Inward investment projects into the UK rose by 15% last year, as it retained its position as Europe's number one destination for global investors while simultaneously increasing its market share.

The 799 projects were the highest number ever secured by the UK according to professional services firm EY's annual UK Attractiveness Survey.

The overall European market grew by just 4%, meaning the UK secured one-fifth of all European projects, close to its record high over the past decade. Its performance saw the UK extend its lead over second-placed Germany as a Foreign Direct Investment (FDI) destination, as both countries pulled away from the remainder of Europe.

The UK has also moved from eighth to fifth in the worldwide ranking of countries investors regard as attractive for FDI over the next three years – its highest ever position – overtaking Germany for the first time. Only China, the United States, India and Brazil are ahead of the UK.

Steve Varley, EY UK&I chairman and managing partner, said:

"The UK's performance was nothing short of stellar and was achieved against the backdrop of more modest increases across Europe. The message that the UK is open for business is being received loud and clear by international investors, but as the global economy evolves, the UK must continue to respond in order to stay ahead.

"With intra-European FDI increasing and almost two thirds of our survey respondents identifying the UK as a gateway to Europe, clarification on the UK's relationship with the wider continent is essential."

Major gains made in software, Europe's largest FDI sector

The UK was the clear leader in attracting projects in the knowledge industries. Software investments surged by more than 50%, meaning the UK secured more than a third of all projects in what is now Europe's largest FDI sector.

It also attracted 52 research and development (R&D) projects. That was 20% more than Germany, giving the UK a Europe leading market share of 18% R&D FDI. The UK also led the way on headquarters, contact centres, logistics, international distribution centres and sales & marketing projects.

Mark Gregory, EY's chief economist, said:

"The UK's success in attracting R&D and HQ investments reflects the positive impact of initiatives to reduce corporation tax and incentivise R&D investment via the Patent Box.

"It would be sensible to consider approaches that have the potential to strengthen the UK's appear for other types of project as we look to the future of UK FDI."

Manufacturing strategy required

The report suggests the UK is 'punching below its weight' when attracting manufacturing projects.

"The benefits of manufacturing projects are three-fold; they create permanent skilled jobs, pay relatively good wages and are crucial in developing the next generation of British workers," said Gregory.

"Tax policy should play a central role in a more ambitious manufacturing strategy that also results in improvements to the transport and logistics infrastructure. The latter would open up the regions, where a sizeable portion of the labour force is located."

US investment increases

The UK continued to be the number one recipient of US investment into Europe, receiving 27% of US projects, an increase of 1% on the previous year's figure. The UK is also the top European destination for investors from another three of the top 10 countries of FDI origin – France, Japan and the Netherlands.

On the other hand, Germany has built up an especially strong market share of Chinese investments, meaning its share of Chinese-originated projects is more than double that of the UK at 19%.

UK Flag - FreeFoto.com

UK Flag – FreeFoto.com

UK needs to attract new investors

The UK's main assets appear well defined, and include its quality of life, diversity, the stability of the political, legal and regulatory environment and local labour skill levels.

Survey respondents also identified financing, taxation and support for key industries as areas in which the UK has advanced, with companies that have already invested in the UK being more likely to invest there in the future.

However, Gregory believes that further work is required to raise awareness among new investors to the UK. "The UK scores highly for reinvestments, but potential new investors cite the development and cost of real estate and labour costs as a deterrent," he said.

"This is more true of London, which tends to be out of line with the other regions of the UK, so further articulation of all the UK's attributes is required," he added.

Leading light of London must cast positive glow on rest of UK

The number of projects secured in London (380) rose by more than one-fifth in 2013 and accounted for nearly half of all UK investments.

The pulling power of London for global FDI means it risks overshadowing the rest of the UK, particularly the English regions where total projects – excluding London and the South East – were 20% lower in 2013 than 2010, the last year of the Regional Development Agencies (RDAs).

With just 23 FDI projects recorded in 2013, the North East of England recorded its worse year in the past decade.

Gregory concluded: "London is one of the UK's strongest assets. In fact, its position is now so strong that it would rank fourth in Europe if it were a country. Its strengths must be leveraged more effectively in order to benefit regions across the UK and bring balance to the economy. Combined bids for multi-site or multi-function opportunities are steps that should be considered."

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