Fixing the foundations: Making Britain a more attractive destination for Foreign Direct Investment

Executive summary

Context:

• Foreign Direct Investment (FDI) can be defined as an investment made by a resident entity of one economy in an enterprise in another economy. The investment involves a long-term relationship, reflecting a lasting interest and control – with the aim of having an effective voice in the management of that enterprise.
• FDI is an important driver of economic prosperity. It acts as a vital channel for capital, innovation and skills. For an open, trading economy such as the United Kingdom (UK), attracting high-quality FDI is not only beneficial; it is essential for long-term growth, creating high-value jobs, fostering cluster formation and enhancing global competitiveness. FDI can be seen as a vote of confidence in a country’s long-term prospects. 
• There is a large body of literature linking the attraction of FDI to improving productivity growth. Britain’s productivity growth has been stagnant since the 2008 financial crisis and is a seemingly intractable problem for the UK.
• In 2024, Britain attracted 853 FDI projects, making it the second most popular destination in Europe for FDI. However, this represented a 13% decline from the previous year.
• FDI projects are a major source of employment. In the 2024-2025 financial year, FDI projects created 69,355 new jobs and safeguarded another 10,195 existing ones.
• His Majesty’s (HM) Government has explored opportunities for improving the UK’s attractiveness for FDI, most notably the 2023 Harrington Review of FDI. The Harrington Review calls for a shift in how HM Government approaches FDI, moving from a reactive and silo-based approach towards a more proactive and coordinated plan which places investor priorities at its core.
• This Report picks up from the Harrington Review and builds on its approach for a more contested and volatile world.

Questions this Report addresses:

• What are the primary factors that attract and deter foreign direct investment in Britain?

• To what extent can subsidies and incentives effectively attract investment, and what are their merits and limitations?

• How can HM Government enhance the UK’s attractiveness as an FDI destination?

Key findings:

• HM Government should focus primarily on ensuring that Britain is the type of country businesses want to invest in. This cannot be achieved through subsidies, such as grants or tax exemptions, alone. Instead, it involves fixing the foundations and tackling the root causes of why investors are put off the UK. Specifically, HM Government should address:
  • The challenges facing investors trying to navigate Britain’s complex institutional arrangements and bureaucracy. This requires certainty about where decision-making authority lies in the UK. In order to do this, HM Government should provide clarity on devolved decision making by either centralising authority in Westminster and Whitehall, or devolving greater authority to mayors and regions so they can secure FDI projects directly. The former would yield results more quickly, while the latter might be a more effective engine of prosperity across the country in the long term. The status quo is the worst of both worlds and leads to confusion for investors. In the absence of clarity over where decision-making authority lies, HM Government should start by bolstering the Office for Investment (OfI) to improve its ability to act as a ‘concierge service’ for investors;
  • The UK’s stifling planning system and laws, and the resulting poor and irregular quality of British infrastructure;
  • High UK energy prices and land acquisition costs; and
  • Competition with other countries.
• Subsidies have their place when used properly, but HM Government should not view any single incentive as a panacea for Britain’s economic malaise. Incentives can be used to alleviate difficulties, but can also be a sign of underlying problems with a country’s ability to attract investment on its own merits. As such, the UK should be cautious about getting into ‘subsidy races’; countries and regions around the world can offer preferential tax incentives, subsidies and land with access to water, electricity and other utilities. Subsidies are risky, and do not work in all circumstances.
• Similar subsidy control rules apply now as when Britain was a member of the European Union (EU). This is not a significant barrier now – nor was it when the UK was a member of the EU – to providing incentives for attracting FDI to Britain. In practice, EU countries do support their industries – and Britain could have supported particular sectors, such as clean technology, while remaining part of the EU on the grounds of economic development. The UK-EU Trade and Cooperation Agreement of December 2020 required Britain to introduce an alternative state subsidy system. At the same time, being outside the EU has enabled Britain to secure a better tariff deal with the United States (US) than the EU.

Recommendations:

In order to make Britain a more attractive destination for FDI, HM Government should:

• Implement a five-year reduced tax rate of 10% for ‘greenfield’ investments in areas HM Government deems as critical sectors: These include clean technology, quantum and biotechnology. Reduced tax rates could be conditional on meeting targets on job creation and Research and Development (R&D) spending. This strategic move would make the UK more competitive compared to international investment zones and significantly improve its appeal for FDI.
• Offer 100% first-year capital allowances (full expensing) for investments in these critical sectors: This incentive would make the cost of a capital investment deductible upfront, rather than over time. By doing so, HM Government could help channel private investment towards its strategic priorities.
• Help investors to navigate the UK’s institutional arrangements and bureaucracy: A more proactive and coordinated approach from HM Government would help investors understand Britain’s bureaucracy, and shield them from unnecessary bureaucratic burden. As noted previously, this would ideally involve addressing devolution, and in doing so, providing clarity – for both the UK and investors – about where authority lies within Britain’s governance institutions and architecture so that investors are not sent back and forth between government departments, regional authorities, non-departmental government bodies and other ‘quangos’. In the absence of such reforms, HM Government should:
  • Increase resources and capacity for the Office for Investment (OfI) so that it is better able to act as a concierge service for investors. In the 2025 Mansion House speech by Rachel Reeves, Chancellor of the Exchequer, such a concierge service for the financial sector was announced. However, a concierge service should be broader than this, and explicitly seek to attract strategically important companies and investment – in areas such as clean technology, quantum and biotechnology – and connect them with a clear strategic vision for the UK’s future;
  • Promote a new culture within the OfI which better understands investor thinking and motivation. New staff should be hired primarily on their experience of trade and investment. The OfI should reduce reliance on generalist civil servants, who are often not as experienced in understanding the motivations and thinking of investors;
  • Ensure that the OfI employs staff with a deep cultural awareness of key partner countries with which the UK seeks to improve investor relations;
  • Systematise ‘soft landings’ by providing more structured support for new investors, such as short-term office solutions and connections with local universities and ecosystems; and
  • Improve availability of information for potential investors, such as rent prices, tax levels and labour costs.
• Promote a clearer story and value proposition: This would explain to investors why HM Government wants to attract FDI, which types of FDI and, crucially, how this relates to Britain’s national and strategic objectives. That includes a clear-eyed assessment of what the UK’s unique offer is to investors, such as a bridge to European markets, a world-class science and technology ecosystem, and a comparatively flexible and well-educated labour market.
• Improve planning and infrastructure: This should be done by addressing challenges in planning (such as setting hard deadlines on statutory consultations, and making ‘brownfield’ sites readily available and connected to energy infrastructure through kitemarked certification).
• Find a new mechanism to reduce energy prices: Now that zonal pricing has been rejected, a long-term solution should tackle the structural causes of high energy prices instead of using subsidies.
• Conduct regular international benchmarking: This would ensure that Britain is aware of the changing international environment, such as the arrangements and schemes being offered by other countries. Although such research and analysis is currently conducted by external organisations (such as EY), Whitehall itself requires a deeper understanding of FDI metrics and how they are compiled. More importantly, such information should be better embedded within decision-making structures and processes within Whitehall, and as such should not be seen as the purview of external organisations alone.