Francesca Fraser is a researcher at Onward.

In recent weeks, there have been a number of calls for the Government to put some real meat on the bones of its levelling up strategy, to make clear what the markers for success will be. It seems these calls have been heard, as Minister have now announced that, later this year, a Levelling Up White Paper will be published.

One of these markers should be the level of private investment going into our regions. The Government is rightly attempting to light the touchpaper of regional growth with public investment, but the real fiscal firepower will come from business and industry recognising the potential of investing outside of London and into our once lagging regions.

Previous research by Onward found that London received 77 percent of venture capital investment into the UK in 2020, a fourfold increase in five years. Today, we publish new research, focusing on foreign direct investment (FDI), which finds that London has tripled its number of FDI projects since 1997 whilst the number of projects outside of London has fallen by an average of 15 percent.

As a result, the capital’s share of FDI projects rose from a fifth in 1997 to more than 50 per cent in 2016. Whilst the UK’s core cities have also over doubled the number of projects between 1997 and 2016, no other location gets close to London’s share, and this gap is growing. This has important implications for the rest of the economy: research suggests that FDI projects can leverage greater spending elsewhere, create jobs and knowledge spillover. Where this spending is directed at matters.

It is true that destinations are driven, in part, by the type of FDI we attract in this country. In 1997, over two thirds of FDI projects were in manufacturing. By 2016, this had halved to only 33 percent of total FDI. Meanwhile, finance and business services have doubled their share of investment in the same period, accruing FDI towards London rather than our industrial heartlands. Supporting data presents a similar trend whereby software and IT services receive a growing share of investment.

This means that the UK’s much-outed record in attracting FDI, second globally to the US by total inward investment projects, is potentially perpetuating the regional economic imbalances we see in the UK. Whilst we should not disregard London’s important role in representing the UK on a global stage, this should prompt us to consider how we can attract additional investment into lagging areas without harming the capital’s competitiveness in the meantime.

Lessons from elsewhere in the world show that it can be done. With a relentless focus in attracting internationally mobile investment, countries like Ireland and Singapore as well as the former East Germany have completely transformed some of their least productive areas.

But this can only be achieved if the Government has the tools for the task. The UK has a range of strengths that are attractive to mobile companies; a competitive environment for business, a robust intellectual property regime, and an adamantine commitment to the rule of law.

However, the UK is an outlier internationally in its approach to FDI attraction. Amongst the G20, the most advanced economies in the world, the UK is in the clear minority in that it does not currently have a bespoke incentive regime for mobile investors. The proliferation of investment attraction mechanisms like special economic zones and existing investment tax credits, matched with the growing number of opportunity markets through globalisation, means that competition in the future will be even more intense. This could lead to the UK’s armoury to attract mobile investment being whittled down, and its capacity to boost regional growth depleted.

The already significant challenge of levelling up will only grow greater if investment continues to flow to the already prosperous parts of London and the South East at the expense of the towns and cities up and down the UK – many of which sit in the Red Wall and deserve greater opportunities, which they were promised in 2019. Whilst the pandemic has rightly taken precedence over the last year and has led to limited progress, the recent local election results prove that voters still have faith in this message. Now this Government needs to make good on their commitment.

As they work to do so, Ministers should consider whether the UK currently possesses the tools needed to shape the flow and direction of FDI into the UK, taking into consideration their new freedoms outside of the EU. This should mean empowering devolved administrations to improve investment architecture, increasing regional capacity and sending the message through incentives that the whole of the UK, not just London, is open for business.