Countries across the world compete fiercely for FDI because of the strong correlation between FDI and economic growth – with investment often creating many new jobs and local ‘ecosystems’ of smaller businesses.

The last 40 years has been a period of rapid globalisation. Trade, cross-border capital flows and migration have seen strong growth. The ownership of assets, from equities, to government bonds to prime housing, is becoming ever more international.

“There is a strong consensus among economists on the gains that can come from free trade and open markets. Trade helps drive living standards in consuming and producing countries. Competition sharpens incentives for domestic businesses to raise their performance. Inward investment introduces new approaches to business and management.”

Ian Stewart, Chief Economist, Deloitte UK

There is an argument that FDI results in technology transfer – with domestic companies learning new technological and managerial practices from inward investors. It can also increase competition, driving managers to improve performance.

The productivity puzzle 

Foreign-owned firms are thought to be more productive than their domestic counterparts. Office for National Statistics (ONS) data for around 40,000 UK companies shows that foreign-owned companies in the UK are twice as productive as domestically-owned companies. Part of this is due to the fact that foreign firms tend to export and are larger in size, two characteristics which are associated with higher productivity levels. Once the ONS controls for size, industry, age and region, foreign-owned firms are around 74% more productive than those not involved in FDI, either inward or outward. 

There is also data which shows that foreign-owned firms invest more in research and development (R&D). On average, they spend roughly five times more on R&D than domestic companies and they account for 50% of total R&D spending in the UK. Such innovation can often lead to productivity increases.