February 2007

NEWS

UK remains leading European destination for FDI
Global foreign direct investment (FDI) inflows grew in 2006 for the third consecutive year to reach $1.2 trillion, according to the first estimate for the year by the United Nations Conference on Trade and Development (UNCTAD). The total was an increase of 34 per cent from 2005, although it was short of the record of $1.4 trillion set in 2000. The United States reclaimed its position as the leading FDI destination, overtaking the UK, which led in 2005 due largely to a single merger deal (that of Royal Dutch/Shell). The UK, however, was still comfortably the leading FDI destination within Europe. The European Union as a whole was the largest host region, claiming 45 per cent of the world total. The UK accounted for $170 billion for the year, and held $771 billion in foreign-owned stock.

The increase in FDI globally reflected a strong economic performance in many parts of the world, according to UNCTAD. Increased corporate profits added to the value of merger and acquisition (M&A) deals, which account for a large part of FDI flows. Flows to developed countries rose by 48 per cent year-on-year to reach $800 billion, while inflows to South East Europe, the Commonwealth of Independent States and Africa all reached record levels. However, UNCTAD sounded a warning note for developed countries in the years ahead, citing factors such as current account imbalances, fiscal deficits and inflationary pressures, including higher oil prices, that could potentially derail further growth. The organisation predicted that, as a result of these factors, economic growth would slow moderately in 2007.

Figures from the UK’s Office for National Statistics meanwhile put the total value of foreign-owned stock in the UK at $948 billion at the end of 2005, an increase of 33 per cent from the previous year. The rise was due largely to big increases in European-owned stock, up $170 billion to $514 billion, and US-owned stock, up $61 billion to $327 billion. The value of stock held by Asian companies also increased, by $5 billion to $52 billion. “It is clear evidence that our stable economy, skilled workforce and strong IT and telecoms infrastructure provide the right conditions to both attract international companies and help UK companies expand overseas,” said Andrew Cahn, chief executive of UK Trade & Investment.

London has attracted 40 per cent of all Korean FDI projects into Europe over the past seven years, making the UK the most favoured destination for Korean investment, according to the city’s inward investment agency, Think London. There are now over 120 Korean firms located in the UK capital, and in the final quarter of 2006 alone Think London helped seven new firms to set up there. London has the largest Korean population of any European city, thought to number more than 20,000. Students comprise a significant proportion of this population, with 1,600 Koreans studying in the capital – 43 per cent of all Korean students in the UK. Korean student numbers have increased by 80 per cent over the past few years.

There is a well-developed social and business infrastructure for the Korean community in the capital, particularly in New Malden and surrounding suburbs in the south of the city, an area that is home to an estimated 8,000 Koreans. Recently arrived companies include engineering firm SewonCellontech, clothing and shoe company Hwaseung and SMI Technology, which specialises in the manufacture of inkjet media.


UK economy ‘among the freest in the world’
The Index of Economic Freedom survey by Washington thinktank the Heritage Foundation ranks the UK the top country in Europe, and sixth in the world, in terms of economic freedom. In terms of investment freedom it ranks joint top in the world, along with Hong Kong and Luxembourg. The annual survey, conducted in partnership with the Wall Street Journal, covers ten different freedoms, from property rights to entrepreneurship, in 161 countries. The UK’s overall score was 81.6 per cent free, with Hong Kong taking the top spot with 89.3 per cent, followed by Singapore, Australia, the US and New Zealand. The UK’s freedom of investment score was 90 per cent, as was its score for the freedom of financial services. Only in the area of freedom from government did it fare badly, recording a score of 54.2 per cent.

“The United Kingdom scores highly in virtually all areas: investment freedom, trade freedom, financial freedom, property rights, business freedom and freedom from corruption,” said the report. “Foreign investors receive the same treatment as domestic businesses… The most attractive features of the business environment are deep and sophisticated capital markets, strong macroeconomic fundamentals and a relatively flexible labour market.”


Interest rates up but businesses remain optimistic
The Monetary Policy Committee (MPC) of the Bank of England took most observers by surprise in January by announcing an unexpected rise in interest rates, by one-quarter of a percentage point to 5.25 per cent. This was the third increase in rates in six months, and led many to believe that rates would rise again to reach 5.5 per cent by March. The MPC cited inflation as a reason for the increase, with the consumer price index (CPI) growing at a rate of 2.7 per cent in November. Figures released by the ONS shortly after the rate rise announcement showed that inflation in December climbed by 3 per cent, the fastest increase in ten years and the eighth consecutive month that CPI inflation had been above the government’s target of 2 per cent.

According to the ONS, the main reason for the increase in the CPI was the rising cost of fuels and lubricants, followed by more expensive air travel and higher prices for furniture and household goods. The Retail Price Index meanwhile, which includes interest on mortgage payments, jumped from 3.9 per cent in November to 4.4 per cent in December, its highest level since December 1991.

UK companies nevertheless remain optimistic about the future. The service sector grew at its fastest rate in December for more than a decade, with a monthly survey by the Chartered Institute of Purchasing and Supply and the Royal Bank of Scotland showing an index of activity of 60.6 per cent. This was up from 59.8 per cent in November and the highest score since June 1997. According to Cips/RBS, the growth reflected higher levels of new orders and was broad-based across all sectors, though the performance of business services firms and hotels and restaurants was particularly strong. In addition, employment grew at its fastest rate since August 1997 and some managers reported difficulties in recruiting extra staff, indicating a tightening of the labour market.

Manufacturing output rose in November for the first time in three months, though underlying growth in the sector remained weak. The ONS reported that production rose by 0.3 per cent from October, boosted by a sharp increase in output by the electrical and optical equipment industries. The increase, which was in line with expectations, took growth in manufacturing output to 2.4 per cent for the 12 months to November.

The profitability of UK businesses meanwhile hit a record high in the third quarter of 2006, according to the ONS. The net rate of return for non-financial companies rose to 15.2 per cent in the period July–September, up from 14.9 per cent in the second quarter. “The new record high in the third quarter suggests that conditions are ripe for a continuation of the recent recovery in business investment. Firms are clearly feeling confident enough to invest, perhaps helped by the greater certainty about the outlook for energy prices,” said Roger Bootle, an economic adviser to consultancy company Deloitte.


LSE grabs bigger share of world stock listings
The London Stock Exchange (LSE) raised a record $54.5 billion in new listings for companies in 2006, strengthening its position relative to its US rivals. The total of funds raised was 71 per cent higher than in 2005 and included more than $20 billion from international companies that might once have sought to raise capital in the US, according to the LSE. The exchange said that its growth strategy was only just beginning to bear fruit and would continue to do so, underlining that its growth prospects had been undervalued by potential suitors.

In a statement issued three weeks ahead of schedule, and thought to be aimed at warding off potential hostile takeover bids, the LSE revealed that its pre-tax profits for the final quarter of 2006 rose by 12 per cent to $85.7 million, with revenues up across all parts of its business. The exchange has been the target of a number of takeover attempts in recent years, with the most recent bid to be rejected coming from the US-based Nasdaq, which already owns a 28.75 per stake in the LSE. LSE shares have more than tripled in value over the past two years.

Worldwide, stock market listings hit a record $227 billion for 2006, according to accountants Ernst & Young. The LSE accounted for 15 per cent of all initial public offerings (IPOs) in the 11 months to December, a performance bettered only by Hong Kong, which floated some of China’s biggest companies. Only one US stock market debut (MasterCard) made the top ten for the year, but the LSE accounted for three – Rosneft, worth $10.7 billion, Standard Life ($4.4 billion) and KazMunaiGas ($2.3 billion). Good access to funding has made London an attractive market, according to Ernst & Young, together with tougher regulation in the US. The Sarbanes Oxley act, introduced following the Enron and Worldcom scandals, has led to higher costs and an increased risk of legal action for companies listed in New York.

London markets raised $18.6 billion in domestic capital in 2006, but overseas listings also accounted for significant business, with companies from emerging economies such as Russia, China, India and South Korea among the most prominent. “We are seeing the continued globalisation of the capital markets with increasingly more companies, investors and exchanges looking worldwide for growth opportunities,” said David Wilkinson, UK IPO leader at Ernst & Young.


New agency to focus on urban regeneration
The government has announced proposals for a new, streamlined agency that will deliver housing growth and urban regeneration in England. The new body, Communities England, will bring together the functions of English Partnerships, the Housing Corporation and a range of work carried out by the Department for Communities and Local Government. The new body, unveiled after a nine-month review, is expected to have an annual budget of over $8 billion. “The agency will not only ensure greater value for money but also guarantee the very highest standards of quality, design, energy efficiency and sustainability,” said Communities Secretary Ruth Kelly.

On a local level, the city of Sheffield in South Yorkshire has created a new ‘city development company’, Creative Sheffield, which combines the roles of its former inward investment agency and Urban Regeneration Company. Ruth Kelly has praised Sheffield’s model as having potential for “transformational economic change”, and other cities such as Liverpool are looking at it with a view to simplifying their own network of regeneration agencies. “This is about joined-up thinking – looking at the whole picture rather than just a piece of the picture,” said Ian Bromley, chief executive of Creative Sheffield. Sheffield First for Investment (SF4I), the former inward investment agency, bowed out on a high, being named number one agency of its type in the world in the annual rankings compiled by research and investment strategy company GDP Global. SF4I was set up by Sheffield City Council in 2000.

A distribution centre built on the former Manton Colliery site near Manton in the East Midlands has won the 2006 award for Best Bespoke Development in the industrial category of the Industrial Agents Society/Office Agents Society Awards. The site was reclaimed by the East Midlands Development Agency (emda) at a cost of $8 million, through the National Coalfields Programme. It was then sold to DIY retailer B&Q, which has transformed it into its $120 million national distribution centre. The site now employs 600 people.

Smiths sells aerospace division to GE for $4.8 billion
Engineering group Smiths of the UK has sold its aerospace division to US giant General Electric for $4.8 billion. The aerospace-to-medical equipment maker said it had decided to sell the business, which last financial year accounted for more than a third of its revenues, because of the increased investment requirements of the aerospace industry. It will now concentrate on its medical and speciality engineering businesses, along with a venture set up with GE called Smiths GE Detection, in which the two companies have combined their detection and security businesses.

The deal represents GE’s largest industrial acquisition for several years and forms part of the company’s strategy to expand its aerospace business beyond aircraft engines, a sector in which it already holds a leading position. The former Smiths division has 11,500 employees and specialises in making a range of components, including computer systems, flight management systems, cockpit displays and landing gear. In recent years, under Smith Group, it has demonstrated its ability to win orders for new classes of both commercial and military aircraft, which are expected to account for much of the industry’s growth in the coming years.

The North West Aerospace Alliance (NWAA) is to use $5.2 million in funding from the Northwest Regional Development Agency (NWRDA) to finance its largest ever assistance package for the region’s aerospace sector. The four-year programme will focus in particular on the Aerospace Supply Chain Excellence Programme (ASCE), which aims to boost the competitiveness of small and medium enterprises (SMEs). The programme includes the introduction of industry ‘mentors’ such as Airbus UK, BAE Systems and Rolls-Royce, which will provide industry experts to NWAA member companies participating in the programme. Already five local companies have signed up for the scheme.
 

Road remains favoured mode of freight transport – for now
The Department for Transport (DfT) has published the third edition of Focus on Freight, which presents an overview and analysis of trends in the UK’s freight and logistics industry over the ten years to 2005. Among other findings, the report emphasises the continuing dominance of road transport in the movement of goods: in 2005, road accounted for 64 per cent of tonnes moved and 82 per cent of tonnes lifted within the UK. The country’s stock of heavy goods vehicles increased by 6 per cent between 1995 and 2005, although lorry traffic increased by less than GDP, meaning that the UK economy has become less freight-intensive. Rail has increased its share of goods moved in recent years and is still the major transport mode for coal and coke, while water transport still dominates the movement of petroleum products.

The number of heavy goods vehicles travelling between the UK and mainland Europe more than doubled during the ten-year period, with most of the increase attributed to foreign-registered vehicles. Freight traffic through the Channel Tunnel has expanded rapidly since it was opened in 1994, though sea continues to be the dominant mode for international traffic. The volume of air freight handled at UK airports rose by 40 per cent, although it remains a relatively small part of the total. According to an experimental index produced by the ONS, the costs of road freight transport rose by a third between 1996 and 2005. The same index estimated that rail prices, after falling for a time, were roughly the same as ten years earlier, while it had become cheaper to move freight by sea and coastal services.

London Gateway, the first big container port on the River Thames, is likely to bring about a radical change in the way goods are distributed in the UK, according to a senior figure involved in the $3 billion project. Stephen Kerridge, a director of the property arm of Dubai Ports World, the company behind the huge project at Shellhaven, near Thurrock in Essex, said that in future importers were more likely to use two UK distribution centres – one in the South and one in the North – rather than a single site centrally located in the Midlands, as at present. DP World’s planned port development on a former oil refinery site will be able to handle 3.5 million teu (20ft equivalent units) of containers a year and will include a logistics park for onward distribution.

According to Mr Kerridge, road transport costs in the UK account for a significant amount of the total cost of transporting containers across the world. It therefore increasingly makes sense to reduce the road component of the journey by siting new terminals closer to the final destination for the goods. This is already happening in the North of England, he points out, while suggesting that the large amount of logistics space available in the London Gateway area means that it makes sense for distributors to base their operations there. London Gateway is the largest of three new container new ports proposed for the South East. If it receives all the planning consents it requires, the first berths could be operational in two to three years’ time.


New schemes to boost input of renewable energy sector
The government has given the go-ahead for two major offshore wind farms to be built in the Thames Estuary. The London Array and Thanet schemes will together generate 1.3GW of ‘green’ electricity, enough to power a third of London’s 3 million households when fully operational, and will make a significant contribution to the government’s target of delivering a five-fold increase in renewable energy resources by 2020. “We expect this announcement will be the first of a number of large-scale offshore wind farms in the UK and will provide real impetus for the continued developments in the offshore renewable energy sector that will benefit generations to come,” said Environment Secretary David Miliband.

The London Array will consist of 341 turbines, each capable of generating 3-7MW, together with five offshore sub-stations and four metereological masts. They will be sited in the sea 20km off the coasts of Kent and Essex, occupying an area of 232 sq km between Margate and Clacton. The $1 billion Thanet wind farm will be located 11.3km from North Foreland on the Kent coast and will occupy an area of 35 sq km. Scheduled for fast-track completion in 2008, this scheme will have 100 turbines and will be able to provide electricity for around 240,000 homes.

A new energy-efficient Hydrogen Office and Demonstration Centre is to be built by the end of the year at the Energy Park at Methil in Fife, Scotland. The $5.5 million development will be powered by innovative renewable energy and hydrogen fuel cell technologies, and is expected to become a world-leading demonstration project that will also integrate proven renewable energy technologies such as solar, wind and geothermal heat source pumps. The project, funded by Scottish Enterprise and other partners, will work towards meeting the Scottish Executive’s targets of generating 18 per cent of Scotland’s energy needs from renewable sources by 2010, rising to 40 per cent by 2020. It is expected to create up to 1,350 jobs over the next 25 years and to create up to $162 million in gross value added (GVA).

In the meantime, the Department for Environment, Food and Rural Affairs (Defra) is inviting applications for the third round of its Bio-energy Capital Grants Scheme. The $20-$30 million scheme supports the installation of biomass-fuelled combined heat and power projects in the industrial, commercial and community sectors, including local authorities and schools. The minimum grant under the scheme, which runs for five years, is $50,000 and the maximum $2 million. The closing date for applications is 9 March 2007. More information at: www.aea-energy-and-environment.co.uk.


London Olympics promise to improve business performance
London business leaders met in January to map out a strategy for securing long-term benefits from the 2012 Olympic Games and Paralympic Games, which will be the largest sporting event ever held in the UK. Representatives of leading companies and employers’ organisations came together with political leaders, including Olympics Minister Tessa Jowell and Mayor of London Ken Livingstone, at a summit held at Arsenal Football Club’s Emirates Stadium. The Olympic Games will see businesses large and small working together to create jobs, improve opportunities and transform the look and feel of the capital.

A business prospectus by consultants Arup predicted that the Games may generate benefits much earlier than 2012 and will leave a legacy for a long time afterwards. The summit proposed the creation of a network for London businesses, with five distinct initiatives aimed at improving economic competitiveness. These are: promoting London overseas; improving employment and skills levels; increasing corporate involvement in the community; improving visitor facilities across the city; and ensuring that the physical legacy of the Games aids in the growth and regeneration of east London.

The London Business Network will help companies to pool their knowledge and expertise, and will be funded initially by London First, London Chambers of Commerce, the Confederation of British Industry and the London Development Agency. Businesses are set to benefit from direct opportunities in areas such as construction, hosting services and media contracts, but there will also be considerable knock-on effects in supply chains both in London and across the country. “The legacy of 2012 must be much more than a successful Games and the physical regeneration of the Olympic Park site. Using the Games as a catalyst in the five areas we have identified can enable London to become the leading world city, dynamic, creative and truly international,” said Ian Barlow, chairman of the London Business Board.


Top sports events and movie-makers put UK in the spotlight
The Olympic Games are not the only cultural and sporting event set to attract investment to the UK. The Tour de France cycling race, the world’s biggest annual sporting event, will visit London for the first time during the weekend of 6-8 July this year. The 8km Prologue on 7 July will start at Whitehall in central London and will take the world’s top cyclists past some of the capital’s most famous landmarks, including the Houses of Parliament and Buckingham Palace, before finishing on the Mall. The next day, Stage One will see the field head out of the capital into the Medway area of Kent, passing through Dartford, Gravesend, Maidstone and Ashford before finishing at Canterbury. A number of special events will take place to welcome the 200 riders and their expected entourage of 5,000.

In early 2008, Manchester in North West England will host the 9th FINA World Swimming Championships, the biggest sporting event to be held in the city since the 2002 Commonwealth Games. Two huge temporary pools will be built in the MEN Arena, a venue more accustomed to hosting big-name rock concerts. Some 650 swimmers from 120 countries are expected in Manchester for the five-day event, many of them making their final preparations for the 2008 Beijing Olympics. The $8 million event is being backed by the Northwest Development Agency (NWDA), Manchester City Council, UK Sport and British Swimming. It is expected to benefit the local economy to the tune of around $6.4 million.

More international films were produced in the UK in 2006 than in 2005 or 2004, with the total value of spending climbing by 40 per cent to nearly $1.7 billion. The government’s new system of tax credits for film productions is thought to have persuaded Hollywood producers to return to Britain, after previous uncertainty over tax relief and increased competition from low-cost locations such as New Zealand, Canada and Eastern Europe. The new system, which came into effect in January 2007, offers 16 per cent tax relief on large-budget films and 20 per cent on smaller productions, providing that they meet criteria on ‘Britishness’ under a points system covering the nationality of lead actors, the location and the promotion of British culture. Films shot in the UK in 2006 included Harry Potter and the Order of the Phoenix and The Bourne Ultimatum, while Pinewood Studios near London will this year make Prince Caspian, the second film in the Chronicles of Narnia series.


Regional news
San Francisco-based law firm Heller Ehrman LLP is to open a London office, its fourth outside the US and its first in Europe. The expansion will allow the company to extend three of its core practices – corporate, real estate and competition – to meet growing demand for global legal services. The move will also bolster the firm’s status as a leading legal services provider to emerging growth and technology industry companies, including those in the life sciences sector. The office will initially be staffed by three of Heller Ehrman’s principals, who will relocate to London, but it anticipates having a staff of 15-25 lawyers by the end of 2007.

Leading international games developer Nikitova is to establish a new team in the UK to improve communication with major developers and publishers based in the UK and across Europe. The company, based in California, already has four offices worldwide and over 250 employees. According to CEO Olya Nikitova, the decision to set up a European office was motivated by a steady growth in demand for its products. “The London office will allow us to support our clients and to contribute to the community of European games developers on a higher level,” she said.

US-based Optio Software has set up a new EMEA headquarters at the University of Warwick Science Park in the West Midlands, a facility that caters specifically for knowledge- and technology-based businesses. Optio’s software helps businesses and healthcare organisations to improve efficiency for processes such as invoicing and purchasing, and the company has built up a client base of more than 5,000 customers over the past 25 years. “The resources at the science park suit us as a technology business, providing a cost-effective facility with a central location,” said Warwick Taylor, the company’s director of marketing.

The go-ahead has been given for a project to design and build a new media centre at Knowle West in Bristol, South West England, with the South West RDA and a number of other funding bodies pledging to support the project to the tune of $6.2 million. Archimedia will provide media studios, managed workspace and exhibition space for use by young people locally. It will also be designed with environmental concerns in mind: it will be the largest straw bale building in Europe and will feature a woodchip boiler and a rainwater recycling system, among other innovations.

International directory enquiries business Yell is to establish a new contact centre in Newport, South Wales. The company, based in Bristol in South West England, has expanded substantially since it was set up in the wake of deregulation of the telephone directory enquiries market in 2003. It will employ up to 250 staff at the Newport centre over the next four years, with financial support from the Welsh Assembly. The call and contact centre sector employs some 24,000 people across Wales, with Newport being a recognised centre for the industry.

The Scottish Executive has introduced a new grant structure aimed at increasing business investment, employment growth and R&D. Among key changes to the existing structure, the new system includes a new tier of Regional Selective Assistance (RSA) grants for small and medium enterprises (SMEs) across a larger part of the south, east and west of Scotland, including all the areas that have lost Assisted Area status in the European Commission’s new regional aid map. In addition, the existing SMART, SPUR and SPUR PLUS schemes will be consolidated into a single R&D scheme for SMEs from April, and a new general R&D scheme (consolidating R&D PLUS, SCIS and SCORE) will be introduced in September/October this year.

Edinburgh, the Scottish capital, has gained its fourth fully-fledged university with the promotion of a former university college to the title of Queen Margaret University, Edinburgh. Queen Margaret’s has long had a reputation as a university-level institution. It has been carrying out high-level teaching and research and, for two years running, has been ranked by the Sunday Times as the UK’s top higher education college and firmly in the upper half of all UK universities. It currently has around 4,000 full-time students.

Ahlstrom of Finland is to set up a new production line at its existing site in Chirnside, near Duns in the Borders region of Scotland. The investment will be in ‘food non-wovens’, i.e. products such as bags for tea and other products, which the company says is an expanding market. The production line should be in operation by late 2008 and is set to create about 30 new jobs. “The investment opens up new investment opportunities for Ahlstrom,” said company president Jukka Mosio. “The UK and continental Europe still remain the leading tea bag consumers, but demand in emerging markets such as Russia, India and China is growing fast.”

US financial company Citigroup, the largest bank in the US, is to further expand its offices in Belfast, Northern Ireland. The company plans to create 117 jobs in a new operations division during the course of this year, bringing its workforce in the province to more than 500. The move has been supported by a grant of $3.2 million from Invest Northern Ireland.

The Almac Group, a growing pharmaceutical services firm, recruited over 250 new employees at its European headquarters in Northern Ireland in the course of 2006, marking its fastest expansion since it was founded in 2001. The company now employs almost 2,000 people in the US, the UK and Ireland. The $580 million company offers a full range of services to pharmaceutical, biotech and other organisations and has recently consolidated its services, including drug discovery, R&D, patient diagnostics and clinical trials for new drugs. Overall, the value of the European drug discovery market is forecast to expand to $10.2 billion by 2011, from $6.4 billion in 2004.

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