Nesta research challenges the myth that foreign investment is hollowing out the UK's economy

25/10/12

New research commissioned by Nesta shows the importance of foreign investment to employment and innovation in the UK. Foreign-owned businesses increased their share of UK employment from 11% to 19% between 1997 and 2010.

Foreign-owned businesses increased their share of UK employment from 11% to 19% between 1997 and 2010. They are more likely to develop new IP, products or processes than similar UK firms, and they are more likely to encourage their UK suppliers to innovate.

The research is based on new analysis of the performance and ownership of all UK businesses between 1997 and 2010, and on a new survey of 1,135 foreign-owned and UK-owned businesses and their suppliers.

The research shows that:

• Foreign-owned firms in the UK went from employing 11% of the UK's workforce in 1997 to 19% in 2010.
• In 2010, foreign-owned firms employed 1.6m more people in the UK than they did in 1997, while UK-owned firms employed 0.4m fewer (net UK job growth in the period was 1.25m).
• Foreign-owned businesses are more likely to innovate than similar UK-owned ones (over 50% of foreign-owned companies developed new products compared to 25% of UK-owned ones; 38% of foreign-owned companies developed new processes compared to 25% of UK-owned ones; 10% of foreign-owned businesses developed new IP compared to 3% of UK-owned ones)
• Foreign-owned businesses are more likely to encourage their suppliers to innovate than similar UK-owned ones (38% of suppliers of foreign-owned companies reported an impact on their general innovation capabilities; 31% of reported an impact on their R&D capabilities; 37% reported an impact on their technological capabilities; 32% reported an impact on their intellectual property capabilities; these figures compare to 25%, 18% and 23% and 18% respectively for supplier to UK-owned companies)
• The survey suggests that the positive effect foreign-owned companies have on their suppliers is deliberate. They are more likely to run supplier development programmes and actively to encourage innovation on the part of suppliers.

Stian Westlake, Nesta's Executive Director of Policy and Research, said:

"These findings are very significant indeed. They show that foreign investors are critical to the UK economy. They are not only major employers, but they encourage UK businesses to be more innovative. This research shows that the idea that FDI is "hollowing out" the UK's capacity to innovate is a myth.

"Government policy needs to recognise that FDI is a crucial part of innovation policy. Government should take pains both to attract foreign investors and to help them develop UK supply chains. The UK could learn from the approaches used by the governments of Singapore, Malaysia and Ireland to get foreign investors working with local suppliers.

"The Department for Business (BIS), UK Trade and Investment (UKTI) and the Local Enterprise Partnerships (LEPs) need to work together to ensure that links are forged between foreign investors and local supply chain if the UK is to make the most of the benefits of foreign investment on the UK's capacity to innovate."

Figures from the UK Trade and Investment (UKTI) show that from 2001/2 to 2010/11, FDI created jobs throughout the UK, with London the biggest beneficiary, followed by the North West and South East.

Ends

To arrange an interview or for further information, please contact Suzi Browne on suzi.browne@nesta.org.uk / 0207 438 2606 or Natalie Hodgson on natalie.hodgson@nesta.org.uk / 0207 438 2614

A copy of the report and full breakdown of foreign investment regional job creation statistics across the UK is available on request.

Notes to editors

1. Foreign direct investment (FDI) occurs when overseas businesses invest in the UK, either by acquiring a British company or a stake in one, or by setting up a brand new subsidiary.
2. The FDI and UK employment research funded by Nesta was conducted by Michael Anyadike-Danes and Mark Hart of Aston University using the Office of National Statistics' Intergovernmental Business Research Database, which holds detailed records of all companies in the UK.

The second piece of research commissioned by Nesta examined the link between FDI on innovation was based on a survey of 1135 foreign and UK-owned businesses in Britain, and conducted by PACEC (Private and Corporate Economic Consultants). The inward investors survey sample, which was designed to mirror the population of inward investors in the UK, comes from five main sectors, with financial and business services, and retail and hospitality representing around a quarter, conventional manufacturing and high technology each representing about a fifth of businesses, and infrastructure one in ten.