By Kristy Dorsey

Scotland appears relatively well-placed to retain its allure among foreign investors after the worst of Covid-19 is past, but the pandemic will take a significant chunk out of what was shaping up to be a strong year in 2020 for foreign direct investment (FDI).

A new report released this morning found that Scotland retained its title as the most attractive UK location outside London for inward investment during 2019, a position it has held for seven years straight. The number of projects secured rose by 7.4%, a rate of growth that outpaced that of the UK as a whole.

According to the annual Attractiveness Survey produced by accountancy giant EY, Scotland looked set to further build on that performance this year. However, prospects have been significantly eroded by the Covid-19 pandemic.

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Of the international investors polled prior to the coronavirus outbreak, 31% said they were planning to invest in the UK during 2020. That was a significant increase from 23% the previous year, and the highest level recorded during the past decade.

But in a follow-up questionnaire carried out during the global lockdown, respondents said 35% of projects planned for the UK this year would now not go ahead.

Ally Scott, managing partner for EY Scotland, said the UK results were favourable compared to those of other European countries. With Scotland’s solid position within the UK, the country “has a strong foundation to navigate beyond Covid-19”.

However, he added that this positive view is relative to the outlook for other European locations, and there remains “no doubt FDI will be quite difficult as the world gets back on its feet”.

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“Certainly the fundamentals in Scotland have again proven themselves to be very strong, but we are heading into a fundamentally different environment, so there is no room for complacency,” he said.

The number of projects secured rose from 94 to 101 last year, with the average FDI project in Scotland creating 83.6 jobs. That was the highest since 2011, and ahead of the UK average of 51.4.

There was a big shift in the sectors responsible for most FDI in Scotland, with machinery & equipment and agri-food leapfrogging into first and second position ahead of digital and business services. That marked the first time in 10 years that the service sector failed to rank among the top two.

The country’s share of projects from first-time investors fell from 7.6% to 5.9% as the bulk of money coming in was generated by follow-on investment. The number of new projects recorded in 2019 was Scotland’s lowest since 2014, and continued the downward trend that has been in place every year since the 2016 Brexit referendum.

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Mr Scott said that is “a development that has troubled us for a bit”, but in the current circumstances could be a short-term positive as investors are more likely to back existing projects rather than strike out on new ventures. This could shield Scotland from some of this year’s fallout.

Brexit appears to have become less of a concern for investors, though the report questioned whether this could be due at least in part to the pandemic supplanting political worries. Although 53% said the UK would be a less attractive investment destination after the end of the transition period with the EU, four-fifths of those respondents believe the impact will be “slight”.

Scotland’s three largest cities all saw an increase in FDI projects in 2019, and all three ranked among the top 10 most attractive cities for inward investment in the UK. Projects in Aberdeen rose by 88%, Glasgow was up by 21% and Edinburgh posted a 10% increase.

Glasgow was home to Scotland’s largest FDI deal of 2019, the expansion of JP Morgan’s technology base within the International Financial Services District. It will house approximately 2,000 existing staff from other locations in the city, with room for a further 700.