Record foreign investment in UK skewed by two big company mergers

by Gavin Jackson in London

Foreign investment in the UK reached a record high in 2016, the year of the EU referendum, according to data from the Office for National Statistics published on Tuesday.

However, two big company mergers and acquisitions completed that year boosted the figures and show the difficulty of interpreting foreign direct investment figures, which have become highly contested in the aftermath of the Brexit vote.

At the Conservative party conference in October, Liam Fox, trade minister, said that “in the full year since the referendum we’ve had more investment into the UK than at any other year in our history. Didn’t read that headline in the FT unless I missed it”.

Britain attracted a net £119.6bn of foreign investment in 2016, the highest since the measure was established in 1946. Overall foreign direct investment was £220.5bn.

However, a single deal, the £79bn takeover of London-listed brewer SABMiller by its rival Anheuser-Busch InBev in the autumn of 2016, counted for two-thirds of the net foreign investment figure.

A deal by Japanese telecommunications company SoftBank for UK chipmaker Arm Holdings made up around £24bn, or another 20 per cent of the total. The size of these two deals meant that foreign direct investment increased at the sharpest rate since 1987, although the numbers are not adjusted for inflation.

The release was part of the so-called Pink Book, an annual publication from the ONS that describes all transactions between Britain and the rest of the world.

Direct investment requires investors to own a controlling stake, or more than 10 per cent, in an enterprise. Other types include portfolio investment — buying government bonds, smaller stakes in companies or other financial securities — and “other investment”, such as placing deposits with banks.

Portfolio investment continued at roughly the same rate in 2016 as 2015. Net outflow of “other investment”, mostly UK-owned deposits in foreign banks, also continued at a similar rate to the previous year, suggesting no overall change in the attractiveness of Britain as an investment destination.

The ONS said “the financing of the current account deficit with direct investment inflows could be seen as a more sustainable approach for the UK economy” and that direct investment is often more long term and stable than other forms.

Britain needs foreign investment in order to finance its current account deficit, which, at 5.9 per cent of national income, is the largest in the G7 group of rich countries.

The deficit grew in 2016 to its widest level since records began in 1946 owing to a deterioration in Britain’s primary income balance. This is a measure of the difference between what foreign investors earn in Britain and what UK investors earn abroad.

For the first time since 1997 UK investors earned less on their foreign direct investments than overseas investors did on their British assets, despite a fall in the pound, which would normally raise the value of the UK’s overseas earnings in sterling terms.

While British investors’ earnings from investments in the EU increased in 2016, the primary income balance with the rest of the world widened to its largest ever. This was mainly because UK investors earned less on investments in the US.