Scotland tops foreign investment list but ‘can’t get complacent’

Scotland retained its position as second to London among UK locations attracting new Foreign Direct Investment (FDI) projects into the UK last year.

However, higher income tax and the “visible deterioration” of city centres are risking that position in the long-term, according to the report authors EY.

The firm’s Scotland Attractiveness Survey shows a record 124 inward investment projects were secured by Scotland in 2023, a 12.7% rise on the previous year.

With projects into the UK as a whole rising by just 6%, Scotland’s increased FDI flow saw its share of all UK projects rising to 14.4% (up from 13.6%), the fifth consecutive year of increase and its highest over the past decade.

The US has remained the single biggest originator of FDI projects, accounting for 27 projects or 19% of Scotland’s total during the year — the lowest proportion in the past decade. Projects from Germany doubled to 20, a decade high, making it the second-biggest source of projects into Scotland, followed by France with 10.

Three Scottish cities ranked in the UK’s top 10 urban locations for FDI outside of London, as Edinburgh is placed second with 32 projects, Glasgow fourth with 25 projects, and Aberdeen eighth with 13 projects.

Surge in utility supply investments

Utility supply is the leading sector for Scotland’s FDI, with 40 projects secured in 2023, a rise of 81.8% on the 22 projects secured in 2022, and the highest recorded by any sector in any year of the past decade in Scotland.

This is followed by digital technology, business services, and transport & logistics, each securing 14 projects. This contrasts with the UK and the rest of Europe, where digital technology leads the sectors for inward investment. For the first time in six years, utility supply has overtaken digital technology projects in Scotland due to increasing levels of low-carbon and ‘cleantech’ investment.

This shifting trend gives rise to more projects located out with the country’s main cities. Scotland’s past success in maintaining its longstanding position as the second-ranked ‘region’ of the UK for FDI has been largely built on the success achieved by its cities. However, the strong rise in sustainable utility supply projects – generally located in more rural areas – could create a shift in Scotland’s investment hubs.

‘No room for complacency’

Investors’ main criteria when considering investing in the UK includes access to regional grants and incentives, the local skills base, and the availability of business partners and suppliers.

Ally Scott, EY Scotland Managing Partner commented: “Scotland has demonstrated yet another very strong performance, both in attracting FDI and retaining the confidence of investors. Utilities, including renewable energy, plays a strong role in Scotland’s FDI growth story, as the country leads in sustainability and low-carbon power generation.

“This offers a real competitive advantage on the back of the ScotWind leasing rounds, but will it create the critical momentum required to see another impressive yield in the years ahead?

“Yet, as we celebrate the continued trend of year-on-year success in FDI, there is no room for complacency. We still hear frustrations from clients and the market that Scotland’s tightening economic policies, including the latest income tax hikes and issues around city and infrastructure quality, are causes for concern.

“While the potential impact of these goes far beyond FDI, the fact remains that access to talent is a major driver of attractiveness and investment. Action is also needed around the ease, transparency, and efficiency of planning processes to make Scotland and its cities more globally accessible to help boost the incoming flow of people and capital.

“Scotland has come second to London for projects in nine of the past ten years, but this status can’t be taken for granted and other parts of the UK are closing in on Scotland’s lead. Now is the time to capitalise on the strong historical performance by taking active steps to leverage our position and raise ambition further, setting the scene for the next wave of growth in projects.”

Outpacing the UK and Europe

Scotland outpaced both the UK and Europe with FDI growth last year. Europe recorded a 4% year-on-year decline with a total of 5,694 projects recorded in 2023. This was the continent’s lowest FDI total since 2020, was 11% lower than its pre-pandemic level (6,412) and 14% lower than 2017 (6,653). 2017 represented Europe’s highest peak for projects in the last decade.

The UK’s share of all European FDI projects grew to 17.3% in 2023, an increase on the 15.6% seen in 2022. However, the UK’s broader FDI trend mirrors Europe’s by recording a lower level of projects in the last four years in comparison to pre-pandemic levels. UK project numbers have remained below 1,000 since 2019 and there were 220 fewer projects recorded in 2023 than at the UK’s high point of the decade in 2017, when 1,205 projects were recorded.