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A framework for understanding transformation FDI

Executive Summary

This paper was commissioned by the Office for Investment and the Department for Business and Trade to aid their developing strategy on how inward investment promotion can contribute to so called levelling up. The purpose of this paper is there to explore the potential for inward investment into the UK to contribute to reducing regional inequality. We present a framework which explores how inward investment can be used to “move the dial” in lagging nations and regions of the UK, not merely offering more of the same in terms of output, productivity and employment opportunities, or alternatively not simply attracting activity that is subsequently rather divorced from the rest of the local economy.

We present a model that is based on the understanding of the interaction between multinational firms and the host economy, but with insights from supply chain analysis, economic geography and analysis of the trade-offs involved in delivering levelling up.

We go on to explore a series of policy prescriptions and interventions, which we outline in detail in the conclusion. In summary however these involve developing:

  • A better understanding of the nature of Foreign Direct Investment (FDI) that can really move the regional dial on productivity.
  • An understanding of how and why the extent to which FDI can move the dial in productivity may vary between regions of the UK.
  • How national and regional efforts concerning investment promotion, skills interventions and business support are required.
  • An understanding of the importance of absorptive capacity, and the fostering of local supply chains to maximise productivity spillovers.

Finally, we offer a series of metrics that may be used to evaluate the prospects of a given inward investment project to contribute to levelling up, that cover both the nature of the investment, and the nature of the host economy.

Glossary of terms

In order to explore this further, we therefore define a series of concepts to frame our discussion:

Foreign direct investment (FDI). This is generally understood to be a movement of capital that seeks to own or create income by generating assets overseas. This includes expansion or creation of new business (greenfield FDI) and mergers & acquisitions (M&As). Our discussion here is framed in terms of greenfield FDI, because it is this that introduces new capital, knowledge and demand. That is not to dismiss acquisitions, as they can also be important in fostering business growth, or injecting capital and knowledge into businesses.

Transformational FDI. We explore what we mean by this term in some detail below, but the key point is that it must have the capacity to “move the dial” on productivity for its location, that it needs to be a step change compared with current activity, rather than simply add to existing capacity.

Productivity. Here we are using the term productivity in its generic sense. We simply refer to productivity growth as being the ability of the firm to increase output with the same level of inputs. While in empirical papers productivity is typically measures as labour productivity or total factor productivity, this distinction is not important for our broad discussion.

Firm Specific Assets. This is a term used in the study of FDI, to capture the collective knowledge or technology that a firm possesses which the firm is able to exploit and is not generally available.

Authors: Nigel Driffield, Xiaocan Yuan (both Warwick Business School)


  • Organisational Capital




N. Driffield, X. Yuan (2024) A framework for understanding transformational FDI. Productivity Insights Paper No. 033, The Productivity Institute.