Analysing FDI performance at a regional level rather than at the national one is a complex task. This is because regional differences within the same country are more subliminal than between different countries. This article analyses the FDI performance of the UK's regions between 2005 and 2009.

According to FDI theory, the location choice for FDI may be influenced by three strategic motives. These are:

- Market-seeking FDI: The company locates in proximity to customers.

- Efficiency-seeking FDI: The company locates where production costs are cheaper and its target markets can be supplied through exports.

- Knowledge-seeking FDI: The company locates where knowledge generation assets, such as world-class research institutions, can be found. This is particularly relevant for R&D and other knowledge-intensive FDI sectors.

Although these motives function primarily at the national level, they still hold at the regional level. A company that has decided to invest in the UK over other candidate countries will still need to make the same decision at the regional (sub-national) level.

Methodology

- Data provided by greenfield investment monitor fDi Markets was used to derive the number of FDI projects in the UK's regions between 2005 and 2009. The number of FDI projects was chosen over other measures of FDI performance, such as capital expenditure, because FDI projects represent individual business decisions.

- The FDI project market share of each UK region is benchmarked against each region’s share in the UK gross value added (GVA) for the years 2005 to 2008, which according to the UK Office of National Statistics is the official measure for regional output. If market-seeking is the main FDI motive then the FDI performance of each region would be expected to be proportional to its share in the national GVA.

- The study proceeds by examining the FDI performance in a sample of business functions that are expected to be driven by different strategic FDI motives. FDI projects in the manufacturing business function are expected to be more sensitive to cost considerations (efficiency-seeking FDI), business services projects more sensitive in market size consideration (market-seeking FDI), while R&D, digital design and technology (DD&T) and information and communications technology (ICT) projects are more likely to be influenced by the scientific infrastructure of each region (knowledge-seeking FDI).

- Regional FDI performances that are adjusted for cost considerations use the gross weekly median full-time pay for 2008 and 2009 as a cost measure. FDI performances that are adjusted for the scientific infrastructure of each region use the gross domestic expenditure on R&D as a percentage of total GVA for 2005 to 2007 as a measure. Both of these measures are provided by the Centre of International Competitiveness of the University of Wales Institute.

Regional analysis

As can be seen in Table 1, Northern Ireland, Wales, Scotland, the South East and the North East are the best performing UK regions in terms of total FDI projects. These regions attracted a higher number of FDI projects than would be expected given their market size. On the other hand, regions such as the East Midlands and East Anglia have performed relatively poorly if one takes into account their regional market size. It seems then that regional market size is not the main key success factor in attracting FDI at the regional level. This can be explained by the fact that the UK is relatively small in geographic terms and homogenous in terms of legislation. Such regional disparities would be more likely to occur in a vast country such as the US, which also has very different laws and regulations amongst its regions.

Manufacturing

Manufacturing is a relatively cost-sensitive business function and a location decision within a country such as the UK is highly likely to be influenced primarily by cost considerations. Regional market size, therefore, is not expected to be highly relevant for manufacturing projects. This is verified by the regional performances in Table 2. The South East, for example, although it represents the 35.29% of the UK GVA, received only 10.09% of the UK's manufacturing FDI projects between 2005 and 2009. On the other hand, regions such as Northern Ireland, Wales and the North East have performed extremely well when it comes to attracting manufacturing FDI projects despite the fact that they have relatively small shares in the UK GVA.

Table 3 reveals that once cost considerations are taken into account differences in the regional manufacturing FDI performances are not as pronounced. The performance of all the UK regions in the attraction of FDI in manufacturing projects declines or increases according to each region’s cost advantage. The performance of the most cost-effective UK region, Northern Ireland, falls from 3.47 to 3.07, while the performance of the least cost-effective region, the South East, increases from 0.29 to 0.33. Cost considerations seem to matter but they cannot fully explain the variations in the regional FDI attraction performance in manufacturing. Other factors may come in play. For example, the impressive performance of Scotland, Northern Ireland and Wales may be attributed to investors considering these regions as separate markets to those in England.

Knowledge-Intensive business functions

Table 4 reveals, as expected, that regional market size is not particularly important when it comes to attracting FDI projects in knowledge-intensive business functions. Northern Ireland is the best performing region in the UK, once results are adjusted for regional market size. Above average performers are also Scotland, Wales, the South East and the North East. The rest of the UK's regions perform poorly in this area, even when taking into account their market sizes. The North West, for example, although it represents the 9.64% of the UK output, attracted just the 3.11% of knowledge-intensive FDI projects between 2005 and 2009.

It could be expected that once regional FDI performances in knowledge-intensive functions are adjusted to regional differences in scientific infrastructure then they would become more normalised. However, the results of this adjustment are surprising. The performance of East Anglia, for example, falls from 0.97 to 0.40, although it is the region with the highest expenditure in R&D as a percentage of regional GVA. Regions such as Northern Ireland, the North East, Wales and Scotland, which have less prominent scientific infrastructure than the national UK average, improve their performance once this is taken into account. In other words, the results suggest that differences in the scientific infrastructure among the UK regions are not an important determinant for the location of FDI projects in knowledge-intensive business functions.

One possible explanation for this could be that multinationals with knowledge-intensive projects in the UK take this decision mostly at the national level (ie, they compare the UK scientific infrastructure with those of other candidates for the project countries). Once the location decision at the national level has been made then investors do not place a lot of importance on regional scientific infrastructure variations within the UK, possibly because such variations are not as extreme as the ones that can be found in country-level comparisons.

Business services

Theoretically, FDI projects in business services are largely market-seeking motivated. According to the results in Table 6 this is verified for most of the UK regions. The three largest UK regions in terms of GVA – the South East, the North West and Scotland – also attracted the highest share of FDI projects in business services over the period in question. The results, though, are strongly skewed towards the South East, which has a performance index of 2.03, and this supports the central role of London not only as a national but also an international cluster for business services. It seems to be the case that the South East (mainly London) competes for FDI projects in business services not so much with the rest of the UK regions but with other global international business services clusters. The strong  bias of FDI projects in business services towards the South East is reflected in the performance of most of the other UK regions, as almost all of them perform lower that what it would be expected given their share in the national GVA (ie. they have an FDI performance index lower than unity). The only exception to this is Northern Ireland, which has an FDI performance index of 1.05.

Conclusions and policy implications

The results suggest that the FDI attractiveness of the UK does not have a strong element of regional variation (with the exception of FDI in the business services in the South East). This may be because the UK is a comparatively homogenous country meaning that regional economic, scientific and legislative variations are small. This is enhanced by the fact that although the UK is one of the world’s largest economies it is relatively small in geographic terms and the whole national market can be accessed easily from most of the regions.

This is not to say that regional differences do not have any significance. They still have a role to play but this mostly depends on the type of business activity. Differences in the size of the regional markets, for example, found some support in the attraction of business services FDI projects as was expected. Additionally, cost advantages were important in explaining regional differences in the FDI performance for manufacturing projects.

Surprisingly, regional differences in the scientific infrastructure were not reflected so much in the FDI performance in knowledge-intensive (R&D, DD&T and ICT) FDI projects. A possible explanation for that is that differences in the scientific infrastructure are more profound at the international rather than at the sub-national level, at least as far as the UK is concerned.

Such findings would suggest that the proposed abolishment of the UK's regional development agencies (RDAs) is rational, at least as far as their function as investment promotion agencies is concerned. The relative economic, political, scientific and legislative homogeneity of the UK regions makes the case for such RDAs less strong in comparison with federal and larger countries that are significantly heterogeneous at the regional or state level, such as the US. On the other hand it is true that some regions have performed strongly in attracting FDI projects and this cannot be explained fully from pure economic analysis. The performance of Northern Ireland, for example, in knowledge-intensive projects and of the North East in manufacturing projects significantly exceeds their potential. In such cases, different RDAs may have played a significant role in making their region successful in attracting specific kinds of FDI projects. Such experience and specialist skills should be integrated in the successors to the UK's RDAs, even if this is at a more national level.

Click on the link below to see charts of the latest UK regional figures.

Antonios N Kalyvas is a PhD researcher (FDI) at the Centre for Finance & Risk, Bournemouth University