No 9 – 30th June 2000

Dr DeAnne Julius, Member, Monetary Policy Committee, Bank of England,

The Maxwell Fry Global Finance Lecture, University of Birmingham,

20th October 1999

By IAN MILNE

FDI and the UK

FDI¹ involving the UK is still largely to and from other English-speaking countries: almost three-quarters in the case of inward investment, almost two-thirds in the case of outward investment. The USA is overwhelmingly the UK's biggest FDI partner in both directions. The Commonwealth is the second most favoured destination for outward investment. The macro-economic importance of Far Eastern investors in the UK is minimal, despite some high-profile investments.

Two-thirds of all inward investment goes into British service industries (including utilities and oil and gas); only 35% goes into British manufacturing industries.

In contrast, a higher proportion of outward investment by British companies overseas goes into manufacturing (45%), though more than half (55%) goes into services.

By Region Net Earnings² £bn %

USA & Canada 63.41 69

EU '14' 18.53 20

Rest of world 10.03 11

World 91.97 100

By Country

USA 60.47 66

France 6.47 7

Germany 3.79 4

Australia 3.74 4

Switzerland 3.28 4

Canada 2.94 3

Belgium / Lux 1.74 2

Italy 1.66 2

Netherlands 0.78 1

Japan 0.68 1

English-speaking countries 67.51 73

By Region Net Earnings² £bn %

USA 71.74 35

Commonwealth 44.13 22

EU '14' 39.59 19

Rest of World 49.53 24

World 204.99 100

By Country

USA 71.74 35

Australia 14.23 7

Hong Kong 10.18 5

Singapore 9.13 4

Germany 7.78 4

France 7.54 4

Ireland 7.05 3

Canada 5.47 3

South Africa 5.01 2

Bermuda 4.60 2

English-speaking countries 133.1 65

The UK, by a wide margin, is the biggest single destination for outward US FDI, accounting for approximately one-fifth of the US global total and two-fifths of all US FDI in the European Union.

Of American firms' total overseas assets, 27% are in the UK. US foreign affiliates account for approximately 7% of British GDP and employ approximately one million British-based workers³.

Worldwide, most FDI is between Organisation for Economic Co-operation and Development (OECD) countries. The USA accounts for just under a quarter of global FDI, outward and inward⁴. Worldwide, the UK is the second-biggest outward investor and the third-biggest recipient of inward investment⁴. In 1998 and 1999 outward British FDI was similar in value to outward US FDI.

USA (75%), France (65%) and Germany (58%).

USA UK Germany France Japan

24% 14% 11% 7% 6%

USA China UK France Belgium/Lux

24% 10% 8% 6% 4%

USA UK Germany France Japan

1.08 1.90 4.70 1.32 16.9

FDI is playing an increasingly dominant role in internationalising the global economy. FDI flows have more than tripled in value during the 1990s alone, with no sign of slowing down. By 1998 the total sales of inward investors in their host country markets were worth $11 trillion, compared with total world exports of $7 trillion. The prominent role taken by the English-speaking countries in the growth of global FDI, notably the USA and the UK, is quite striking. Another feature is the continuing extraordinary interdependence of the American and British economies through FDI - a phenomenon that began in the 18^th century. The internet may or may not be the global economic story of the next ten years; but there is good reason for saying that FDI was the story of the 1990s.

1. FDI is long-term illiquid cross-border commercial and industrial investment by a business based on one country in a business based in another country, where the investor exercises control or significant influence. FDI occurs as "greenfield" investment, where the investor builds a facility from scratch; as the acquisition by the investor of an already-existing business; or as combinations of the two.
2. The analyses are based on aggregates for the ten-year period 1989-1998, adjusted for the Netherlands Distortion (see Note 5 below). The period chosen covers at least one full UK business cycle, from the Lawson boom through the slump and ERM membership to recovery; a period when the crucial dollar/sterling exchange rate was fairly stable and when the sterling/DM/euro exchange rate was volatile; and during which the Single Market - if it made any difference at all - came into effect. The indicator used is "Net Earnings" as defined by the ONS. This captures the earnings on all investments made to date, not just on those investments made during the ten years 1989 to 1998. Source: Overseas Direct Investment 1999, Business Monitor MA4, ONS, February 2000.

3. Source: US Bureau of Economic Analysis, quoted by Joseph Quinlan, Senior Global Economist, Morgan Stanley Dean Witter, article, January 2000.
4. Percentages for Aggregated Amounts during the 6 years 1993-1998 inclusive. Source: UNCTAD: World Investment Report 1999. Adjusted for the Netherlands Distortion.(See Note 5).

5. The Netherlands Distortion For tax reasons, FDI is often channelled through intermediate holding companies domiciled in the Netherlands. The Office for National Statistics (the "ONS"), in collecting its statistics on FDI involving the UK, records such FDI as originating in or going to the Netherlands, rather than the country of origin or the country which is the end-destination of the FDI. This is the cause of the Netherlands Distortion. To adjust for the Netherlands Distortion, it has been assumed that the underlying level of Dutch FDI in the UK per capita of the Dutch population is the same as the recorded level of FDI in the UK from the EU '13', per capita of EU '13' population. A similar assumption has been made in respect of outward British FDI: that the underlying level of British FDI in the Netherlands per capita of the Dutch population is the same as the recorded level of British FDI in EU '13' per capita of EU '13' population. The resulting over-recordings in respect of the Netherlands have then been apportioned to other countries inside and outside the EU '13' pro-rata to their shares of recorded total inward and outward FDI in respect of the UK. A similar adjustment was made to the UNCTAD global data to compute the percentages in the section headed "Global FDI".

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