Can foreign investment transform regional productivity?
Foreign direct investment (FDI) has long been important in the UK economy. Overseas investment has created jobs, introduced new technologies and supported industries across the country.
However, not all investment delivers the same long-term benefits. While some projects create employment, others have a much wider effect by strengthening local supply chains, developing skills, encouraging innovation and raising productivity.
In a new episode of Productivity Puzzles, Bart van Ark is joined by Jun Du, Managing Director of The Productivity Institute; Nigel Driffield, Professor of International Business at Warwick Business School; and Neil Rami, Chief Executive of the West Midlands Growth Company. They explore the idea of “transformative FDI” and consider what the experience of the West Midlands can teach other UK regions.
Their discussion points to a central question: how can the UK move beyond simply attracting investment and ensure that it creates lasting improvements in productivity, earnings and living standards?
What makes foreign investment transformative?
For much of the post-war period, inward investment was viewed primarily as a way to create jobs. This became particularly important during the decline of UK manufacturing in the 1980s, when investment from countries including Japan and the United States helped to offset rising unemployment.
Although creating jobs continues to matter, Nigel argues that policymakers should now ask a broader set of questions. Does the investment raise productivity? Does it increase demand for skills? Does it encourage innovation and generate higher earnings?
This distinction is important because simply attracting more of the same kinds of jobs is likely to not affect the underlying performance of a local economy. New warehouses and distribution centres can provide valuable employment, for example, but they may not necessarily help a place move away from a low-skill, low-productivity economic model.
Transformative FDI must therefore be assessed by the wider changes it produces, rather than by the number of jobs it creates when a project begins.
How can transformative FDI be measured?
Jun identifies five questions that can help determine whether an investment is having a real transformative effect.
- Does the investor stay and grow? A small office that remains limited in size is very different from an organisation that expands its workforce and operations over several years.
- Does the company reinvest? Repeated investment can indicate that a business has developed a lasting commitment to a place, although evidence suggests that this is most likely to be happen in London.
- Do local suppliers benefit? Transformative investment should create opportunities for nearby businesses to increase sales, improve their products and services, export or form new partnerships.
- What kind of jobs are being created? Higher-skilled roles, training and investment in employees can strengthen the region’s stock of human capital.
- Does the investment make connected firms more productive? This is perhaps the most difficult effect to measure. It requires detailed firm-level evidence that can distinguish genuine productivity improvements from changes caused by the displacement of existing local activity.
Together, these questions highlight how important it is to look at the wider picture when assessing an investment’s value.
Why local connections matter
The impact of FDI does not begin and end with the investing company. Its connections with universities, suppliers, public institutions and existing businesses can be just as important as the original decision to establish a regional base.
Neil describes this as “sticky investment”: investment that develops deep roots within the regional economy and becomes more difficult to relocate.
Tata’s presence in the West Midlands provides an example. Following their acquisition of Jaguar Land Rover, a range of complementary Tata companies developed connections with regional institutions, including both Warwick University and Wolverhampton University. These relationships help to spread expertise and capability across the region’s workforce and business base.
This also means that a region’s response matters. Investment is more likely to become transformative when colleges and universities provide the right skills, when transport allows people to access new opportunities and when local organisations help companies connect with supply chains and innovation assets.
Inward investment alone cannot transform a regional economy. It needs an economic and institutional environment capable of making the most of it.
A changing global investment landscape
The environment in which regions compete for investment has changed substantially.
Global investment is increasingly concentrated in a small number of strategic sectors, particularly AI infrastructure, semiconductors, critical minerals and clean energy. Competition between countries and regions for these projects has intensified, while investors are placing greater emphasis on resilience, energy, skills, supply-chain security and the quality of local partnerships.
The UK also faces specific challenges. Brexit has weakened its former position as a bridge between international investors and the European market. Subsidy-backed industrial policies in the United States and European Union have changed where companies choose to invest, while more extensive screening processes have added complexity and cost to investment decisions.
For the West Midlands in particular, these shifts have meant that the approach has had to change. The region has had to respond to disruption in automotive manufacturing, technological change and new patterns of reshoring, nearshoring and dual sourcing.
Rather than waiting for suitable projects to appear, regional organisations are increasingly working with companies at an earlier stage to understand their strategic challenges and shape investment propositions around them.
Should investment policy be more regional?
The UK’s investment landscape involves a range of national, regional and local organisations. This can make the process difficult to navigate, particularly when investors encounter planning, infrastructure or regulatory barriers across different levels of government.
Regional leaders are often best placed to understand their economic strengths, skills base, supply chains and business clusters. Giving them greater control could allow investment policy to be aligned more closely with local growth strategies, skills provision and business support.
This does not mean that every region should pursue the same industries. Instead, places need a strong understanding of their existing capabilities, the areas in which they can compete and the sectors into which they can realistically transition.
For the West Midlands, these strengths include advanced manufacturing, engineering, automotive innovation, health sciences and private-sector research and development. The region is also exploring opportunities in areas such as defence, where existing engineering expertise may be applied in new ways.
What has the West Midlands done differently?
The West Midlands benefits from scale, established industrial strengths and a network of universities and innovation institutions.
Assets such as the National Automotive Innovation Centre, Warwick Manufacturing Group, the UK Battery Industrialisation Centre and Birmingham Health Innovation Campus help the region present research, talent, technology and public-sector support as a combined offer to investors.
The region has also used major events and targeted programmes to expand its international reach. Its Business and Tourism Programme, developed around the 2022 Commonwealth Games, increased the region’s investment pipeline and supported collaboration with various markets, including Australia, Malaysia, Canada and India.
Another initiative, the Global Growth Programme, provides a supported landing point for international, high-growth STEM companies. Nearly 50 companies have used the programme, with landing locations based within five regional universities.
These initiatives reflect a longer-term approach for the West Midlands. According to Jun, consistency is one of the characteristics shared by places such as Manchester and the West Midlands. Their strategies have developed over periods of five, ten or even twenty years, creating greater predictability for investors.
Why regions should collaborate rather than compete
Although successful cities and regions can learn from one another, their models cannot simply be copied.
Manchester’s offer combines research, data, services, talent and the concentration of activity around areas such as the Oxford Road Corridor. The West Midlands has different strengths, with a larger exposure to automotive manufacturing, energy costs and industrial transition, alongside opportunities in advanced engineering and defence.
Both regions also face limitations. Their administrative boundaries do not always reflect the wider economic geographies in which investors operate. Companies are interested in access to workers, infrastructure, logistics, suppliers and markets, rather than where one local authority ends and another begins.
This creates a strong case for collaboration. If UK regions compete only against their neighbours, they risk weakening the country’s overall investment proposition. Whereas collaboration could allow places to offer complementary capabilities and achieve the scale needed to compete internationally.
London has an important role overall. Many international companies establish themselves in the capital but may find better opportunities to scale in other cities such as Birmingham, Manchester, Leeds, Belfast or Edinburgh. Stronger links between these places could help successful firms expand while spreading investment more widely across the UK.
Winning investment is only the beginning
Much of the discussion around FDI focuses on attracting new investors. However, a company’s arrival should be the beginning of the relationship rather than the end.
Neil argues that the term “aftercare” understates the importance of this work. Regional organisations need relationships not only with local plant managers, but also with the senior decision-makers at company headquarters around the world.
This allows regions to identify risks earlier, understand future investment plans and support businesses before they reach the end of a product or investment cycle.
Goldman Sachs in Birmingham demonstrates the potential value of this approach. The company initially planned to create around 250 roles, but its presence is expected to grow to more than 1,000. Sustained engagement with the company helped the region demonstrate the strength of its talent pool and wider business environment.
Regions must also provide the enabling infrastructure investors need, including energy and power capacity, suitable sites, data infrastructure, skills and connections to local suppliers.
What would success look like?
In ten years, the success of inward investment in the West Midlands should not be measured solely by the number of projects secured.
From Nigel’s perspective, success would mean reducing productivity and earnings gaps between neighbouring communities, with good jobs and higher wages spreading beyond the region’s existing economic hotspots.
Jun hopes the West Midlands can balance economic openness with security and a fair distribution of the benefits from productivity growth, while building an indispensable position in national and global value chains.
Following on, Neil suggests higher salaries, improved living standards and greater international recognition for the region’s centres of excellence. He also wants to see more locally grown businesses become internationally significant, supported by the ideas, competition and energy that foreign investment can introduce.
The discussion shows that successful places attract investment through their capabilities, not simply through short-term incentives. The real test is whether that investment stays, grows and becomes connected to the wider economy.
Transformative FDI is therefore not only about bringing capital into a region. It is about using investment to strengthen skills, businesses, institutions and communities in ways that produce lasting improvements in productivity and prosperity.
This blog is based on a conversation between Bart van Ark, Jun Du, Nigel Driffield and Neil Rami for The Productivity Institute’s Productivity Puzzles podcast.
