Letter: Foreign markets

From Mr Michael Littlechild

Sir: In his Economic View (22 February), Paul Wallace discussed the pros and cons of the UK's lead in foreign direct investment (FDI). He rightly stressed that Britain's well-known success in inward investment is matched by its less-publicised lead in outward investment. However, he finds the propensity of UK firms to seek greener pastures overseas perplexing.

His view underestimates how, in the vast majority of outward investment decisions, the objective of penetrating new markets is paramount over that of lowering production costs. In services, local "production" is usually unavoidable, sometimes for regulatory reasons but mainly for delivering the service to the customer with a responsiveness that competes with domestic suppliers.

Similarly, in many manufacturing sectors, customer responsiveness and just-in-time delivery requirements make local production essential for serious market penetration. Our experience of international investors, big and small, finds production costs to be a factor in a much smaller minority of cases than is commonly assumed.

Most British companies are not displacing domestic production when they invest abroad but are extending their markets. Outward investment in many industries is an essential entry route into foreign markets, which cross- border sales of domestic production could not replace.

Yours faithfully,

Michael Littlechild

KPMG

London, EC4