The writer is founder of White Hawk Green and co-founder of the UK’s Office for Investment

Foreign capital investment by institutional investors is a major force that shapes the international investment landscape. The capital they deploy to either gain a meaningful stake in existing local companies, or engage directly in greenfield or brownfield projects, is transforming infrastructure, energy, real estate and the world’s most dynamic companies. 

Political leaders are courting capital providers as alternative sources of finance for projects, and institutional investors are seeking international investment opportunities. However, both local and national-level investment promotion agencies (IPAs), which are more accustomed to FDI by corporates, must do more to understand the unique characteristics of capital investment attraction.

In the UK, despite declining overall FDI figures, the new Department for Business and Trade (DBT) supported more than £17bn-worth of large capital investment in the year ending March 2023. That’s a 268% increase on the previous 12 months. 

The figure for this year should increase again, given that prime minister Rishi Sunak announced £29.5bn-worth of commitments in new UK projects and capital from global investors across a variety of sectors in November 2023. More than half is from institutional investors committing to deploy capital across priority sectors in the coming years.

According to the DBT’s predecessor, the Department for International Trade, “while capital investment is all foreign investment, most does not meet the criteria for FDI”. That is because it is harder to prove that the UK was competing with other countries for this investment and the number of permanent jobs created.

Given this absence of clarity, IPAs might be tempted to consider capital investment too nebulous to support, and assume the market can take care of itself. To do so would be a missed opportunity. 

According to data provider GlobalSWF, the world’s top 10 sovereign investors deployed more than $120bn of fresh capital internationally in 2023. If we expanded this figure to include other institutional investors such as pension funds, insurers and asset managers, the total amount would be staggering. More should be done to seize this opportunity.

More on the institutional investors:

• Sovereign investors splurge on emerging markets
• China's sovereign funds riding the global market
• Saudi Arabia switches to overseas investment to boost influence

Opportunity to be seized

So, how is capital investment similar to traditional FDI, how is it different, and how could it be done better? 

Like efforts to attract FDI by companies in battery manufacturing and net zero technologies, capital investment attraction benefits from senior government support. This is particularly important given that capital is internationally mobile and market sentiment is a vital component of decision-making. Consider the UK’s decision to pursue a series of sovereign investment partnerships internationally to land investment. 

The 2021 decision by Abu Dhabi’s sovereign wealth fund Mubadala and the British Business Bank to partner to deploy £1bn of venture capital in UK life sciences has the potential to be as transformative as Moderna’s announcement in late 2022 of a 10-year partnership with the government. 

Where capital investment differs from traditional FDI is that IPA support is often bespoke. For example, capital investors predominantly source investment opportunities independently, meaning parts of the FDI toolkit such as benchmarking and site identification are often not needed.            

The development of a high-quality and publicly available playbook with a common set of metrics would help IPAs assess what good capital investment looks like and quantify the value they add to economies. Failing to measure the contribution of this investment risks undermining what is a valid, useful and growing pool of capital. Because this capital seeks investable opportunities in areas aligned with governments’ economic policies, the need to support these investors is ever more essential. 

At its best, capital investment can be a force for good, allowing long-term institutional investors to meet the growing needs of countries to provide economic growth in the face of declining public finances. 

At the moment, however, it remains misunderstood. For it to be better delivered, more needs to be done to explain what it is, how it benefits economies, communities and investors, and equip IPAs to provide them with a better-quality service.

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