Inward investment hotspot: What Scotland must do to retain its foreign investor appeal after record 2023

Scotland attracted a record number of inward investment projects last year to retain its top spot outside of London but there is “no room for complacency” amid concerns over tightening economic policies, a new study today reveals.

A bumper 124 projects categorised as foreign direct investment (FDI) were secured by Scotland in 2023, an increase of about 13 per cent on the previous year, according to EY’s latest annual Scotland Attractiveness Survey. With projects into the UK as a whole rising by a more modest 6 per cent, Scotland’s increased FDI flow saw its share of all UK projects rising to 14.4 per cent, up from 13.6 per cent - the fifth consecutive year of increase and its highest over the past decade.

The report shows that the US has remained the single biggest originator of FDI, accounting for 27 projects or almost a fifth of Scotland’s total during the year. Projects from Germany doubled to 20, a decade high, making it the second-biggest source of projects into Scotland, followed by France with ten. Three Scottish cities ranked in the UK’s top ten urban locations for FDI outside of London, as Edinburgh was placed second with 32 projects, Glasgow fourth with 25 projects, and Aberdeen eighth with 13 projects.

Utility supply, which encompasses the likes of offshore wind, was the leading sector for Scotland’s FDI, with 40 projects secured last year.

In terms of what overseas investors have been buying into, utility supply, including the likes of offshore wind, is the leading sector for Scotland’s FDI, with 40 projects secured last year, up sharply on the 22 projects in 2022, and the highest recorded by any sector in any year of the past decade north of the Border. Utility supply is followed by digital technology, business services, and transport & logistics, with each of those sectors 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.

EY noted that this shifting trend was leading to more projects located out with the country’s main cities - Glasgow, Edinburgh and Aberdeen. Scotland’s past success in maintaining its longstanding position as the second-ranked part 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 - typically located in more rural areas - could create a shift in Scotland’s investment hubs, the report added.

Ally Scott, EY Scotland’s managing partner, said: “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?

Ally Scott is EY Scotland’s managing partner.

“Yet, as we celebrate the continued trend of year-on-year success in FDI, there is no room for complacency.”

According to the survey, 69 per cent of investors are planning to establish or expand operations in the UK over the next year, and 26 per cent are planning to invest in Scotland - second only to London. When investors were questioned on which locations specifically, 23 per cent were targeting Edinburgh and 9 per cent Glasgow - putting those locations in second and fourth respectively among all UK cities.

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

Scott added: “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.”

Looking at the wider picture, Scotland outpaced both the UK and Europe with FDI growth last year. Europe recorded a 4 per cent 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 per cent lower than its pre-pandemic level (6,412) and 14 per cent lower than 2017 (6,653).

EY said Scotland’s strong year for FDI projects was underlined by its “impressive” performance in attracting new projects from first-time investors, as opposed to expansions of existing investments. The number of new projects secured increased to 85 in 2023, from 66 the year before, marking the highest across the decade and almost three times the total in 2014, when just 29 projects were secured. Significantly, Scotland’s haul of new projects in 2023 increased at a faster rate than for the UK.

Peter Arnold, EY UK chief economist, said: “The progress of Scotland shows that there is a clear appetite for investing outside London. Our survey highlights that deploying a combination of incentives, grants and skills-building can be a key motivator for attracting global capital to different parts of the UK.

“The diversity of sectors outside the capital could become a significant asset for the UK, if it plays to its regional strengths. Manufacturing and utility supply are key sectors in Scotland.”Economy Secretary Kate Forbes added: “Attracting inward investment is critical to economic growth and driving forward strategic objectives in key sectors. From being at the forefront of the energy transition to the rapidly emerging cutting-edge technologies, we have an enormous opportunity to capitalise even further.”