Brexit with Ireland being seen as a safe alternative to the UK for investment. While it cannot be said that there is a direct relationship between an increase in FDI projects in Ireland and a decrease in Scotland, every FDI project in Ireland is one not happening in Scotland. EY’s survey points to other European nations becoming more attractive as investment destinations, with a UK decline of 9% in the past two years.
While the Scottish Government’s efforts to increase investment into Scotland, such as the establishment of ‘innovation and investment hubs’ in multiple countries, are a step in the right direction, the only thing that might prevent an all-out decline in FDI is the cancellation of Brexit. The Centre for Economic Performance predicted that Brexit would reduce FDI into the UK by 22% – considering that while the UK’s FDI only fell by 13% from the previous year while Scotland’s fell by 19%, if the UK did experience a fall of 22% it would be plausible to say that Scotland’s FDI will fall by a larger percentage. With FDI projects creating over 6,000 jobs in 2017 and a further 2,191 in 2018 ensuring that the continued growth of FDI into Scotland should be a key economic goal.
Despite the decrease from the previous year, Scotland’s FDI performance in 2018 should still be considered resilient – retaining the most attractive place in the UK for FDI outside of London since 2014 is no mean feat. It’s also worthwhile to consider that despite the drop in projects, the number of projects in 2018 was still higher than any other year, other than the record-breaking period of 2015-2017. This shows that Scotland can, given the right conditions, continue its record-breaking performance. All that is required is a step back from the economic cliff-edge of Brexit and Scotland’s status as a ‘Trading Nation’ can be secured for years to come.