What is the key to 'levelling up' the British economy after Brexit?

“Productivity isn’t everything, but in the long run it’s almost everything.” Starting with this well-known premise from the American economist Paul Krugan, it is no surprise that London dominates the UK economy. Productivity in the capital is 40 per cent higher than the national average. It is also obvious that productivity growth outside London is the only viable path to levelling up.

There are only three routes to achieving productivity growth in a given location. We detailed these in our recent reports for the Productivity Institute. The first is to encourage start-ups that are more productive than the existing firms, the second is to helping existing firms to become more productive, and the third is to attract firms that increase average productivity and while simultaneously making others more productive.

Clearly, ‘levelling up’ requires regions outside the South East to better establish and communicate their value proposition to attract internationally mobile capital. They also need to better harness that investment to secure productivity growth by encouraging cooperation between foreign-owned and local businesses for mutual benefit.

The onset of the financial crisis in 2008 changed the landscape for those seeking to attract inward investment forever. The days of using subsidies or capital allowances were over. Budgets were cut and regional policy sought to prevent different locations using public money to compete with each other.

Instead, they had to become more strategic, targeting certain sectors and understanding why those firms would consider their location. They also had to understand how they could maximise the benefits of any investment, not just in terms of employment, but also in productivity growth.

Our approach is to help different regions understand why firms might consider their location and what features make this a long-term proposition. In turn, they have to consider how this investment matches the needs of the region. For example, a biotech lab may bring in new technology and increase productivity, but remain relatively disconnected from local firms.

Alternatively, a large logistics hub may create jobs, but add little to productivity. One also needs to consider that for many firms, investment decisions are driven by the “war for talent” and they are wary of needing to compete for scarce labour. Typically, some sectors will offer a “sweet spot” in terms of potential suppliers, local capacity, and the mutual gains of co-location. These are different for every location.

How has Brexit affected UK inward investment?

The most common issue that investment promotion agencies have sought to address since 2016 is how to mitigate threats from Brexit. Our research indicates that inward investment into the UK is expected to fall by some 40 per cent. In particular, there will be a prolonged negative impact on FDI in advanced manufacturing, food technology, and financial services, which are especially vulnerable to the fallout due to frictions in global value chains.

Brexit has changed the UK’s relationship with potential inward investors. For 30 years, the UK’s key offering was as an English-speaking bridge between America and Asia (initially Japan, subsequently India, and more recently China) as the single market encourage the separation of activities and the lengthening of value chains.

Now a much higher percentage of the investment the UK attracts will be focussed on selling here or on exporting to locations outside the EU. Our promotion activities need to recognise and reflect this.

They need to consider the potential benefits for the firm and the location in terms of the precise jobs that will be created, how these can be filled from the local labour source, and what existing activities can connect to the investors, such as local suppliers.

How did Coventry and Warwickshire recover from COVID-19?

Done right, this approach can yield tangible benefits as it has in Coventry and Warwickshire, where we helped to develop a strategy for economic recovery post-COVID.  Equally, it is important to recognise that the goal here is not merely growth, but inclusive growth, and therefore requires an understanding of how this may be achieved.

The challenge the region faced was therefore substantial. Three districts were among the ten hardest hit by COVID-19 in the entire country. The key to a focussed recovery lay in understanding the region’s strengths and how inward investment could amplify them.

By targeting electric vehicles and batteries, zero carbon technology, and video games development, local leaders established a strong value proposition and gave companies the confidence to invest in the region, relocating operations and creating and securing jobs.

As a result, Coventry and Warwickshire has bucked the trend of general decline in the British economy over the last two years. It secured 50 foreign direct investments in 2021, which created 2,000 new jobs – a year-on-year increase of 10 per cent. This included major investments from REE Auto, Rimac, Classic Legends BSA motorcycles, Epic Games and Electronic Arts.

This success was recognised by the Foreign Direct Investment Intelligence Magazine, which placed the region in the top ten overall, for strategy, and for economic potential in its bi-annual awards.

With the Russian invasion of Ukraine pushing the world towards global recession in the wake of the COVID-19 pandemic and Brexit, the challenges facing regional economies are likely to grow. It is more important than ever that local leaders understand and exploit their strengths to prevent the productivity gap between London and the rest of the country growing too.

Research with impact

Nigel Driffield is Professor of International Business at Warwick Business School and Deputy Pro Vice Chancellor for Regional Engagement at the University of Warwick. He is the Midlands lead for the new ERSC Productivity Institute and is completing a three year study into productivity in the West Midlands.

His research contributed to the Greater Birmingham Region attracting record levels of inward investment and underpinned a successful bid for £1 billion of growth funds for Birmingham. He also helped to develop Coventry and Warwickshire Local Enterprise Partnership’s reset strategy post COVID-19.

That work formed the basis of an impact case WBS submitted for the Research and Excellence Framework, the results of which saw WBS ranked fifth in the country for its research by the Times Higher Education.

He teaches Law and the International Business Environment on the Undergraduate Joint degree programme,

Further reading:

Driffield, N., and Yang, Y., (2022) "Leverage the benefits of location decisions into performance: A global view from matched MNEs", Journal of Business Research

Becker, B., Driffield, N., Lancheros, S., and Love, J. H., (2020) "FDI in hot labour markets: The implications of the war for talent", Journal of International Business Policy

Driffield, N., Pereira, V., Temouri, Y., (2019) "Does offshore outsourcing impact home employment? Evidence from service multinationals", Journal of Business Research

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