UK remains attractive for foreign investment despite Brexit

A study ranks the UK as the world’s fifth most attractive destination for M&A activity; fintech attracts significant investment and renewable energy is a potential source of FDI growth.
UK remains attractive for foreign investment despite Brexit

A low interest rate and the weakened pound sterling helped the UK remain attractive to foreign investors last year even with Brexit uncertainties, according to a report by The Business School, City, University of London.

The study of M&A activity last year ranked the UK in fifth place in a Mergers and Acquisitions Attractiveness Index. The US was the most attractive market, followed by Singapore, Germany, and the Netherlands.

M&A Attractiveness Index 2020

While Singapore scores consistently well, particularly on political and economic factors, the US is host to almost 50% of global M&A volume deal and value, thereby securing the top spot, said Naaguesh Appadu, author of the report and research fellow at the business school. Recent editions of the annual index have seen these two countries vie for the top spot.

Researchers assessed the ability of 148 countries to attract and sustain M&A activity, taking into account development indicators including the technological landscape, ESG (environmental, social, and governance) factors, the economy, and the regulatory and political environment. These indicators combined are given 75% weighting in the index. The other 25% takes into account the volume of deal activity and value of domestic and in-bound cross-border M&A activity.

Infrastructure and assets — such as the number of registered companies, ports, railways, and roads — were the highest scoring factor for France, Germany, Singapore, the UAE, the UK, and the US. Meanwhile, Canada, the Netherlands, and Switzerland scored highest on ESG factors, and technology was Hong Kong’s major strength.

Low interest rate and decline in pound favourable to foreign investors

The Bank of England lowered its base rate to 0.1% last March at the onset of the pandemic, and the low interest rate is one factor that contributed to the UK’s resilience in the ranking. Another advantage for foreign buyers looking to purchase organisations in the UK is the pound’s slide in value where it’s almost 1 to 1 against the euro, Appadu added.

The UK left the EU single market and customs union on 31 December 2020, hence, during the period of study, the practical ramifications of Brexit were yet to take effect.

Data from the UK department for international trade suggests that leading sources of foreign direct investment in the UK include the US (462 projects in 2019–2020), Nordic and Baltic region (134), India (120), Germany (115), France (99), China and Hong Kong (87), Italy (78), Australia and New Zealand (72), and Japan (65).

Software and computer services most attractive sector

The UK’s strong industrial base and geographic location continue to make it attractive for investment. These advantages are underpinned by robust legal and regulatory frameworks, and strong corporate governance code that international investors understand and that provides some stability, said Tej Parikh, chief economist at the Institute of Directors.

The world-class universities located across the UK, and associated access to highly qualified graduates, is a further asset.

Financial services and professional services are particularly successful sectors and continue to attract investment from abroad, Parikh noted.

A notable development over the last five to ten years is the emergence of startups in the tech space, and UK fintech and digital firms are attracting significant international investment. Alongside these, renewable energy is another potential growth area for FDI.

“We’re at the stage where we’re evaluating the risk of these strengths being undermined by Brexit, the pandemic, and other factors,” Parikh said.

Manufacturing is one area that has become less attractive to international investors, particularly in light of withdrawal from the single market, but the UK’s strength as a financial services hub hasn’t been dented by much even after the loss of passporting rights within the EU, he added.

However, Parikh noted that the last three years of Brexit and political change has undermined the reputation of the country and its stability, and these factors could become difficult for investors to navigate as UK laws and regulations are reworked to replace EU regulations.

With the end of freedom of movement and consequent reduced access to skilled workers, coupled with existing shortages of talent in the STEM (science, technology, engineering, and maths) fields, “foreign investors know there is a risk that a UK firm may not have access to certain skillsets”.

The nation’s physical and digital infrastructure also requires attention. “When the government set out its industrial strategy in 2017, investors could see that the UK was planning to reinvest in its roads, rail, digital networks, towns, and cities, and that helped attract foreign investment,” he added. “Brexit and the pandemic mean the government’s focus has gone elsewhere.”

Samantha White is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Chris Baysden, an FM magazine associate director, at