Billions of pounds of financial investments flow into and out of the UK each year, whether it be a foreign company acquiring a UK company, a fund manager investing in foreign stock markets, or someone setting up a savings account with an overseas bank.
These investments can be made with the aim of spreading risk, achieving higher returns, or simply expanding the reach of an existing business by investing in other markets.
In all, the stock of UK investments abroad was worth around £11 trillion in 20171, with foreign investment in the UK worth a similar amount, according to our latest Pink Book published in July.
To put these numbers into context, UK gross domestic product (GDP) was roughly £2 trillion in 2017, around one-fifth of the values of UK investments overseas and foreign investments held in the UK.
For further context, UK investments abroad were worth nearly twice those of France (£5.9 trillion in 2017), despite both economies being of similar size (GDP around £2 trillion).
The value of foreign investment in the UK has fallen slightly from its peak in 2008, although it increased by £796 billion in 2016 (the year of the EU referendum). However, just one-fifth of that rise was due to new investment in the UK (£155 billion).
The rise was instead driven by currency and price changes2. The British pound depreciated to its lowest value since the financial crisis following the Brexit vote, which increased the value of deposits held in UK banks (mostly denominated in foreign currency) when converted back into sterling.
The country that attracts by far the most investment from the UK – almost one-third of total investment (31%) – is the US.
This is more than three times the amount the UK invests in France, which is the next highest at 9%, followed by Germany (7%), the Netherlands (6%), Japan (5%) and Luxembourg (3%).
Similarly, the US invests the most in the UK, ahead of France, Germany, the Netherlands, Ireland and Luxembourg.
UK investment in emerging markets remains small relative to developed countries. Prime Minister Theresa May has announced plans to increase investment in Africa after Brexit during a recent visit.
While UK investment in Africa has risen by 61% since 2008, investment in Europe has dropped by 20% in the same period. Yet UK investment in Europe was worth approximately 38 times as much as investment in Africa in 2017.
Although UK investment in emerging markets is relatively low, many of those who have invested are in it for the long haul.
More than half (54%) of the UK’s investment in Africa is either direct (when an investor buys at least 10% of a company) or portfolio (when an investor buys less than 10% of a company), compared with just 39% in Europe.
Both direct and portfolio investments are generally made for the long-term, largely because they’re not always easy to sell quickly and convert into cash.
Meanwhile, “other” investments – mainly deposit accounts and loans with overseas banks – are short-term, because they’re easier to withdraw. Around 42% of UK investment in Europe is “other”, compared with 33% in Africa.
Potential investors are likely to consider the rate of return4 before deciding to invest abroad, which is the percentage gain or loss on an investment over a specified period.
However, our data show that investment levels do not necessarily follow rates of return.
Investors may value the perceived security of an economy and its currency above rate of return. If an economy is stable and seen as a safe place to invest, it may be more attractive to investors than somewhere perceived as riskier, albeit with higher expected returns.
For example, the typically stable economies of the US, France and Germany, which make up 44% of UK investment overseas, provide some of the lowest rates of return.
Other factors affecting investment decisions include price levels, interest rates and tax laws. For example, Ireland – the sixth-largest destination for UK investment – has one of the lowest rates of Corporation Tax in Europe (12.5%).
The full article by the Office for National Statistics can be found here.