British share of new investment in EU `declining'

Business leaders' fears that the tide of anti-European feeling in the Conservative Party will harm inward investment prospects are backed by a report published today which shows that the British share of new overseas investment in the EU is in decline.

The figures from the UN's Conference on Trade and Development (Unctad) add weight to fears that Adair Turner, director-general of the CBI, will express in a St David's Day speech in Cardiff today.

Mr Turner will say that even if the UK does not join the single currency, it is essential for the sake of business for the Government to strike a positive tone.

He will also criticise the Government's "triumphalism" about the difficulties some continental economies are currently facing. "Before we fall for the myth of Europe's economic disaster, we should remember that its income per head has grown faster than that of the US in the past five, 10 and 20 years, and that continental Europe's export performance remains strong. The European economy is not a disaster."

He adds: "Our national interest lies in full and constructive membership of the European Union, arguing from within for the changes needed to make it more successful. We cannot afford to let Euro-phobia rule."

The fear that British isolation from Europe could be damaging investment flows was backed by economists yesterday. Nigel Pain, an expert on the subject at the National Institute of Economic and Social Research, said: "The primary factor in inward investment has always been to locate in the EU. To the extent that there is any uncertainty about Britain's commitment, that will discourage potential investors."

Ruth Lea, head of policy at the traditionally Euro-sceptic Institute of Directors agreed. "Our membership of the EU is valuable on balance, and one reason is inward investment. There is no doubt that free access to the single market is a major factor," she said.

Mr Pain added that concerns about Britain staying outside the single currency, and having a volatile exchange rate against the euro, could potentially offset any advantages investors saw in the low level of costs in the UK.

The Unctad figures show that the UK share of new investment by Japanese companies has fallen from 44 per cent in the late 1980s to 39 per cent in the first half of the 1990s, although Britain still has by far the highest amount of existing Japanese investment.

While the UK holds the lead for investment from Hong Kong and Taiwan, Malaysian investment is concentrated in France, and China's in France and Germany. The smaller Asian economies invest far more in Japan and the US, but are increasing their investment in the EU rapidly.

The Government has argued deregulation and low taxation are among the key factors attracting inward investment to Britain. But the UN report, commissioned by the Thai government, shows the British share of total investment from overseas has shrunk from nearly $22bn (pounds 13.5bn) out of a $60bn total in the late 1980s to $17bn out of an $82bn cake in the early 1990s. That is, it has shrunk from more than one-third to just under one- fifth.

However, Ms Lea argued that it was no surprise to see countries such as France catching up in terms of attracting inward investment after a poor record in the early 1980s. Asian businesses would anyway want to invest in a range of countries. "They don't want to put all their eggs in one basket," she said.

The UK still has the highest level of existing, as opposed to new, Asian investment in the EU - about 40 per cent by value as opposed to 30 per cent for Germany.

The report says that a clear trend towards further liberalisation by the dynamic industrialising economies in Asia means their overseas investment will continue to grow. For EU countries, continuing to attract this new flow will be crucial. But it predicts that Eastern Europe will emerge as a significant competitor to the EU.

Comment, page 21

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