Inward Investment Insight #3

Jan 2023: China; Northern Ireland; FDI Jobs

Jan 24, 2023

Year of the Rabbit… in the Headlights

Happy Chinese New Year. It’s the Year of the Rabbit… but for those seeking inward investment from China it might be the ‘Year of the Rabbit in the Headlights’.

According to the latest figures from the Department for International Trade China remains the UK’s #4 market for imports and #6 export market. But beyond the numbers, the relationship is in freefall and that poses a problem for many inward investment teams who have invested in building bridges with China.

Ever since PM David Cameron welcomed Xi Jinping to the UK in 2015 and famously heralded a ‘Golden Era’ for relations with China, inward investment and trade teams have sought to capitalise on links with the world’s largest market. Images of the two leaders sipping a pint of beer in a pub and posing for selfies with Manchester City footballers seem like a different world now. Fast-forward a few years… Cameron is a distant memory thanks to Brexit, but Xi has strengthened his grip on the CCP and the UK and China find themselves on different sides of a cold war that feels like it's getting warmer by the day (and not in a good way).

Ironically, it was in Manchester that UK-Chinese relations reached a new low point when pro-democracy protesters were attacked by diplomats outside the Chinese consulate in October 2022. So where does this leave inward investment partnerships like Manchester-China Forum - which still has a pic and quote on its website from Zheng Xiyuan, the infamous hair-pulling former Consul General who assaulted students before being ‘recalled’ to Beijing?

Manchester is one of several high-profile cities to have a major focus on attracting Chinese FDI, which now seems at best outdated, and at worst downright dangerous.

In 2022 cities including Newcastle, Newport, Wakefield and Bath all severed ties with Chinese sister cities. This was largely as a result of the growing ‘Detwinning’ campaign which notes that:

“Sister city agreements have been a crucial part of China’s diplomacy… the Detwinning Campaign aims to evidence how Chinese propaganda is infiltrating and financially controlling higher education institutes in some sister cities by the use of Confucious institutes”

In response to human rights abuses, some councils have adopted a more creative approach. In London, Tower Hamlets Council said last year it was considering renaming the streets around Royal Mint Court (where the Chinese plans to build a new embassy) to Tiananmen Square, Uyghur Court and Hong Kong Road, to protest against China’s treatment of minority groups.

Even for those locations which managed to successfully attract Chinese investment, this was more often than not in the form of acquisitions of UK companies rather than the traditional job-creating expansion projects associated with European or North American inward investors.

An investigation by The Times published on 1 January 2023, revealed the true extent of China’s ‘venture communism’ spending spree which has resulted in ‘£1 billion of dividends flowing back to Beijing’.

This trend is mirrored in the U.S. too, where many states have stopped seeking Chinese FDI and most recently, where Virginia’s governor rejected Ford’s planned battery factory investment because CATL was a partner, calling the project a "front" for the Chinese Communist Party. Some have accused the Governor of playing politics, but having a healthy scepticism of the motives that drive strategic investments from authoritarian states is long overdue.

The relationship between any Chinese company and the CCP is rarely transparent, so expecting local government teams to be in a position to adopt a nuanced approach is a big ask. It seems that the tantalising prize of any FDI win is so powerful it can be difficult for local investment teams to raise a red-flag or reject a potential investment. The same goes for the flattering approaches of trade missions or the lure of a partnership with a Chinese university, especially when there’s some money to be had.

Anyone wishing to understand the complexities involved should check out the latest book by Ian Williams, ‘The Fire of the Dragon: China’s New Cold War’. Award-winning journalist Williams shows how under Xi:

“China’s global ambitions have taken a dangerous new turn. Bullying and intimidation have replaced diplomacy. Trade and investment, even big-spending tourists and students, have been weoponised.”

The UK introduced new restrictions on inward investment from 2022, with the National Security and Investment Act. The new law enables the government to prevent investments which threaten national security covering 17 critical sectors, where notification and prior clearance will be mandatory. In the first three months of the new law, 222 notifications were received of which 17 required further review. According to lawyers studying the cases, this process adds around a month to transactions.

In 2022, five UK transactions were blocked, four involving Chinese investors and one a Russian. These were:

licence agreement between the University of Manchester and Beijing Infinite Vision Technology Company.

acquisition of Bristol-based electronic design automation firm, Pulsic Ltd, by a Hong Kong firm owned by a Chinese software company.

acquisition by SiLight (Shanghai) Semiconductor Ltd of Southampton-based HiLight Research.

Nexperia’s deal to buy Newport Wafer Fab in Wales. The British government ordered the Chinese investor to divest 86% of its ownership for national security reasons.

acquisition of Peterborough broadband provider Upp Corporation by LetterOne Holdings S.A., an investment company whose owners include three sanctioned Russian oligarchs.

There were also conditions placed on other investments which involved a broader range of countries including UAE, USA and Germany, such as a requirement to keep R&D and manufacturing in the UK.

While these restrictions appear to be entirely justified from a national security context, the new law is suitably vague that it could be manipulated by future governments to deter FDI projects that are considered politically unpalatable.

It’s not just FDI teams that have to rethink and unravel relationships with China. The Times newspaper published details of UK universities with ties to Chinese military research. They cited 42 universities that have links with institutions considered to be a concern, with 22 deemed “very high risk” by the Australian Strategic Policy Institute think tank.

Anyone who doubts the importance of China’s sabre-rattling over Taiwan should check where the semiconductors that are central to future UK growth; advanced manufacturing and the electrification of mobility, are currently being made. The short and mid term fortunes of Taiwan and the UK are inextricably linked.

With so many opportunities (for both FDI, city twinning and university collaborations) in Europe, America and friendly parts of South East Asia, it’s easy to see the trend for ‘friendshoring’ becoming a safer option than wrestling a mighty dragon. Especially when the Chinese dragon is breathing fire and boasts of its “no limits friendship” with a bloodthirsty Russian bear.

#Teams

Northern Ireland

This month’s dive into an inward investment agency takes us to beautiful Northern Ireland. For many years, Invest Northern Ireland has been a much-envied organisation with a reach and reputation that far exceeds the size of its location.

With most investment promotion agencies, we only really get to see what they want us to see in annual reviews and promotional websites. But thanks to a major new audit of the agency, INI’s innermost workings have been laid bare.

Damning references include:

“relationships at senior levels within Invest NI are damaged and are harming the performance of the organisation”
“Concerns relating to trust, openness and respective responsibilities”
“little focus on outcomes”

Aside from these internal wranglings, other economic development teams may be shocked at the sheer scale of the Invest NI:

Invest NI has a headcount of 647 staff, including 53 people overseas in Boston (5); Miami (1); New York (5); Chicago (2); San Francisco (4); Santiago (1); Toronto (1); Brussels (2); Dublin (1); Dusseldorf (2); Madrid (1); Beijing (2); Hong Kong (1); Shanghai (5); Guangzhou (1); Singapore (3); Sydney (1); Tokyo (2); Doha (1); Dubai (9); Saudi Arabia (1); and South Africa (2).

Between 2016 and 2020, Invest NI was allocated an average annual budget of approximately £138 million.

It’s worth remembering that Northern Ireland has a population of 1.8 million (that’s smaller than the county of Hampshire or the state of Idaho). Not a bad budget!

Rarely does a report get published with so much inside information, but it’s definitely worth a look - so to summarise the key findings of the Review Panel include:

Northern Ireland needs an economic development agency and Invest NI is best placed to continue to take forward this work

Profound change is needed that requires reform and repurposing

The agency is having limited impact on productivity

There is considerable room for improvement in leadership, structure, operation, control and public accountability of the agency

Stronger governance and oversight is required from DfE and better strategic and policy direction needs to be provided

Strengthening public understanding of Invest NI work and how it uses public monies is crucial

The agency needs to be a better partner, particularly in the sub-regional context

The full evaluation can be found at:

https://www.economy-ni.gov.uk/publications/independent-review-invest-northern-ireland-investni

#Hacks

Top Risks 2023

With wars, threats of wars, climate disaster, insurrections and political instability hogging the headlines, it’s important to make sense of the global risks that will impact FDI in 2023. The annual report by Eurasia Group neatly explains the 12 key risks facing the world.

Toronto Global Annual Report Shows Impact

I worked closely with the folks at Toronto Global when I represented the Government of Ontario a few years ago. They were very good then and they’re still delivering today. I like the focus of this annual report which has a big focus on the federal, provincial and local revenue raised from new taxes paid by inward investors.

Nurturing Early FDI Scaleups

A great example of an innovative approach to FDI is the fantastic initiative to nurture Nordic medtechs into the UK by partners in Leeds, Yorkshire. Get them in early, when they're bigger it's often too late!

Tech Nation Review of 2022

This great review of the tech scene in the UK by Tech Nation shows the strengths of the startup and scaleup scene, not only in London, but across all regions of the UK.