The effects of Brexit have been profound for the UK, both at a macroeconomic level with slower growth, and with the associated economic and political turmoil. Nigel Driffield and Xiaocan Yuan identify four policy implications for the UK. 

From the perspective of international business, or firm location decisions, Brexit can be seen as part of a global trend of increased tensions between different trading blocs and governments increasingly acting to protect their own industries. In addition, after the COVID-19 pandemic, firms have local suppliers to mitigate potential disruptions, and governments have sought to encourage firms to invest at home. This serves to highlight the challenge that decoupling, and the shortening of supply chains, with the emphasis on “make here to sell here”, present for national and local policymakers.

In the case of the UK, we are seeing higher proportions of foreign direct investment (FDI) attracted to the domestic market.

In the case of the UK, we are seeing higher proportions of foreign direct investment (FDI) attracted to the domestic market. Therefore, aligning the needs of inward investors with the local supplier base, as well as support for skills and infrastructure, for example, not only enhances a location’s ability to attract inward investment, but ensures that the benefits, in terms of employment, exports and spillovers are maximized as well.

More generally, this type of decoupling suggests a number of challenges for business, that investment promotion agencies should look to help address. The first returns to our theme of an increase in place-based market-seeking FDI. This may require a change of emphasis by investment promotion agencies (IPAs), away from promoting conditions such as costs or resources towards market opportunities. This also requires coordination between local and national policy, for example over infrastructure investments that facilitate market access.

The above highlights the need for changed policies at both the national and local levels in terms of inward investment promotion. We identify four policy implications:

Inward investment promotion must be made part of wider polices on economic development.

The West Midlands region of the UK has been successful over a considerable period of time in attracting FDI in sectors linked to advanced manufacturing. While one could argue that this playing to the region’s historical strengths, it is more due to an alignment at a local level on support for start-ups, for innovation and for skills to support supply chains in such sectors. This is then aligned to national efforts on investment promotion, by pan regional bodies such as “Midlands Engine”, and with input from the region’s universities on supporting innovation.

Inward investment policy cannot exist in isolation from strategies to develop supply chains and boost absorptive capacity.

This means that investment promotion must be aligned with local (and national) initiatives on skills, innovation, and productivity. In the US, for example, this may mean aligning local investment promotion with the Inflation Reduction Act, with localities seeking to encourage investments in green tech or future mobility solutions.

This emphasises the link between investment promotion and industrial strategy. Investment promotion should therefore be linked to local supply chains. For example, identifying cases where local capacity cannot fill gaps in supply chains, perhaps due to technological gaps, or access to finance, and seek inward investment (or reshoring) to fill those gaps.

A targeted approach needs to focus on areas with strength or proven competitive advantages in the region.

In terms of establishing a value proposition, and maximising both the attractiveness of a location, as well as the likely spillovers, this suggests the need to focus on sectors that are strong in the region and have a proven competitive advantage.

In terms of establishing a value proposition, and maximising both the attractiveness of a location, as well as the likely spillovers, this suggests the need to focus on sectors that are strong in the region and have a proven competitive advantage. A targeted approach around certain activities or sectors ought to focus on a location’s strengths and align its value proposition with demand conditions rather than the supply side. This may include considerations of where the region is already export- or innovation-intensive.

One interpretation of this, and potentially a challenge for investment promotion in countries such as the UK, is that investment promotion needs to focus on areas of strength. For example, the Manchester City Region in the UK has sought to align its strategy on the development of the digital sector, through support for start-ups and scale ups with its inward investment offering.

Local partners ought to help inward investors navigate the changing investment landscape.

More generally, the pivot towards market-seeking FDI offers an additional challenge, which is perhaps akin to the analysis of FDI in emerging economies. As decoupling increases, so does institutional unfamiliarity. Standard analysis of this problem highlights the needs, not just for greater due diligence but also potentially a greater need for local partners to help inward investors navigate the changing landscape. This emphasises information problems, not only between home and host country, but also at the level of the firm. Thus IPAs, even in the world’s richest countries, may find themselves offering due diligence services, and brokering partner selection, in a manner traditionally reserved for emerging economies.

In the light of the UK’s decoupling from the EU, this piece of work sheds light on inward investment policy. Inward investment promotion needs to be integrated into the wider polices on economic development. Typically, inward investment policy is supposed to linked with strategies to develop supply chains and boost absorptive capacity. The emphasis on the importance of absorptive capacity underlines a targeted approach which focuses on areas with strength or proven competitive advantages in the region. From the perspective of local investment promotion, local partners can help inward investors navigate the changing investment landscape to mitigate the information problems, not only between home and host country, but also among the organisations involved.

All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science.

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