The best place to invest – perhaps

Posted on 19 Apr 2011 by The Manufacturer

The UK can be the top western economy for business investment, says a CBI report, if government can help industry to answer frontline investment needs like creating certainty, keeping business costs down and developing new markets.

The UK possesses a clutch of high priority business advantages, including flexible labour laws and a well-developed innovation ecosystem, which can make the UK the number one destination for business investment in the West if government can ‘fill the gaps’, says the business organisation.

The CBI’s ambitious report, Making the UK the best place to invest describes a ‘vision’ for UK business that builds on these competitive advantages – which also includes world class universities that are primed to collaborate more closely with industry, and a natural geography that can support a low carbon energy industry – to enable the UK to dominate a new generation of business opportunities.

Manufacturing and long-termism are at the heart of the vision, the report says. The domestic investment that has returned to manufacturing in recent months must be capitalised on to attract foreign direct investment and cover sectors like the digital economy.

The report targets three core areas for government to focus on:
• Targets for the UK economy that are integrated with the country’s industrial strengths and sets out a clear route map, including a 20-year strategy;
• An overarching framework for business to operate in, beginning with fiscal stability and credibility and effective leadership to join up strategies across government. Key to this is cross-party support to provide certainty and predictability beyond the parliamentary life cycle so businesses can invest for the long-term.
• A core framework of business-relevant policy to address specific micro-economic issues around business investment, covering eight core themes that need to be tackled: new market activity, public procurement, business tax, enterprise finance, personal tax, skills, infrastructure resilience and planning and regulation.

As well as highlighting the strengths to build on, the 48-page report identifies some headline negative factors that hinder the progress of UK business. As well as saying business generally regards the 50p tax rate as a disincentive to invest, for example, the UK is ranked 89th out of 139 for having the biggest regulatory burden on business, on a par with Nigeria.

The UK lags behind France, Germany and Japan in maths rankings. And just 6% of high growth firms provided half of jobs growth between 2002-06, and we should be doing more to harness the potential of these companies.

On the 50p rate, the report refers to a study by leading independent think tank the Institute of Fiscal Studies, which considers the effects in terms of individuals changing their behaviour (excluding the dynamic effects on business investment).

It concluded that, “the revenue maximising income tax rate applying to incomes over £150,000 in 2011-12 is the current [in 2009] 40% rate”. Indeed, a rate over 45% would cost rather than raise money for the government”.

Could do better
In an economy which needs to be progressively weaned off the public sector, business investment and private sector growth is the highest economic priority, the CBI says. For some, this entails a targeted revival of manufacturing.

The Office for Budget Responsibility forecasts that capital investment by businesses will grow by 7.5%-10.2% a year over the five years to 2015. The latest data show UK business investment in the fourth quarter of 2010 grew by 10% compared with the fourth quarter of 2009 – and that manufacturing investment was up 14.4%.

The bigger challenge within the context of a highly globalised economy, the report says, is how to generate sustainable growth in all parts of the economy – both manufacturing and services sectors.
The UK was the most popular investment destination within Europe in 2009 in terms of the number of foreign direct investment projects and people employed, according to an annual survey by Ernst & Young. The UK is also ranked first in Europe for: business services, software, electronics, financial intermediation, pharmaceuticals, telecoms & post, publishing and insurance and pensions.

Countries to have withdrawn capital from the UK in 2009 included the Netherlands (-£8bn) and Japan (-£5.7bn). Net investment from Africa fell from £1bn in 2008 to -£6m in 2009

The report highlight’s the UK’s well developed ‘ecosystem’ to enable business innovation. These strengths include the strong science base, world class design expertise, a diverse economic base (which makes multi-sector innovation possible), the R&D tax credit, an established support infrastructure (providing an incredible range of materials and services – including brand development, IP, legal, measurement, clean-lab, services and professional agency staff, right through to full product innovation), and a population that is generally open to innovation.

The UK possesses four of the world’s top 10 universities, according to the QS World University Rankings 2010/11.

But the report’s analysis says that the UK is losing its attractiveness as a place to invest. It also charts a decline in levels of inward investment and in the UK’s competitiveness. One-to-one interviews with CEOs and senior directors in the UK produced hundreds of possible policy suggestions of which over 40 came up repeatedly under 20 headline themes – see the table below.

The report Make the UK the best to invest is the result of first-hand interviews with business leaders and analysis of data on the blockers and drivers of business investment in the UK. It incorporates findings from the CBI/IpsosMORI survey of CEOs published ahead of the CBI’s 2010 Annual Conference.

CBI Business demands for policy reform
The CBI’s report identified the top blockers of and drivers for business growth, from interviewing hundreds of CEOs