What foreign direct investment figures (don't) tell us about Brexit

26 June 2019, 17:46 | Updated: 26 June 2019, 20:27

Is foreign direct investment (FDI) into the UK falling or rising? Is there a Brexit effect or not?

These are pretty straightforward, not to mention important questions, as Britain edges towards its latest Brexit deadline.

Yet answering them is more complicated than you might have thought - in part because no one can quite agree what foreign direct investment actually is.

That might sound a little odd, but consider how you'd define it. Should foreign investment include when a foreign company buys a UK company? Surely, yes.

But what if that company is listed on the London Stock Exchange but has very few employees in Britain? What if it is an old established manufacturer being taken over by a foreign company which will shortly relocate all those jobs to China?

The reality is that many measures of FDI would still include this as a positive flow of money into the country - for good reasons.

Because for many economists FDI isn't a propaganda tool, designed to show how brilliantly or otherwise Britain is doing; it's a part of the balance of payments statistics that illustrate money flowing into and out of the UK economy.

Whether that money was used to create jobs and improve Britons' lifestyles is rather irrelevant from this narrow statistical perspective.

Still, on this simple monetary basis, Britain's foreign direct investment looks rather healthy.

Indeed, total inward FDI increased by a whopping 13% in 2017 alone.

Or consider international numbers collected by the UN Commission on Trade and Development (UNCTAD).

They show that in 2018 a grand total of $64bn (£50.4bn) in FDI flowed into the UK, more than France and Germany combined.

Both of these numbers look very healthy indeed, but there is a problem.

London is home to one of the world's biggest capital markets. Many companies list on the LSE even if they have little actual business in the UK, because London provides a platform for raising money.

And a large chunk of the FDI numbers as measured by the ONS and UNCTAD reflect something that might not, on the face of it, feel much like lasting foreign investment: mergers & acquisition activity.

Part of the reason Britain often comes so high up in these simple monetary measures of FDI is that the figures are heavily distorted by this "capital market effect".

And so often those big numbers might fall dramatically even when the underlying picture of the UK economy and its attractiveness is looking rather good.

As a result, analysts have sought to come up with alternative ways of measuring FDI, that better reflect peoples' livelihoods.

One of these methods is to simply count the number of projects foreign companies invest in, and the number of jobs created as a result.

This has the benefit of better measuring underlying attractiveness but is less good at measuring scale of investment - and can often miss some investments altogether.

Anyway, that's the method the Department for International Trade has used to try to measure the attractiveness of the UK as a place to invest.

And in most of the past few years, the FDI numbers have told a very positive story, with the number of projects up by 61% between 2011-12 and 2016-17.

But since then the numbers have deteriorated dramatically, with the number of projects down 21% and the number of jobs down 24% between 2016-17 and 2018-19.

Is that the Brexit effect? Given it coincides with the post-referendum period, you might jump to that conclusion and that does seem consistent with what some major international companies have said over that period.

Then again, that wouldn't explain why the number of projects has also fallen in other countries including Germany.

It might also reflect a fall in global investment activity.

The reality is that while domestic spending on investment has certainly been considerably weaker since the referendum, it's not altogether obvious so far that the fall in foreign investment is directly down to Brexit.

But these big investment decisions take some time to be planned and implemented - so the likelihood is if there is a Brexit effect, we won't see fully it in the numbers for a year or two yet.