A New Government’s Challenge
With the new Labour government gearing up for its first major economic test – Rachel Reeves’ inaugural budget on October 30th – the stakes have never been higher. The mission is clear: drive growth and secure the UK’s economic future. One critical avenue for achieving this is through Foreign Direct Investment (FDI), where the UK has both opportunities and urgent challenges to address.
Lord Harrington, author of the landmark Harrington Review on FDI, recently led a debate in the House of Lords, asking: “What progress has there been in implementing my recommendations?” His review lays out a clear, actionable strategy to attract global capital by streamlining policies, offering consistent incentives, and cutting through red tape. With the International Investment Summit set for October 14th, just 100 days into the new government’s term, the timing couldn’t be more critical.
This summit is a prime opportunity for the government to demonstrate its commitment to economic growth by surpassing the £29.5 billion in foreign investment secured at the previous Global Investment Summit. By acting on Lord Harrington’s recommendations, the government can create a stable, predictable investment climate that drives innovation, generates jobs, and fosters sustainable growth in sectors like technology, infrastructure, and green energy.
The Harrington Review
The recent Harrington Review, published last November, could offer some solutions for the new government. The review came at a crucial time, with the UK slipping down the league tables for investment attracted, this report offers a blueprint for revitalising the investment landscape. Currently, the UK’s business investment stands at 10% of GDP, which lags behind the 12% average of its global competitors. This 2% disparity translates to a staggering £50 billion annually and missed opportunities, jobs, and economic growth. To make matters worse, the gap is widening. The latest ONS statistics published in August revealed that business investment fell by 0.1% in Quarter 2 and is now 1.1% below the level in the same quarter one year ago.
In February this year, iNHouse hosted a roundtable with Lord Harrington to discuss the contents of the review. The insights from this session with business leaders made clear the urgency and potential impact of the report’s recommendations.
Here’s what we learned:
Business Investment Strategy
Developing a clear and measurable Business Investment Strategy is crucial for setting the UK’s investment priorities. A dedicated Investment Committee overseeing this strategy can ensure stability and visibility in investment priorities, making the UK a more attractive destination for investors. Despite ranking second in Europe for attracting FDI projects, the UK can do better. With a share of Europe’s inward investment market growing to 17.3% in 2023 from 15.6% in 2022, there’s clear potential. A cogent strategy, derived from the review’s recommendations, could help the UK leverage an unstable international market to attract investment and deliver the economic growth Labour promised.
Organisational Reforms
The review made clear that prioritising investment across central government with clear accountability is essential. The appointment of an Investment Minister, supported by a cross-government Investment Committee, can lead this effort. This minister would play a critical role in breaking down silos and problem-solving across departments, akin to a business executive. This centralised approach ensures that investment priorities are identified and actively pursued across government.
Proactive Engagement and Tools
Shifting from a reactive to a proactive approach in engaging with businesses and investors is necessary. The Office for Investment (OfI), which would be empowered to contact and negotiate with strategically important investors and utilise government tools and resources effectively, is a good start. This proactive engagement would mean the government actively seeks out investment opportunities rather than waiting for them to come. This includes identifying potential investors and sectors, understanding their needs, and tailoring strategies to attract them to the UK.
Planning and Infrastructure
Strengthening measures in the National Planning Policy Framework to prioritise high-value investment projects will expedite the readiness of sites identified for significant investments. This includes fast-tracking planning processes through specialised units and agreements. This will be particularly important for our devolved regions, which can take renewed authority in delivering economic growth. The West Midlands, for example, secured 127 projects in 2023, a 72% increase from the previous year, demonstrating the potential for regional growth when planning and infrastructure are streamlined.
Regulation and Tax
Regulators should focus more on encouraging investment, ensuring they report on facilitating long-term value. A consistent, long-term approach to tax that reduces complexity for businesses is also recommended. Additionally, reviewing funding allocations to UK Research and Innovation will ensure they incentivise business investment effectively. Regulators should be reconcentrated away from seeking to find the problems and risks in issues to considering how to maximise opportunities when they present themselves.
Place-Based Investment and Collaboration
Building on the success of Metro Mayors and devolved administrations to expand the place-based offer to investors is vital. Strengthening local investment strategies and creating long-term Memoranda of Understanding with sub-national Investment Promotion Agencies will support this effort. For instance, Greater London recorded 359 FDI projects in 2023, a 20% increase from 2022, making it Europe’s highest-performing region for investment. With defined local powers and a complementary national strategy, London could lead the UK’s growth efforts, and regional hubs – Manchester, Birmingham, and Glasgow – can be delivered the tools to deliver growth like comparable European cities such as Milan, Frankfurt, or Lyon.
The Benefits of Enacting These Recommendations
These recommendations, if enacted, are not just about economic theory – they are directly relevant to the challenges the government faces today. With businesses expressing concerns about the new Labour government’s direction, a clear and proactive investment strategy could be the antidote to waning confidence. By attracting global investment, the UK could close its current investment gap, creating jobs and revitalising communities across the country.
In practical terms, this means more than just numbers on a spreadsheet. Increased foreign investment could lead to higher GDP, which, in turn, would bolster public services like healthcare, education, and infrastructure—areas that are always under the spotlight when politicians return to Westminster. For a government keen to show it can deliver, this is a real opportunity to back up rhetoric with tangible outcomes. The question now is whether Labour will seize this moment to reshape the UK’s economic future and restore its standing on the global stage.