Could proposed new rules on foreign investment in UK damage SME prospects?

foreign investment in businessThe Government recently proposed expanding its powers to review and intervene on foreign investment in UK businesses.

Under the proposals, which are subject to consultation, the Government’s remit would cover all UK businesses including SMEs, where previously it could only review proposed deals where there were national security implications. It would include powers to block takeover deals across all sectors of the economy.

The UK’s plans are reportedly in line with efforts in the United States, Germany, France and Australia and relate to concerns that China and other rivals are gaining access to key technologies.

How does foreign investment affect the UK economy?

The UK’s current account is a measure of the economy’s health.

It is calculated by adding up the goods and services of our exports and the income earned by the UK from overseas investments and subtracting those goods and services we import, income paid overseas for investments in the UK and the payment of things like international aid.

If this figure is negative it means that the economy has a deficit which can act as a disincentive to foreign investment in the UK, especially now, while business is beset by uncertainty and the prospect of exports being stifled by Brexit.

The most recent Office for National Statistics (ONS) figures, for January to March 2018, show that the current account was a deficit of £17.7 billion (3.4% of gross domestic product (GDP)) albeit this is a reduction of the gap for the third successive quarter.

How does foreign investment affect UK productivity?

According to ONS figures published in July this year British businesses, including SMEs, with foreign owners are up to three-times as productive as those with only UK investors.

It is not clear whether this is because overseas investors choose to put their money in the most productive UK businesses, or those which are already intensively involved in export, but there is also an argument that foreign investment comes from businesses that are already expert in the latest and most productive techniques of management, the organisation of work and the application of new ideas.

Readers might like to see a guide I recently produced on this topic: Guide to Productivity Improvement.

Why does a change in foreign investment scrutiny matter to SMEs?

The proposals have already raised concerns among MPs and notably the Institute of Directors (IoD) whose policy director Edwin Morgan said: “…the wide scope for intervention set out in the white paper could have a chilling effect on foreign investment in growing sectors of the economy”.

Oliver Welch, of the manufacturers’ trade body EEF also warned that even those companies not seen as a security risk “could end up caught in red tape”.

As many as 4 million UK workers are employed by companies with foreign investors, so a reduction in foreign investment could also have a significant impact on jobs.

More significantly, for SMEs hoping to grow and expand into overseas markets, many of whom are in the tech sector, access to investment is essential. Equally, as mentioned by the EEF, the last thing SMEs need is to have to engage with yet more Government red tape which is already a burden.

If the Government is proposing to widen its scrutiny of foreign investment to include key technologies on national security grounds, how does this square with its exhortations to SMEs to step up their efforts to seek more export opportunities?

Joined up thinking is not much in evidence here. We need policies that promote us abroad, not ones that isolate us from the rest of the world.

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