In the words of Mark Twain, news of the death of the city has been greatly exaggerated. International investment statistics for 2020 have been complicated by lockdowns in either the source or the destination country, or both, often at different times, but the underlying data suggests cities retain their critical role in international investment.
Here, we give an overview of what’s been happening in FDI since the onset of the Covid-19 pandemic, why big cities continue to be important, where the strongest FDI relationships are, and how you can reap the benefits.
FDI did not run for the suburbs during lockdown
The exodus from cities during the pandemic has been well documented. To take London as an example, the population is expected to decline for the first time in the 21st Century, and one in seven Londoners (14%) wants to leave the city, citing coronavirus as their reason for leaving. Improvements in technology have also made home-working easier, and proximity to large employment centres is no longer a necessity for finding high-skilled, well-paid jobs.
But there is more to working in a city than high-paying jobs. Dense cities allow for human interaction, and human interaction is craved by highly-skilled workers. A recent article in Nature Neuroscience reported how when people are isolated from each other they crave social interaction in the same way that people who are fasting crave food*. Moreover, it is often more informal person-to-person interactions that generate creativity and spark innovation, which is a vital ingredient for growth.
FDI decreased in 2020, but the share going to the top 20 cities remained stable and dropped by only one percentage point from 19% to 18%. In reality, the reduction in projects in these cities was the result of companies not reinvesting, rather than going elsewhere.
The lure of the big city
Bigger cities have a natural advantage in a connected world. They provide proximity to major markets, strong infrastructure, easy access to support services and the presence of similar firms. They also have a soft power advantage of being better known through their greater exposure in media, sport, culture, and tourism. What made big cities attractive to investors in the past will continue to bring them back.
On a global scale, four cities remain the focal points for international investment: London, Paris, New York and Singapore. These cities account for 0.6% or the world’s population, but 8% of all inward FDI, while the top 20 cities account for 2.3% of the population, but 19% of inward FDI.
As the largest FDI destination market for 13 of these 20 cities, London is the beating heart of FDI. While it does not always reciprocate investment – it is the largest source of FDI for only eight of these 13 cities – London typically gives more projects than it receives, for example, there were 170 projects from London to Singapore between 2015-19 compared to only 44 projects from Singapore to London in the same period. In short, London is a good investment partner.
While leading US cities often target London as their number one destination for investment, they will tend to look to New York for investment into their own cities. New York is a generous city as the top source of investment for seven cities across the United States, plus London, Shanghai, and Tokyo. It is, however, only the top destination for one city, London.
Singapore is the ‘Asian London’, being the leading city for investment from cities such as Tokyo, Hong Kong, and Bangalore, but it seems to reject its regional neighbours to send the largest proportion of its investment to London. Admittedly, this is a wise move as Singapore receives more investment from London than from those three cities combined.
Finally, there is Paris. Paris is London’s rival for local affection, attracting the most investment from Barcelona, Berlin, and Munich; however, only Barcelona gets its largest share of FDI from Paris. For the German cities, London supplies the majority of investment.
These four big cities drive international investment and all the financial and productivity benefits that go with it. If the pandemic has shown us anything, it’s that big cities aren’t going away and the FDI dynamic remains unchanged.
Reaping the big city benefits
In the UK, policies such as Levelling Up often seem to be about taking from London to give to others, but why should it be such a zero-sum game? Instead, London (and big cities around the world) should be seem as assets for local prosperity.
Expansion has accounted for 27% of all FDI activity in the UK over the last five years, which means traditionally overlooked areas can reap the benefits of international investment by becoming part of the future investment plans of international investors who are already based in London.
Benefitting from these assets will take more than relying on spill-over investment from London; it will require actively pursuing connections as part of a strategy to attract investment. And that means economic development organisations (edos) and investment agencies must be more proactive.
Building stronger connections within nations can be an extra strand to any inward investment strategy, and it can be achieved in any number of ways. Physical connections around transport and communications may be the most obvious, but knowledge-based connections through support services and industry specialisation are equally valuable. Alternatively, a softer strategy could involve building cultural or political links that raise the profile of a town or city in the minds of decision-makers.
Just like rock stars, the best cities are the ones that can re-invent themselves for a new audience. Coronavirus has shown that cities have their issues, but investment has continued to flow, and we expect them to bounce back, perhaps even better than ever.
Developing a strategy to connect yourself to a big city could be a valuable play. As proven inward investment advisors, OCO Global can help you understand what you have to offer and how you can connect to this world of opportunity.