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US and China lead surge

Scotland still a magnet for investors – for now

First Minister at Xilinx
First Minister at the Edinburgh lab of US firm Xilinx

Scotland has continued to attract record numbers of inward investment projects, but the Brexit decision is likely to see a cooling of activity in the coming years.

The total number of projects in 2016 exceeded the previous ten-year high set in 2015, according to EY’s latest Scotland Attractiveness Survey, with China surging up the list of investors.

But the compilers point out that many of these decisions were taken up to three years before last summer’s vote by Britain to leave the EU and this is likely to impact on future plans.

The report shows that Scotland has secured the UK’s second-highest number of projects in every one of the past five years, demonstrating Scotland has established itself as the second most attractive destination in the UK behind London. The 2016 data also places Aberdeen, Glasgow, and Edinburgh within the UK’s top 10 cities for attracting FDI.

However Mark Harvey, EY senior partner in Scotland, cautioned over the longer term outlook.

“The research suggests that the EU Referendum vote and its aftermath may be having an influence on global perceptions of the UK’s medium to long-term attractiveness. Western European investors are twice as negative as Asian and North American investors.

“Decisions on the majority of investments made in 2016 would have been made up to three years ago, which helps to explain the UK’s solid performance last year, but signs of a slowdown are on the horizon.”

Nine per cent of investors surveyed said leaving the European Single Market may prompt them to change their investment plans or re-locate from the UK to Europe in the next three years.”

The data also shows a decline in the number of jobs created by inward investment from 12.7% to 6% and the average number of jobs per project in Scotland also decreased from 45 to 24 in the same time period.

Mr Harvey, said: “The decrease in FDI job creation in Scotland could also signal a shift in the labour market away from lower-skilled roles to higher-skilled, such as those required for R&D and software activities, which deliver increased value to the economy.”

Scotland’s cities, sectors and projects

Glasgow achieved a 27% increase in FDI projects (28 in total) to maintain fifth place behind London, Manchester, Birmingham and Belfast.

Edinburgh follows closely in sixth with 27 projects, falling three places. In contrast, Aberdeen has bounced up from tenth to seventh position with projects doubling to 18, signalling a rebound in offshore activity.

The leading sectors generating FDI into Scotland were the service sector with 17 projects (an increase of 42% from 2015), construction which had 14 projects (representing an increase greater than three-fold), closely followed by software with 13 projects. Software is a particularly strong area for Scotland as it is now second only to London in securing investments from the software industry, overtaking the South East of England with 12.

The surge in construction projects is partly due to the development of offshore wind farms and the technical services these require, as well as some pipeline construction projects that have been undertaken for the oil & gas sector.

In terms of FDI activities Scotland performed particularly well in relation to research and development (R&D) with a total of 21 projects secured in 2016, more than any other UK region.

Mr Harvey said Scotland’s reputation as a global leader in the software sector is reflected in the data, likely to be a result of the strength of the Scottish universities.

Scotland’s source of investment

The primary investor in Scotland remains the US, with 43 projects representing 35% of all projects into Scotland in 2016. French FDI investment continues to be significant and sustained – 2016 was the fifth consecutive year that France was Scotland’s second largest investor – followed by Germany in third place.

There has been a notable change in the fourth and fifth largest investors in Scotland with Ireland taking the former as a result of a 200 per cent increase. China leapt from outside the top ten in 2015 to rank as fifth largest originator of investments in Scotland in 2016.

UK performance

The UK secured its highest ever level of inward investment in 2016 and retained its title as Europe’s most attractive location for international investment, ahead of Germany, France and Spain.

The UK attracted 1,144 foreign direct investment (FDI) projects last year which represented an increase of 7% on 2015 but a decrease of market share of European FDI from 21% to 19%. The European market as a whole saw a 15% rise and enjoyed the best year for international investment since the Eurozone crisis, securing 5,845 projects.

Mr Harvey said: “Scotland is very good at securing follow-on business with inward investors, but more needs to be done to attract new FDI projects.”

Time to act

The survey indicates that UK economy has performed well after the EU Referendum vote and the outlook for FDI remains strong in the short-term. However, there are a number of indicators suggesting that the outlook for the UK is likely to be challenging and the UK needs to move quickly to position for future success.

Mr Harvey said: “What is clear, is that there is a short window of time to act.”

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