Official Statistics

Net zero related inward investment in the UK: technical annex

Published 14 October 2021

Preface

This technical annex has been published to accompany the Department for International Trade inward investment relating to net zero results. It aims to provide technical details to help interpret the statistics.

The statistics include the number of investment projects landing in the UK between 18 November 2020 and 24 September 2021. The estimated jobs created as an outcome of these projects and the amount of capital expenditure invested are also shown. The projects are a combination of both foreign direct investment (FDI) and non-FDI.

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

1. Introduction

1.1 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, 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.

1.2 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.

1.3 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 DIT, are focused on and measure their operational performance based on the number of specific individual investment decisions - FDI projects.

1.4 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 DIT 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. For the purposes of this publication, retention projects have been grouped together with the expansion category. 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. For the purposes of this publication, joint ventures have been grouped together with the M&A category. 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.

1.5 Non-FDI

Non-FDI projects do not meet the full definition of FDI. However the investor has stated their intention to invest funds into a UK project or company and deploy capital with immediate effect, or at least in the very near future.

1.6 Net zero

The investment projects which underpin this publication are all related to one of the areas set out in the government’s 10 point plan for a green industrial revolution which was published in November 2020. Further information on how the projects align with the 10 point plan (10PP) is in section 3.

2. Methodology and production

2.1 Data collection

As the government department responsible for the promotion and facilitation of inward investment, DIT aims to record and report information on all investment projects successfully landing in the UK. This includes projects assisted by the DIT network teams and those which land without the DIT network’s involvement (non-involved projects). DIT aims to capture all those FDI projects which meet DIT 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 i.e. the businesses have had some support from DIT 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 and/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 DIT.

Data and information related to involved projects are self-reported by the DIT 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.

2.2 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 three years. DIT 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 three 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, and/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

Projects that don’t meet the full definition of FDI are recorded as non-FDI. The underlying principles of capital being invested in to the UK remain the same. However there isn’t a need for job creation or for the capital to be invested directly from the overseas company to the UK entity. Non-FDI projects encompass a wider range of vehicles for capital to be transferred, for example venture capital.

2.4 Project involvement

One of DIT’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. DIT 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 DIT 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).

3. 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 DIT network is also assessed. The tests applied on each project in the main verification stage are mapped out below. The majority of projects are FDI (DIT), and where the project does not meet all of the criteria (for example no job creation), then it’s recorded as non-FDI.

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 DIT officials’ visit to the UK company site.

3.1 Alignment to 10 point plan

For any investment project included in this publication, the company has expressed an intention with the investment that is aligned with the objectives of the 10 point plan. This is in addition to other criteria described in this methodology. Below is a list of the 10 points, with a short description of characteristics necessary to align. This is tested through the existing verification process applied to all DIT recorded investment projects.

Advancing offshore wind

Projects directly contributing to the establishing of offshore wind energy capture installations; or developing or deploying technologies that are advancing offshore wind energy capture capabilities.

Driving the growth of low carbon hydrogen

Projects that directly invest in the advancement of low carbon hydrogen installations and technologies, including where it replaces existing carbon-based facilities.

Delivering new and advanced nuclear power

Projects directly contributing to the improvement, expansion or installation of nuclear power facilities.

Accelerating the shift to zero emissions vehicles

Projects directly contributing to the distribution, deployment, development or manufacture of technologies and vehicles with zero emissions.

Green public transport, cycling and walking

Projects directly contributing to the deployment, facilitation, distribution, development or manufacture of technologies and individual vehicles that increases the access to and use of green modes of transport.

Jet zero and green ships

Projects containing or advancing technologies, machinery or vessels that directly serve to reduce carbon emissions from aerospace and maritime transport.

Greener buildings

Projects directly introducing new energy-efficient buildings, or technologies that significantly transform existing buildings making them more energy efficient.

Investing in carbon capture, usage and storage (CCUS)

Projects directly facilitating the development, design and installations necessary to advance CCUS technologies and practices.

Protecting our natural environment

Projects directly improving flood defences, land management, as well as planting trees to capture carbon; or sustaining natural conservation through alternatives to using wood, peat; deforestation and sustainable agriculture.

Green finance and innovation

Projects that directly 1) support innovation and accelerating the commercialisation of innovation low-carbon technologies; or 2) mobilise financial sector as an enabler to finance across the 10PP.

In addition to the main verification process, prior to publication, an extra verification exercise takes place. Quality assurance checks are performed to ensure consistency, accuracy, and to identify any irregularities within the data set.

4. Technical notes for publication

4.1 Imputing missing capital expenditure values

As investors are under no obligation to provide DIT with a capital expenditure amount, there is a data gap in the coverage. To minimise this gap, an exercise of imputing values based on historical projects with similar characteristics has been carried out.

The crucial drivers for investment value are the type of project (like new investment/expansion), the sector and the market of origin. By using a 10 year dataset of landed investment projects it’s possible to calculate an average investment amount for each of these combinations. Due to some high values potentially skewing some estimates, the median for each combination is used.

The missing values are imputed as per the below:

• if there are 5 or more historical projects with the exact type, sector and market of origin the median of those projects is applied
• if that is not possible, the type, broader sector group (for example energy rather than offshore wind) and market of origin is used

If there is still not 5 or more projects historically to base the estimate on then the value is left blank as a broader estimate would be too inaccurate. Based on this methodology, the data gap for capital expenditure in this publication has been reduced from 7% to 4%.

The approach for imputing missing values remains subject to review based on further investigation and feedback.

4.2 Timing of projects landing

Projects which underpin this publication landed (that is revenue generating activities commenced) in the UK between 18 November 2020 and 24 September 2021. 18 November 2020 was selected to align with the publication date of the 10 point plan. 24 September 2021 was the cut-off period needed to complete verification and quality assurance in time for this publication.