Foreign Direct Innovation

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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.

The UK has a strong track record in attracting FDI and in benefitting from it. FDI helped turn the ailing British car industry into a productive powerhouse, and the city of London from a sleepy gentleman's club into the world's financial nexus.

But in recent years, the role of FDI in the UK's economy has come under challenge. Critics have argued that FDI, in the form of acquisitions, hollows out the UK's productive capacity.

It is suggested that foreign owners are more likely to shift high-value functions overseas and to neglect UK supply chains, gradually turning their UK subsidiaries and partners into dumb and disposable operations.

Lord Young, a staunch advocate of FDI as Secretary of State for trade and industry in the 1980s, recently argued that foreign investment is no longer the future of economic growth.

Government's ability to attract FDI has also declined, at least in England: the abolition of the regional Development agencies removed a key part of the support mechanisms for inward investors, specifically those designed to improve supplier development.

This report offers a reassessment. In particular, it uses detailed business records data and new surveys to examine the effect of FDI on job creation (between 1997 and 2010), business innovation and on innovation in the supply chain.

Published
October 2012