The determinants and impacts of manufacturing FDI in the UK

Abstract

Foreign Direct Investment plays a pivotal role in enhancing economic growth and development, making it a topic of significant interest for policymakers and researchers. The manufacturing sector is a cornerstone of the UK's economy, contributing substantially to its Gross Domestic Product. Understanding the determinants of FDI in this sector is crucial for sustaining growth and competitiveness. The study investigates the determinants of Foreign Direct Investment in the manufacturing sector of the United Kingdom using secondary data obtained from the Office of National Statistics. It employs a panel data analysis, using a dataset spanning from 2009 to 2019. Panel data combines both time-series and cross-sectional data, providing a more comprehensive analysis of FDI determinants. A range of economic and non-economic variables are examined which may influence Foreign Direct Investment in the sector. Based on the panel data analysis, the study provides several key findings regarding the determinants of FDI in the UK manufacturing sector. A positive and significant relationship is observed between the contribution of the manufacturing sector to GDP and FDI. This suggests that a higher contribution of manufacturing to the economy attracts more foreign investments. The study reveals a negative correlation between wages in the manufacturing sector and FDI. Higher wages are associated with lower FDI, indicating that labour costs impact investment decisions. Productivity in the manufacturing sector exhibits a positive relationship with FDI. Higher productivity levels attract foreign investors seeking efficiency and profitability. The results reveal that these factors exert varying levels of influence on FDI inflows across different sectors within manufacturing, reflecting the unique characteristics and needs of each sector. In addition, this study investigates the effect of FDI on firm productivity and firm growth. Using the firm level panel data, and division level FDI data, the study highlights the significant role of FDI in fostering growth and enhancing productivity within the UK's manufacturing industry. The impact of FDI on firm productivity is found to be particularly pronounced in certain manufacturing sectors, suggesting that targeted FDI can serve as a crucial driver of sector-specific development and competitiveness. The impact of FDI on firm productivity is strongest in the computer and electronics sector and the transport equipment sector These insights underscore the importance of a nuanced approach to FDI policy, tailored to the distinctive attributes of individual manufacturing sectors to maximize economic growth and productivity gains. The study sheds light on various economic and non-economic factors that influence foreign direct investment in the manufacturing sector of the United Kingdom. The findings can guide policymakers and investors in making informed decisions to further promote FDI in the critical sector.