Official Statistics

Inward investment in to freeports: technical annex

Published 24 November 2023

1. Preface

This technical annex has been published to accompany the Department for Business and Trade (DBT) inward investment relating to freeports results. It aims to provide technical details to help interpret the statistics.

The statistics include the estimated jobs created as an outcome of these investments and also the capital expenditure invested. The investments are all foreign direct investment (FDI).

This annex outlines the definitions, data collection process, eligibility and verification process that underpin the publication.

2. Introduction

This section outlines the relevance of FDI, what FDI is, the 3 main measures of FDI and types of FDI projects.

2.1 Relevance

FDI is considered to deliver economic benefits to the UK by improving economic competitiveness and enabling improvements in productivity for both new and existing firms. FDI can create an important positive contribution to an economy by generating employment and increasing tax revenue. It can also provide external resources such as capital, technology and managerial know-how that can substantially aid productivity and economic growth.

2.2 What is FDI?

From a UK perspective, inward FDI is an investment from a foreign investor into a UK enterprise. The UK entity then becomes an affiliate enterprise, which is either a subsidiary, branch, or an affiliate company of the parent company – the foreign investor. In practical terms a foreign company can either set up a version of itself in the UK, or can acquire/merge with an existing UK company.

The parent company needs to own at least 10% of the shares or voting power in the UK entity for it to classify as FDI. Direct investments include the initial operation establishing the relationship between the 2 units, and also all later capital operations between them and between related institutional units, whether incorporated or not.

2.3 Measures of FDI

There are 3 main measures of FDI:

• FDI flow
• FDI stock
• FDI projects

FDI flow measures the net movement in inward direct investments made during any reference period.

FDI flows comprise of:

• acquisitions or disposals of equity capital (which includes mergers and acquisitions (M&As))
• reinvested earnings
• inter-company debt

FDI stock measures the total financial value of FDI in the UK at a point in time.

FDI stock has the following main components:

• foreign companies’ share capital and reserves
• net amount due to foreign parents on the inter-company account
• net amount due to foreign parents on the branch head-office account

It is a statistical measure that is directly linked with the FDI flow. The annual FDI flow contributes to the change in the inward FDI stock.

Investment promotion agencies, including DBT, are focused on and measure their operational performance based on the number of specific individual investment decisions - FDI projects.

2.4 Types of FDI projects

FDI can come in different forms depending on the characteristics of the investment project and the nature of actual engagement of the investor in the UK.

For the purposes of DBT definitions, FDI transactions take 3 main forms:

• new investments
• expansions on an existing investment
• M&As

New investment projects are a type of FDI where a foreign investor starts a new business by establishing a new entity. This could be setting up new offices, building, production or operational facilities in the UK. This type of investment directly contributes to capital formation through new capital expenditures, increases the output and generates employment and other benefits. New investments can be made by either an existing investor or a new investor.

Expansion investment projects are a type of FDI where an existing investor expands the production or operational facilities of an existing UK foreign direct enterprise with additional investments. Retention investment projects are a type of investment where a foreign investor agrees to make an additional investment in an existing foreign direct enterprise. The purpose is to prevent the enterprise from rationalisation or closure.

M&A projects are a type of FDI made by foreign investors to either merge with or acquire at least 10% of existing equity or assets of an existing UK company. A merger occurs when 2 or more companies agree to merge into a new single company rather than remain separated for creating business synergies. An acquisition is a transaction between 2 companies by which the acquiring company purchases the existing assets and liabilities of the target company. M&As are a common mechanism for entering a new market and are usually followed by new additional investments. Joint ventures are agreements between a foreign enterprise and an existing UK enterprise to invest in a joint project. These are usually short-term focused.

2.5 Freeports

The investments which underpin this publication have all landed in freeport tax or custom sites. These sites are designated and recognised in law as geographical areas where businesses can benefit from customs and tax reliefs to bring investment, trade and jobs to regenerate regions across the country that need it most. More information is available at Freeports in the UK and the geographical boundaries of the sites are detailed at Maps of Freeports, Freeport customs sites and Freeport tax sites.

3. Methodology and production

This includes methods of data collection, project eligibility and DBT’s involvement in foreign investors investing and re-investing in the UK.

3.1 Data collection

As the government department responsible for the promotion and facilitation of inward investment, DBT aims to record and report information on all investment projects successfully landing in the UK. This includes projects assisted by the DBT network teams and those which land without the DBT network’s involvement (non-involved projects). DBT aims to capture all those FDI projects which meet DBT definitions and standards and those that can be verified as having landed in the reporting period. For the purposes of this publication, all investment projects are involved meaning the businesses have had some support from DBT on their investment decisions.

New jobs created are estimates over a 3-year period and are sourced from interactions with businesses and public announcements. Capital expenditure relates to the monetary investment to acquire or upgrade physical (fixed) assets, such as buildings or equipment. The level of capital expenditure in each project depends on the type of investment or the industry the company operates in. Similar to job numbers, the amount is sourced from the business although they are under no obligation to disclosure the information to DBT.

Data and information related to involved projects are self-reported by the DBT network and are recorded on an internal database. All parties involved in a project are responsible to enter the necessary data on to the system following agreed operating principles and eligibility criteria.

3.2 FDI project eligibility

FDI project eligibility tests:

1. There must be a new, additional financial investment in the UK foreign direct enterprise as part of the FDI project. Each FDI project must demonstrate it is bringing in some financial investment into the UK.
2. To qualify as an FDI project, the foreign ownership or voting power in the UK company as a result of the new equity investment must be at least 10%.
3. The business activities supported by the investment project are expected to last at least 3 years. DBT supports those investments that create or expand long term businesses in the UK.
4. New investments or expansions must create one or more new permanent (that is expected to last for at least 2 years) jobs in the UK. Total jobs expected to be created or safeguarded in the UK cover the first 3 years of each project.
5. (Applicable only for retention and M&A projects claiming safeguarded jobs). There must be sufficient evidence that without new additional investment the UK based company would potentially reduce its production capacity, or employment level. This could ultimately result in the closure of the UK business.

Projects that are characterised by any of the following elements are not treated as an FDI project for the purposes of this publication:

• a project that does not involve new (or additional) financial investments or capital expenditure
• a project that has short term business objectives (for example less than 3 years), which do not make it qualify for the ‘lasting interest’ test of the FDI definition
• contract agreements, collaboration and partnerships (except when they involve Research & Development (R&D)) that do not involve any financial investment and creation of new businesses for production of goods or services in the UK
• franchise contracts under which a UK company will sell or provide products or services produced by a non-UK entity
• investment in UK residential property (for example purchasing houses or flats in London) without creation of new long-term businesses and associated jobs in the UK

3.3 Project involvement

One of DBT’s key ambitions is to generate increased international awareness of the benefits of investing in the UK and provide information and advice to investors, both in the UK and overseas. This helps them prosper and succeed in investing and re-investing in the UK. DBT collaborates with the devolved administrations and local partners to achieve this.

In order for a project to be recorded as an involved project, there must be sufficient evidence that the DBT network has provided significant assistance to the foreign investor. There must be evidence that the assistance and advice was essential for the delivery of the investment project in the UK. Where no substantive assistance has been provided to land a project into the UK, the project is recorded as a non-involved success (and not included in this publication).

4. Verification

Each project undergoes an independent verification process prior to confirmation as a success for official reporting.

Along with confirming the eligibility of projects, additional objectives of the verification process are to ensure that investment projects are genuine. The robustness, accuracy and consistency of the project data reported by the DBT network is also assessed. The tests applied on each project in the main verification stage are mapped out below.

4.1 FDI project verification tests

1. The UK foreign direct enterprise must be registered in the UK. This is sourced through Companies House.
2. The UK foreign direct enterprise must be occupying or legally committed themselves to taking premises in a specific physical business address. This is sourced through confirmation of the UK business address on the company’s website or through official documentation.
3. There must be evidence that the investment funds have been secured, that at least one person is working or is in the process of being recruited to work. The activities planned as a result of the investment should have commenced. Evidence is sourced from public announcements, investor confirmation, or through a note from the DBT officials’ visit to the UK company site.

5. Technical notes for publication

This covers the timing of the data.

5.1 Timing of projects landing

Projects which underpin this publication landed (that is revenue generating activities commenced) in the UK between December 2021 and November 2023.