A framework for understanding transformational FDI: Productivity Insights Paper No. 033

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.