Investment. Foreign, redirected investment

Britain's share of FDI to the European Union is falling. Is the euro to blame?

WHEN a British company invests in a new plant, it is a source of some satisfaction to the local MP whose constituency benefits. But if a foreign company opens a shiny new factory on these shores, it is a source of national pride and ministerial self-congratulation. Of all the enticing locations a footloose global capitalist might consider - from the Pearl River Delta to Northern Bohemia - they chose us!

It isn't just politicians who like foreign investment. Economists point out that foreign-owned plants tend to be more productive and their workers better paid. Their virtues may also leak into the British “air” as Alfred Marshall, a great 19th-century economist, put it.

But those fickle foreigners are choosing Britain less and less, it seems. The Economist Intelligence Unit (EIU), a sister company of The Economist, reports that inward investment to Britain, which peaked at almost $120 billion in 2000, amounted to just $14.5 billion in 2003. Britain's share of EU FDI has fallen every year since 1998: in 2003 its share was a paltry 5.4%.

Every year, that is, since the euro was born. So has monetary union already begun to reshape the geography of European production? The fall in the share going to Britain's partners-in-exile, Denmark and Sweden, suggests it may have. The EIU concludes that saying no to the euro will cost Britain one-third or more of its potential annual FDI flows. Other economists think it could cost Britain as much as half.

But other, cyclical, forces may be at work. Britain is particularly exposed to swings in the appetite to merge and acquire. Its market for corporate control is more open than that of many of its continental neighbours, as anyone who has recently tried to acquire the assets of a French national champion can readily attest. Britain thus benefited disporportionately from the rush of cross-border corporate marriages in the late 1990s, and may do so again, when the urge returns.

Mergers and acquisitions are not just more volatile than other forms of FDI; they are also less politically sensitive. Politicians might turn out to see the ribbon cut on a shiny new plant. But they rarely get so worked up about foreigners taking a 10% equity stake in a company that already exists. Barry Bright, of Ernst & Young, an accountancy firm, argues that “mergers are about the nature of the company being acquired. FDI is about the nature of the country being entered into.” He finds that Britain attracted more investment projects than any other European country in 2003: 453, up from 370 in 2002.

But acquisitions should not be too quickly discounted, says Laza Kekic, an author of the EIU report. “Firms,” he says, “are acquired for a reason ” - -because the foreign buyer can do a better job of running them. Like all forms of FDI, acquisitions are a conduit for foreign expertise. Without them, Britain must rely on a shallower managerial gene pool.

The UK's share of FDI to the European Union is falling. Is the euro to blame?

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