Research and analysis

The economic impact of outward direct investment (ODI): executive summary

Published 4 November 2024

This report by LSE Consulting’s Trade Policy Hub, commissioned by the Department for Business and Trade (DBT), investigates the economic associations of outward direct investment (ODI) for the UK.

This report is uniquely specific to the UK economy for the period from 2013 to 2019. It explores associations between ODI and key economic outcomes: earnings, productivity, employment, and exports. The report uses datasets from the Office for National Statistics (ONS)’ Secure Research Service, employing primarily regression models to analyse the relationship between ODI and various economic outcomes.

Given that only 1% of all UK firms have ODI positions abroad, which account for 24% of all UK employment and 32% of gross value added (GVA), there is evidence of a disproportionate contribution of ODI from just a few very large companies.  

Earnings 

UK ODI remains profitable. An average UK firm with ODI makes a 7.3% return on its ODI. This firm-level average rate of returns in the UK for this period varies by sector (2.8% to 13.1%), partner country (5% to 11.9%) and source region (4% to 10.2%). In absolute terms, average earnings are highest for financial services, ODI to Europe. 

The source region could be just as relevant as the target market and sector, possibly by acting as a proxy for firm size and other business characteristics. Deeper analysis also confirms that ODI to Europe and in certain services (for example energy, communications) generate lower returns. Given the UK’s overexposure to these areas, there might be gains from diversification of UK ODI.  

Productivity 

The assumption that UK ODI is associated with a productivity increase can be restated with confidence and we find no evidence of the ‘hollowing out’ effect due to UK ODI. For an average UK firm, a 10% increase in time-lagged investment position was associated with a 4.7% increase in its GVA, taking into account various firm-level characteristics.  

However, ODI in the services sector is not associated with an increase in productivity. The analysis could not verify whether ODI to R&D-intensive sectors or target markets heightened the impact on UK productivity either.  

Employment 

Increasing ODI does not correlate with higher unemployment in the UK. For an average UK firm, a 10% increase in ODI was associated with a mere 0.2% decrease in UK employment, controlling for other variables.  

The employment effect isolated for various UK regions or sectors (controlling for other variables) does not vary significantly.  

Exports 

ODI is associated with an increase in trade. For an average UK firm, a 10% increase in ODI was associated with a 0.39% increase in their exports, in line with research from other countries. It is also indicative of a complementary relationship between our ODI and exports. 

Export creation from the ODI effect seems to be marginally stronger in services, which could be due to revenues generated by franchising, intangibles, or management fees. 

Conclusions 

In the case of the UK, there is no cause for concern about hollowing out or offshoring, which is currently debated in other G7 and Organisation for Economic Co-operation and Development (OECD) economies. UK ODI seems to have evolved into a more complementary and synergetic relationship with partner countries than in the past.  

The UK economy is dependent on ODI to seek economies of scale. However, only a few economies are large enough to absorb the sizeable ODI from the UK and offer a reasonable return.  

Results have also shown that global recessions and other exogenous effects could affect these conclusions on ODI. Similarly, the recent subsidy race among major economies and envisaged restrictive regulatory action such as investment screening could alter the effects of UK ODI in the future.