Time to act...improving the trade performance of the English regions

A complicated position

Our 2017 UK Attractiveness survey identified how difficult assessing the UK’s performance in attracting Foreign Direct Investment (FDI) and maintaining its appeal to investors in 2016 was. For every positive indicator, we found an equivalent negative development to take into account, making it hard to draw definitive overall conclusions.

English regions - the potential is clear…

There are mixed messages from the performance of the UK’s regions in 2016. London’s pre-eminence as the UK’s dominant FDI location continued, with the UK capital securing 39% of all projects recorded, ahead of Scotland in second place. Looking across the English regional groupings, the Northern Powerhouse and the Midlands Engine are now attracting roughly double the number of projects they secured at the beginning of the last decade, clearly demonstrating the potential of the English regions.

The core strength of England’s northern and midlands regions is manufacturing. The continued success in attracting FDI in the manufacturing industries continues to underpin economic activity in large areas of the country. The strong performance of both Yorkshire & Humber and the West Midlands in 2016 was based on their manufacturing base. Any future policy has to recognise the importance of manufacturing today and its key role in the medium-term for many parts of the UK. 

Although the East also saw manufacturing contribute to its growth in FDI in 2016, this region and the South East have relative strengths in technology and research. The relatively weaker performance of the UK’s regions in these areas is an important wake-up call that must not be ignored. The digital economy is becoming a reality and the UK needs to move quickly to ensure it is investing in the infrastructure and skills that will enable it to exploit future digital opportunities. In addition, as any impact of Brexit on the availability of skills or funding for research becomes clearer, policy will need to be adjusted.

…and it’s time to act – empower the regions

Our research has identified mixed messages. On one hand, the short-term outlook for the UK in respect of FDI is positive but there are clear risks to future performance in the medium to long-term. Our survey identified that 9% of investors could leave the UK in the next 3 years, but the UK still has the time to act to secure its future attractiveness in a post-Brexit world provided it moves quickly.

Our perception research among investors identifies that the policy priorities are for new trade agreements with both the EU and the USA, China and India and the development of detailed plans for skills and migration. At the regional level, all of these matter but improved infrastructure and high quality skills are the key requirements. A clear plan of action is required. 

A plan for success at the national and regional level

 At the national level, we identified five priority areas for policy to respond to the challenges looming on the horizon:

• Engage with investors on the post-Brexit environment;
• Develop a UK trade strategy ;
• Deliver improved infrastructure; and
• Improve skills.

Empower and support the regions

If the UK is to succeed in future it needs to make the most of all its resources. This means that as a priority the UK’s regions and cities have to be empowered to deliver the trade strategy. The signs are that without more support from the industrial strategy and a sufficient allocation of resources, especially infrastructure and skills, the more peripheral regions, cities and towns will miss out on the benefits FDI brings.

The key determinant of performance at region and city level is the existing capability at sector level. It is important therefore that the policy proposals developed at the local level are framed through a sector lens. We know from our investor research that individual sectors have their own specific priorities: manufacturers tend to want better roads and ports; services companies often value airports relatively higher. The same is true of skills, labour markets are local to a significant degree and hence investment in developing capability should reflect the ends of local markets and employers.

Without doubt, a greater emphasis on manufacturing will be important to helping drive future success. Significant areas of the UK are still heavily dependent on manufacturing and Brexit increases the need for a coherent strategy. There are risks that future trading relationships with the EU may be less favourable than the situation today, policy needs to attempt to compensate for this. At the same time, policy must support the potential transformation of supply chains in terms of both imports and exports to enable UK business to benefit fully from possible trade deals with other countries outside the EU.

We have identified the importance of the digital transformation, which is already becoming a reality in the economy. The pattern of FDI and the regional economic outlook suggests that there is a digital divide in the UK with disparities in the level and volume of digital skills that are available. If manufacturing is one key component of the regional industrial strategy then digital skills, and the supporting infrastructure such as wider availability of higher speed broadband is another. Business, policy makers and academia all have a role to play in improving the digital capability of the country.

Finally, there is a need to review the institutional arrangements for supporting the English regions and cities. The success of the Northern Powerhouse and Midlands Engine demonstrates the potential of adopting greater focus on the English regions and the City and Region deals already agreed will provide further impact over time. However the current structure is both complex and yet far form comprehensive. Investors want an easier to deal with structure and there is a need to accelerate discussions on future structures.

At the same time, there is a need to consider increasing the scope of responsibility of the local bodies tasked with accelerating economic growth. While there has been good progress on infrastructure through bodies such as Transport for the North, the responsibility for skills development remains primarily national in nature. If skills development is to match the needs of local economies then at least some of the responsibility and resources should be deployed at the local level to provide the best chance to match supply and demand.

Download our UK Attractiveness Survey 2017, Time to act: empowering the English regions report

@MarkGregoryEY

Our Economics for Business programme provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.