Foreign Direct Investment into universities: Towards a national strategy

This blog was contributed by Alexis Brown, Director of Policy and Advocacy at HEPI.

Foreign Direct Investment (FDI) has long been a part of the UK R&D ecosystem. In a university context, it can look like investment in physical spaces (such as science, innovation and enterprise parks), business investment in equipment or research activity, or purchasing shares in spin-out portfolios and licenses. But far from investment that can be taken for granted – overseas investment in university R&D declined by 6% between 2020 and 2021– it needs to be actively sought out. Building on a pilot conducted by the Midlands Engine, a roundtable on 15 July 2022 with UKRI and key experts in the field explored what a more joined-up strategy to attracting FDI might look like.

Why FDI into university R&D?

The benefits of this kind of investment to both universities and the economy are clear. According to the Office for National Statitics data, around 16% of UK R&D funding in 2019 came from overseas. We also know that in 2021, there were 60,372 FDI-related jobs in the UK – the highest in Europe. FDI in the UK created 68 average jobs per project, compared to 38 in France and 48 in Germany.

There’s also a real opportunity for FDI to contribute to regional growth. Research in the US context and elsewhere shows that there is often a symbiotic relationship between geographical clusters of innovation and foreign investment – in essence, that foreign investment in an area not only bolsters industry in that region, but then in turn also signals to other firms that this is an attractive place to do business.  

We know broadly what these firms want: research and technical expertise, robust infrastructure, and access to a pipeline of skilled talent, such as can be found in a place full of recent graduates. For all of these reasons, universities are a natural home for attracting this kind of investment. Because they often serve as anchors to their local economies – and have connections abroad through both businesses and alumni – they have the ability to leverage their global networks to increase foreign investment, thereby boosting regional industries as well.  

There is, however, a clear challenge faced by the UK and its universities in continuing to attract this type of investment; the 6% decline in overseas investment in university R&D that we saw between 2020 and 2021 was the first drop since 1999.

What are the barriers to attracting FDI?

Despite UK universities’ success in attracting FDI already, there are significant barriers to going further. Because there is no joined-up national strategy in this area, efforts and initiatives have tended to be disjointed or localised. Other barriers include:

• Refining the offer and setting the right lens: Part of the difficulty universities face in attracting FDI is navigating how to refine their offer in ways that will be attractive to foreign firms. Beyond university walls as well, this process involves being well-integrated into local innovation eco-systems and economies, and having strong links with local government and their priorities – and these structures will vary by region (e.g. those with and without Combined Authorities). The proper governance structures must be in place to make decisions about how to refine that offer and build consensus around what it should look like. There is also the danger of setting the lens too narrow or broad on the proposition; too specific, and you risk closing off opportunities, but too expansive and the offer can become so broad as to lose meaning. Defining the ‘Goldilocks zone’ – where this balance is just right – in each region will take coordinated effort.

• Lack of coherent national policy: Coordination is not only needed between universities and local governments. On a national scale, responsibility for FDI is fragmented, falling somewhere between the Department for Business, Energy and Industrial Strategy (BEIS), Department for International Trade (DIT) and Department for Levelling Up, Housing and Communities (DLUHC). For example, how does an individual institution link up their FDI proposition to a regional priority, and then with relevant DIT teams, or the corresponding team in a target country? Coordinating approaches between institutions and government departments, as well as funders, presents a challenge.

• Incentivising the pursuit: Current funding structures do not incentivise universities seeking foreign investment explicitly – though small tweaks to the existing mechanisms could help address this. Other pressures on universities (financial, regulatory and otherwise) may also make it difficult for them to devote resources to this agenda.

In other words, the UK has a real opportunity to capitalise on and grow its existing R&D strengths, purely by refining and articulating them to the right audiences – but it won’t happen on its own.

How to support FDI into universities: next steps

If we assume these barriers are surmountable – that universities can and should play a more active role in attracting FDI to the UK science base, and that this will help grow their local and regional economies – what kinds of policy mechanisms will be needed to help support this effort?

There’s much we can learn from what we already know has been effective. Examples from the UK – such as the West Midlands Growth Company – but also abroad (e.g. South Korea) can help answer these questions.

 In particular, more work also needs to be done in terms of understanding how to attract the FDI that’s most desirable – for example, long-term investment in a science and innovation park or a satellite manufacturing cluster, versus investment that’s likely to leach away after a short period, or intellectual property (IP) purchases that then leave the country and fail to build businesses in the UK.

The stakes are potentially high; cultivating and articulating what universities have to offer foreign investors would not only bolster the R&D base, but also help connect universities’ international functions with their long-standing civic missions. But developing a national strategy will first require more evidence-gathering, as well as pilots that can test new models of partnership and engagement. Over summer, autumn, and into next year, colleagues in the Midlands, NCUB, UUKi, HEPI and other sector organisations will be exploring just how that might be done.