My Lords, I requested this debate on a subject on which I spent most of last year and produced what is somewhat modestly called the Harrington Review of Foreign Direct Investment—it is probably the only volume that will ever bear my name, so it means a lot to me.
I was asked to do this review by the former Chancellor of the Exchequer, Jeremy Hunt, but it certainly became very much a cross-party matter. I made sure, as it was my job to do, that the then Opposition, now the Government, were plugged in to it during the course of the review, because I did not want it to become a political matter. I am pleased to say that in the Autumn Statement last year, the Chancellor accepted the recommendations. The then shadow Business Secretary, now the Business Secretary, at a separate event at PwC, also accepted it. I really did not want this debate to become a list of criticisms of the last Government for not implementing it, or criticisms of the current Government for the same, because I have had a lot of good will from both.
However, I feel that this House should really know a little about what the recommendations were, because we still have a fundamental problem with foreign direct investment. On the surface of it, the numbers are reasonably good. We do better in terms of volume than many other comparable countries. But when the numbers are analysed deeply, as I do in the report, the situation is not as rosy as it seems. This is shown when we strip out renewables—noble though they are, it is just that the taxpayer is subsidising foreign manufacturers to come in and supply energy, which, while all very good, is not investment in the other way—and if we strip out what I call share swaps, which are basically US private equity and others legitimately taking stakes in companies, which does not really mean new investment.
The cause célèbre that led to me being asked to do this was the AstraZeneca deal, when AstraZeneca took the decision, after 14 months, to move not to Macclesfield, Cheshire, but to Dublin, Ireland. It is easy for people with my personal political views to say it is because of Brexit, and it is easy for other noble Lords who maybe think a little differently on the political spectrum to say it is because of corporation tax. Actually, when we took evidence from about 200 companies, sovereign wealth funds, pension funds and others, the situation was far more complex than that.
My Lords, I congratulate the noble Lord, Lord Harrington, on his review. As a former TUC leader, I hope to add a workforce perspective to the debate.
In my view, the key objective of driving up investment, from whatever source, is simple: the Government’s goal must be to create more prosperity and to ensure that that prosperity is shared fairly, not least in the form of better-quality jobs in the parts of the country that need them most. There is a bigger picture on UK investment, of which the current concern about falling FDI is just one part. Britain languishes near the bottom of the OECD business investment league. Productivity is sluggish and well below the US, France and Germany, with too little invested in innovation, new kit and equipment.
For many years, the TUC has argued that the root cause of low investment is the British disease of short-termism and that this is facilitated by an outdated corporate governance regime which glorifies shareholder primacy while actively excluding workers’ experience and expertise from the boardroom. The former Prime Minister, Theresa May, once agreed with us. It would be interesting to hear whether the noble Minister agrees too.
More positively, I welcome the identification by the noble Lord, Lord Harrington, of the UK’s key growth industries. This is not about picking winners; it is about accelerating success. I support his view that not all wisdom resides in Whitehall. The devolved authorities —and local unions and businesses—have a vital role to play in attracting place-based investment.
But a word of warning: we must guard against the UK’s nations, regions and cities wasting time and public money competing against each other for FDI rather than co-operating for the common good. Also, we must be clear that we cannot and will not seek to attract foreign investment on the grounds that the UK offers cheaper labour and weaker workers’ rights. Those days are over.
My Lords, I am delighted to take part in this debate and congratulate my noble friend Lord Harrington on his excellent review. I draw your Lordships’ attention to my register of interests, which discloses that I am a senior partner of Cavendish Corporate Finance. As such, I have had a 35-year career in attracting investors into UK businesses, mainly from overseas buyers, and thus have some experience in this area. I have very little experience on the greenfield side of FDI, as we typically act for mature businesses. I note that this report is, quite rightly, very heavily focused on greenfield.
It is worth noting that academic research suggests that just 4% of local business units in the UK are foreign-owned but that they account for nearly 40% of UK turnover. Some research by Jonathan Haskel, the son of the noble Lord, Lord Haskel, shows that foreign-owned companies which invest in the UK are about 50% more productive than domestically owned ones, not least due to the knowledge spillover, so this really is important.
Despite all the talking down by some, FDI has remained very strong in the UK post-Brexit. No less a person than Warren Buffett told the FT in 2019 that he was
“ready to buy something in the UK tomorrow”—
a marvellous endorsement. We take 17.3% of Europe’s FDI investments into the UK and are only second in Europe at so doing. To my surprise, the official figures record only 985 FDIs in the UK in 2023, which is very low. It amounts to £83 billion into our current stock of £2 trillion. Only 985 implies that not all the figures are properly recorded. It also misses a huge swathe of inward investment, which is private equity.
We should not forget that, according to a recent BVCA report, private equity and venture capital investment by UK firms in 2023 for global investment raised some £60 billion, of which £20 billion went into the UK alone. Of that £20 billion, over 80% comes from outside the UK; so that is overseas investors—largely American but not exclusively—coming in through private equity straight to UK businesses. This is, if you like, foreign indirect investment, but, none the less, it makes a massive difference to the UK economy.
My Lords, I will, first, thank the noble Lord, Lord Harrington of Watford, both for securing this debate and for producing such a thorough and insightful review on FDI—I read all 120 pages at pace. As the report quite rightly underlines, FDI is all the more critical to the UK because of our continuing low levels of investment in both private and public sectors, which is the major factor behind our lost growth and productivity. We start from a much lower investment base than other G7 countries, however well we are ranked in terms of FDI attractiveness.
I appreciate that the big-ticket foreign investments of £100 million or more grab the headlines and drive much of our promotion and policy, as these projects typically account for about 70% of FDI inflows. But I would like to see much more focus on FDI in the £1million to £5 million and £50 million to £100 million brackets, on which there is curiously little data. That is a comment I often hear from investors themselves, and where, incidentally, the UK underperforms. On this subject, I ask the Minister, first, what data we have on FDI in SMEs, and is it broken down by size of investment and sector? Secondly, how, and to whom, is this data distributed?
I ask because, from my anecdotal experience, the impact of FDI on, particularly, medium-sized businesses, is proportionately far greater than for many of the large projects in terms of growth rates, jobs created, innovation and, indeed, return on investment. Some 52% of our private sector output comes from SMEs; and, more importantly, scale-ups, defined as enterprises growing at 20% on average per year, account for over a fifth of that turnover—that is almost £500 billion per annum—despite representing just 1% of all SME businesses. In terms of generating GDP growth, these scale-ups play a vital role both locally and nationally.
I should perhaps declare an interest, in that I founded and ran one of these scale-ups for 20 years, before we landed what is called an accidental investment from a US investor group, which made an eight-figure commitment and took a strategic stake. With foreign backing and advice, we managed to innovate, expand our overseas markets and double the size of our workforce in four years, and we saw a huge impact on productivity and growth rates. The point of this anecdote is less about the economic impact and more about the accidental aspect: the investors found us via Google. I am now an investor and adviser to start-ups and scale-ups, and continue to see the sporadic, accidental aspect of foreign investment. We need to be far more systematic.
My Lords, I very much welcome the opportunity to speak in this debate on an issue that is so vitally important to the well-being of the United Kingdom. I congratulate the noble Lord, Lord Harrington, not only on securing this debate but on the completion of his review. There is no doubt that the UK as a whole remains a leading investment destination, but there is no room for complacency, and there is certainly space for improvement and innovation.
In my seven years as the Northern Ireland Minister for Enterprise, Trade and Investment, I was always incredibly proud of the amount of foreign investment we attracted to my talented and skilled part of the United Kingdom. We had our challenges, not least that our nearest neighbour, the Republic of Ireland, had a corporation tax rate of 12.5%—which, to be fair to it, it has relentlessly promoted to gain the eyes and ears of potential investors, especially those from the United States, looking for a base in or close to Europe for their “follow the sun” model of operation. The noble Lord, Lord Harrington, talked about consistency of policy: it has had that tax rate for 25 years.
I have long believed that lowering the CT rate across the UK, but especially in Northern Ireland, would have brought huge dividends. As an Executive in Northern Ireland, we argued the case with the Brown and Cameron Governments. We were successful with the latter, and the Corporation Tax (Northern Ireland) Act 2015 granted to the Executive the power to set a lower rate of corporation tax through the Northern Ireland Assembly. However, the rate has not been lowered, as the European Union state aid rules mean that the cost of lowering the rate would have to be taken out of the block grant to Northern Ireland from Westminster. Post-Brexit, as state aid rules from Europe still apply to Northern Ireland, this effectively means that the Northern Ireland Executive will be unable to lower the rate of corporation tax. The whole idea of lowering corporation tax was to make Northern Ireland more competitive with our nearest neighbour, but I am sad to say that European overreach has killed this idea.
My Lords, I commend my friend the noble Lord, Lord Harrington, for his report, and for tabling today’s debate. I know what it takes to harness FDI in the UK. During my stint at No. 10, I worked across Whitehall on several major foreign direct investments. Together with my noble friend Lord Johnson we led the 2023 Global Investment Summit, which beat every investment and attendance record.
Our country has in recent years been a magnet for both capital and talent, topping global rankings. That said, reading the press and hearing from CEOs and entrepreneurs, I fear we have a boom in gloom—investor sentiment is shifting and souring. This is a pressing topic because investor confidence and conviction underpin our national growth priority. We need more investment.
Let me share three observations. First, FDI is a competitive sport, as the noble Lord, Lord Harrington, rightly said. This country has a tremendous hand to play, but there are serious concerns and we face global competition. Investors want stability and common sense. On the former, the Government can no doubt play up their strong majority in Parliament, which is welcome. On the latter, the market is very worried that we will not stay competitive on tax and labour laws. The Government need to back up their pro-business claims with pro-business policies. Business scepticism is now rampant.
Secondly, FDI is not the only capital in town. Our domestic pensions system is woefully under-indexed in both our UK stock market and infrastructure. It needs to get into the game alongside FDI and foreigners. This will boost investment and should also help pensions returns. Moreover, given that FDI often—or always—gets a government subsidy, it will ensure that pensions, not just foreigners, benefit from government largesse.
Thirdly, FDI is about talent—people—not just capital. Let me ask noble Lords which entrepreneur, British or foreign, is going to choose the UK if rumoured levies on capital through CGT, carry and inheritance taxes become uncompetitive. We need wealth creation to pay for our welfare state. We have a mismatch, I fear, between the rhetoric about attracting investment to drive growth on the one hand and policy actions or ideology that will drive entrepreneurs and investors away. I am sorry to be alarmist.
My Lords, the introduction to the debate from the noble Lord, Lord Harrington, was very compelling. I am speaking personally—not that I think my Liberal Democrat colleagues would intervene on and disagree with me, but many of them have expertise in these issues, as, of course, do others in today’s debate, which I do not.
When I saw the title of the debate, I thought: what makes a country attractive? It must include a focus on people. Some of this is soft—similar to soft power. Does the UK give the impression of being welcoming and send out a message of welcoming individuals? Is it open-minded about who would contribute to our society, demonstrating that it is itself interested in and imaginative about contributing energetically and effectively to global society?
The language is important, the Government’s language especially, as it reflects attitudes. So is being warm and welcoming in practical terms. Almost my first thought was immigration policy, including the visa regime. Do we indicate that we are a country which characterises short-term labour needs—shortage occupations—as more important than people’s inherent value and, indeed, their values? Do we say, “Your family members can come with you, provided they are not dependants”?
I give as another example adult dependant relatives. I have heard so many examples of difficult decisions and the distress of high-flyers who have been working here for many years and are very anxious about elderly parents in their country of origin. They have the means to support them in the UK but, crudely, no visa is available unless the parent is so unfit that they are, in fact, not fit enough to travel. I have heard many examples of high-flyers leaving the UK so that they can care for their parents.
In the interregnum between the GLC and the GLA—so 30 years ago, but I do not think that people’s nature change—I chaired the London Planning Advisory Committee, and I did come to realise that planning cannot solve everything and that it can cause problems. We undertook a major piece of work on London as a world city, involving academics and, crucially, the business community. It considered London’s strengths and weaknesses alongside cities such as New York, Paris and Tokyo.
My Lords, investment is the lifeblood of an economy. What will attract investment into ours?
First and foremost, we need to recognise that the investor community, amassing funds of trillions, is truly global, has untrammelled freedom of choice, can invest anywhere, and will place its funds only where it is convinced that it will make good returns—and reliably—in a predictable and non-volatile political, fiscal and financial environment. In other words, a necessary if not sufficient condition for attracting investment is stability, as the noble Lords, Lord Harrington and Lord Petitgas, eloquently underlined.
Where we score highly on stability is our widely admired and trusted legal and regulatory systems, and in the City we possess a world-class financial centre, but, in the past 10 years or so we have failed badly to offer the political stability the investor community looks for. We have exposed investors to the chronic uncertainty of Brexit, religious wars in the ruling party, five Prime Ministers, and the Liz Truss moment of madness, with the Bank of England forced to ride to the rescue of the UK’s pension funds.
A new Government should strain every sinew to restore political calm, to foster a stable currency and to ensure internationally comparable interest rates. Beyond stability, we have to offer investors high returns, so a new Government must also work to remedy the enduring weaknesses that contribute to the UK’s low productivity: underinvested road and rail infrastructure, a planning system that moves at a snail’s pace, skills shortages at every level and too few people in productive work.
I neither have, nor have I ever had, a stake in a private equity fund, but I have chaired companies invested in by PE, and I have been much exposed to global investors. The UK has the greatest private equity firepower in Europe but a high proportion of those working in the sector are not UK citizens and they, and the funds they manage, are highly mobile. Personally, PE professionals can benefit handsomely if they produce high returns for their investors, but if they fail, which happens, they receive nothing, and the risk of that is recognised globally in establishing tax regimes for when they do succeed.
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AstraZeneca lent us its management team and we went through the whole process in great detail. We found that patterns emerged across the spectrum, which I will briefly outline. I have only 10 minutes so I cannot do it too deeply, although copies of the review are available if anyone would like to read it. It showed that signals we send to investors, particularly about consistent changes of policy, were a big one, and I quote several examples in the review. For example, the big ones are HS2 and the road to net zero. Originally it was 2050 for no further production of internal combustion engines, then it was changed to 2030, then to 2035. There are lots of such examples across the whole spectrum of government which investors look at and get worried, because they do not know where the next policy is going to come from.
The second was the availability of money. This is not just a question of the Government not having enough money to help investors. There is quite a bit of money, but it is in so many different pots, challenges, funds and departments that it is so complicated to access, and this puts a lot of companies off. That is before we get to the main hurdles to business investment: the clichéd—but true—planning and getting sites through planning permission; connection to the grid, which can take up to 20 years; skills provision; visas; and a whole list of obstacles to investment. I am sure all noble Lords will know of these.
We have to compare our performance with that of other countries, and other countries have changed and got very well-organised investment operations. For example, AstraZeneca—and many others—go to other countries and are given a written offer by those Governments, in the same way a bank would. The offers say, “Here’s the deal, here’s the money, here’s the site with planning permission, here’s how you get your visas, here are the skills that we are planning to provide”. It is then much easier to decide whether to make the investment, subject obviously to a lot of due diligence.
We really do mess such companies about. We have government departments with policy objectives which are often not compatible with other ones. This leads to people who do a very good job at their own job—which might be reducing the number of visas, because that is their policy—going directly against what another department wants, because it is trying to encourage investment.
Lots of recommendations came out to try to deal with this, some of which I will very briefly mention before I ask the Minister about them. He has been most helpful. We had a cup of tea yesterday to discuss this matter, and I hope he will be able to answer the questions that I gave him. I recommended that a government investment committee be set up to lay out a business strategy for prospective investors, like a bank or financial institution would. It would not say that we can do everything, because we do not have the money nor the resources, but it would identify which areas we are going to use to attract more people. These could be missions, to use the current Government’s statement, or the five areas identified by Jeremy Hunt in the Conservative Government equivalent.
I will give a brief example—I will just pick one out of the hat. In this country, we are very good at aircraft wing manufacturing. The question then is: how do we attract more aircraft wing manufacturers, and, above all, how do we make it possible for them to have their suppliers in the supply chain cluster around them? There is a government investment strategy—if you like, that is the equivalent of the board of a financial institution—which lays out the strategy. Beneath that, we have someone who—again, if it were a financial institution—is akin to a chief executive: a Cabinet-level Investment Minister. We had an extremely competent and capable Investment Minister in the previous Government, who, as it happens, is sitting on the Opposition Front Bench now. I felt that he definitely should have been promoted and made the Cabinet-level Investment Minister. I do not think that the current Government have filled the post, but I can think of someone who is very competent to do that.
The position itself is important. Why should that person attend Cabinet? First, if you look at all the big sovereign wealth funds and others, their bosses attend Cabinet, and have the regular ear of the Prime Minister, President or whomever it might be—that is very important. Secondly, in our own Government, that person has to have overriding powers over other departments. That is very important, because when a prospective investment is signed off, real clout is needed over other departments to get all these things done.
Beneath that, my recommendation was to use the existing Office for Investment and to make it significantly greater. It is very good, but it has 25 people, which, in Civil Service terms, is like a corner shop compared with a whole country. It needs to expand dramatically and to be proactive by hunting out the kinds of companies that the strategy from the board above has given it and finding out what it will take to entice them to this country. It is very important.
Finally—I say “finally”, but there are 150 pages of recommendations—beneath that there needs to be a one-stop shop for prospective investors. They get tired of trooping from department to department and being told the Civil Service vernacular that this policy is “owned” by this or that department. The sort of organisation that other countries have for a one-stop shop is very important.
In the little time I have left, I note that there was progress in the previous Government, inasmuch as the Civil Service seems very tuned into this report. I received a very kind message from our trade commissioner in Singapore, whom I met only once at the beginning of the review. I then went to Singapore, where he said, “You should know that lots of your recommendations are being implemented outside the country, in the posts”.
The ministerial top-level investment committee was due to meet, I think, on the day that the election was called, but it has still not met. I ask the Minister—who is a very accomplished businessman in his own right, so I hope he has some sympathy with what I am asking—what progress has there been in implementing the report? Will the government investment committee with all the Secretaries of State sit? Will a Cabinet-level Investment Minister be appointed? Does the Office for Investment have the additional resources that I asked for? What progress has there been for a one-stop shop for prospective investors?
Instead, our prospectus must be built on a determination to transform the UK’s offer on skills and talent. That means not only cherishing our universities but practical action to address the Cinderella status of further education institutions and that of their learners and staff. Investors, both foreign and domestic, will be encouraged by our Government’s commitment to planning reform and to public investment in national infrastructure, including through the launch of Great British Energy, which will help to contain energy costs, and a national wealth fund. A proper industrial strategy will boost confidence too. Crucially, we must invest more in people. Improving the health, skills and creativity of the workforce will help to make the UK a more attractive destination for foreign investment and ultimately pay dividends for us all.
The review has some excellent ideas on how we can do better. I will focus on recommendation 4.6, on a long-term approach to tax. The Government have been exceptionally helpful to UK businesses through the tax system, with R&D credits of some £6 billion a year and the expensing of capital allowances, but it would be very helpful if the Minister could pass the message to the Treasury that we need certainty on the availability of both capital expensing and R&D credits for overseas investors.
If the new Government are serious about growth, pushing the wealth creators out of the UK is not the way to do it. The lead item in Saturday’s Times shows that they are leaving in droves, frightened by the proposals on non-dom tax; the previous Chancellor’s proposals were quite modest in comparison. There is also the disastrous proposed rise in capital gains tax. Why would anyone who is footloose want to stay in the UK? These actions completely contradict the stated objective of growth. If businesspeople do not want to live in the UK, or will not live in the UK, how on earth do we expect them to invest in the UK? It would be tragic if these excellent ideas from the noble Lord, Lord Harrington, are wasted because people such as non-doms and investors are encouraged almost to leave the country by these tax proposals.
I know that the noble Baroness, Lady O’Grady, will not agree with me, but I must add that overseas investors and, in particular, US investors, who are typically the most significant, are aghast at the proposed employment changes. They have invested in the UK way ahead of European countries because they see the current flexibility in employment legislation that facilitates employing people. Can the Minister please confirm that an impact statement will be prepared, showing the likely impact of any proposed employment laws on FDI and PE investment in the UK?
This brings me back to the issue of data. In the sub-£100 million investment market, and especially the sub-£25 million investment market, we need to ramp up our data and research, and make this more accessible to foreign investors, if we are serious about gaining a bigger share of FDI.
Finally, we should also take heed of the FDI-SME multiyear project, which is conducted by the OECD in collaboration with the EU. It focuses on how to develop linkages between FDI and local enterprises, and on how to create more opportunities of productivity and innovation spillovers for local economic development. It would be good to have a UK equivalent.
I still believe that having a lower rate for the whole of the UK would benefit all parts of the country. It is a great door-opener to foreign investors, and then the different parts of the UK can add their own special parts to the pitch.
In Northern Ireland, we have a very strong education system, and our bright young people are always our starting point. Northern Ireland still has a grammar school system, and I have always had such a positive reaction to our school system from international investors. We have the best maths results in Europe and are rated sixth in the world. It is a great story for employers interested in the skills of our young people.
Vocationally too, because of our size, we can quickly adapt to the needs of the global economy and particular employers. I used to say that Northern Ireland was big enough to do the business but small and flexible enough to care about the individual companies that were coming. In conjunction with our partners in higher and further education, we were able to set up skills academies, specifically to deal with gaps identified by incoming employers. This was a win-win scenario, for the company and for our young people seeking a career.
The triangular working of government, academia and industry was a tangible success for Northern Ireland and its inward investment offering. I welcome the comments from the noble Lord, Lord Harrington, about aircraft wings production. I have no doubt that he was thinking of Belfast—Bombardier and now Spirit AeroSystems.
I want to finish with a best practice example for the Minister. I note the comments of the noble Baroness, Lady O’Grady, about devolved Administrations and metro mayors not being in competition with the Westminster Government, and I think that is right. When I was Enterprise Minister in the devolved Administration, the now noble Lord, Lord Swire, was Minister of State in the Northern Ireland Office and I had the privilege of working with him on a number of initiatives. One was a joint trade mission that he and I made to the Middle East, where we worked together to present Northern Ireland’s offering from a UK Government point of view and a devolved Administration point of view. It worked well and is a model that should be looked at. I ask the Minister to look at it from the point of view of the devolved Administration and that of metro mayors.
I therefore ask the Minister three questions. First, can he provide an update on the International Investment Summit and the appointment of the Investment Minister? Secondly, can he update us on the pensions review and reform, which is tied to FDI? Thirdly, can he say whether an analysis of the impact on FDI of the likely new tax and labour laws will be made in the Budget?
A major conclusion was the importance of London being attractive and liveable if it is to attract foreign investment. When companies consider where to locate, they consider what is important to their staff: good transport, accommodation, air quality, culture—obvious qualities when attracting and retaining staff. If you are bringing your children you need to be assured that it is a good place to bring up children, so it is about living conditions as well as working conditions—not that you can separate them entirely. When I opened the conference to launch the report, the slides—it was that long ago—stuck. They got going when I was talking about the attractions of London’s ceremonial events, and showed a refuse cart; actually, that is important too.
In summary, I am advocating a life in the UK test —not the one for citizenship, which gives too many applicants the feeling they are not wanted, but one for policymakers across the board.
The UK is not an outlier but somewhere in the middle of the pack in the tax regimes applied to PE by the US and leading EU countries—less generous than some, more generous than others. But I hope the Government will be truly wary of the very real flight risk of both funds and professionals, and the consequent dangers for the economy, if our rates are materially increased, as the noble Lord, Lord Leigh, himself underlined.
It is vital that the new Government celebrate and incentivise the spirit of enterprise—a critical route to growth, to increasing individual prosperity, to expanding the tax take, and to beginning the process of re-investing in our mightily challenged, underfunded public sector.