The report examines the performance of Scotland and perceptions of the UK and Europe as destinations for FDI, and this year includes a survey of 800 international investors looking at the impact of COVID-19 on investment.

For the seventh consecutive year, Scotland has retained its title as the most attractive location in the UK outside of London for inward investment. This is evidenced by a 7.4% increase in the number of projects secured, from 94 in 2018 to 101 last year.

The pace of growth in Scotland was faster than the UK as a whole which achieved a 5.2% increase (reaching a total of 1,109 projects in 2019) while Scotland’s share of all UK projects also rose to 9.1% from 8.9% in the same time period.

Scotland also performed better in terms of job creation in 2019 than in recent years, rising to second place from fifth in the UK in 2018. The average size of FDI projects in Scotland created 83.6 jobs last year which is the highest since 2011 (when the figure was 116.2) and ahead of the UK average for 2019 of 51.4.

This strong performance prior to the global on-set of COVID-19 and the nature of investors decisions around inward investment presents a relatively positive outlook for Scotland’s ability to remain an attractive destination for FDI.

Ally Scott, UKI managing partner for EY Scotland, said: “Scotland has yet again achieved an impressive performance on FDI in 2019. The pace and scale of growth achieved is evidence of Scotland being well-placed to tackle the challenges presented by COVID-19 and an uncertain economic environment.

“Importantly, Scotland continues to increase the quality of projects it attracts as demonstrated by the high average number of jobs created, a figure far ahead of the UK in 2019.

“While Scotland has a strong foundation to navigate beyond COVID-19, there is no scope for complacency. Now, more than ever, there must be a strong partnership between government, business and society to formulate a careful, considered and compelling route back to economic growth.”

There has been a big shift in the sectors responsible for most FDI in Scotland from 2018 to 2019 with machinery & equipment (58% increase) and agri-food (78% increase) leapfrogging into first and second position ahead of digital and business services (27% and 31% decrease respectively) in joint third. This is the first time in a decade that the service sector has not ranked in the top two.

In terms of the type of activities carried out, manufacturing shared the top spot with sales & marketing as both secured 32 FDI projects in 2019. The former experienced an increase of seven while the latter decreased by ten. Research & Development (R&D) secured third place following a notable rise in projects (from nine to 14). The biggest percentage increase was in headquarters (HQ) projects, which leapt from two projects in 2018 to nine in 2019 – a rise of 350%.

Ally Scott added: “Scotland has a real strength in the diversity of projects it attracts with a healthy blend between manufacturing and services. The boost in manufacturing places Scotland as the UK leader for this sector. This, along with the growth in machinery & equipment and agri-food, plays directly into Scotland’s international reputation and capabilities within the food and drink market.”

Scotland’s three largest cities all experienced an increase in FDI projects in 2019, Aberdeen 88%, Edinburgh 10% and Glasgow 21%, with all three appearing in the top ten most attractive cities for inward investment in the UK, excluding London. Glasgow overtook Edinburgh as Scotland’s leading city to sit in third position behind Manchester and Birmingham while the capital held firm in fourth and Aberdeen bounded up from tenth to seventh.

Both Edinburgh and Glasgow attracted investment from a variety of countries, 11 for each city. The Scottish capital is more reliant on the US with half of the projects originating from there while in Glasgow this was a little more than a third. In both cities digital, business services and finance account for around half of FDI.

Aberdeen’s FDI was diverse both in terms of country of origin but also sector. The majority of projects came from the US followed by Norway, the Netherlands and Japan which all contributed multiple projects. Just under half of the total were in the energy sector but projects were also secured in business services, digital, machinery & equipment, electronics and transport equipment.

There was also growth in towns with Livingston and Falkirk both attracting more projects in 2019 than in 2018.

The report indicates that investor intentions towards the UK, compared to other FDI destinations in Europe, remain relatively positive when they look beyond the immediate impact of COVID-19.

Survey respondents said that 65% of planned projects were still going ahead – including 6% who had actually increased their investment in light of COVID-19 – with only 3% saying they had completely cancelled their plans. By contrast, the corresponding figures for Europe revealed a more cautious approach from investors, with 66% planning to decrease investment and 23% pausing it, against 17% and 15% respectively for the UK.

Mark Gregory, EY UK chief economist, added: “There is no doubt that the outlook for FDI will be extremely challenging as the world tries to recover from the economic and social impact of COVID-19. Asked whether they expected to see an increase or decrease in FDI globally following a period of recovery from the COVID-19 pandemic, a net -71% of investors responding to EY’s survey said they were anticipating a decline in global FDI. Asked the same question about investment specifically into the UK, the balance expecting a decline was -44 – still very challenging, but more positive than the overall market outlook.

“Before COVID-19 changed the picture completely, 2020 was set to be a record year for UK FDI. At the start of the year, 31% of investors said they were planning to invest in the UK in 2020 – a significant increase from 23% in last year’s survey. This was the highest positive sentiment for the UK in over a decade, and higher than the corresponding numbers for other European countries.

Charlie Smith, managing director, international development, strategy and technology at Scottish Enterprise, commented on the report. He said: “While our priority remains supporting companies through these challenging times, EY Scotland’s Attractiveness survey reminds us that Scotland continues to punch above its weight when it comes to attracting FDI projects that have a high economic value, creating quality, well-paid jobs for our skilled workforce.

“Companies are attracted to Scotland for a number of reasons, but what make us truly unique is our ‘Team Scotland’ approach; the partnership between our public institutions, academia and the private sector is unparalleled and continues to deliver results.  This collaborative approach will be critical as we aim to restart and recover Scotland’s economy.

“The Attractiveness Survey also showed the importance of existing investors who have chosen to grow their businesses here after locating in Scotland.  As part of our COVID-19 response and our future FDI strategy, we will be redoubling our efforts to support these significant companies.

“We know that COVID-19 will have an impact on FDI flows, not just for Scotland but for countries across the world.  However, FDI levels remain stable in Scotland’s priority areas where we excel, such as advanced manufacturing and low-carbon technologies.

“The ultimate prize for us remains the same: seeing international partners work with indigenous companies to innovate, share ideas, share talent, share cultures and grow together for everyone’s benefit.  As we emerge from the darkness of COVID-19, inward investment will be vital to delivering economic opportunities for communities across Scotland.”

Economy secretary Fiona Hyslop added: “There is no doubt these are incredibly challenging times for our economy and we continue to focus on helping as many businesses as possible survive this crisis with our £2.3 billion package of support.

“As we begin to take steps to ease lockdown, this survey provides us with a welcome reminder of the strength and attractiveness of Scotland as a location for investment and for establishing a business. Inward investment will always have a part to play in our economy, so it’s hugely encouraging to see that for the seventh consecutive year Scotland led the way in the UK. This is also yet another example of our strong global reputation as a fantastic place for businesses to locate in and thrive.

“We will feel the impact of COVID-19 for some time and the outlook for international trade and investment has changed significantly following the pandemic. There is also the danger presented by a no deal Brexit if the UK Government refuses to ask for a two year extension to the current transition period, and the threat that poses to Scotland’s inward investment success story.

“However, this survey demonstrates that Scotland is well placed to meet the economic challenges as we work to recover and restart our economy.”