So when will Britain's foreign investors return?

The UK is slipping down the league table for foreign direct investment. It has been a success story – but there are attractive new rivals, says Sean O'Grady

The list was impressive. The Prime Minister; Business Secretary Lord Mandelson; bosses from Ford, Hitachi, Bombardier, China Merchants Bank, Burberry, Lockheed Martin, Daimler and the Italian defence group Finmeccanica; and hundreds of other world business leaders, academics and entrepreneurs, including the inventor of the iPod.

Yesterday's Global Investment Conference in London was certainly a high powered sort of gathering, and the mood was determinedly upbeat. Looking to a future economy that will no longer be able to rely on the City and housing to turbo-charge its growth, the search is on for new engines to drive Britain forward, and, more immediately, investment, ie money. Mr Brown declared: "We know that for Britain, a prosperous future must be built not only on sound economics, but investment in the industries of the future, and leadership of the new science and engineering breakthroughs that are today shaping tomorrow's world." He also announced a new "investors' charter", which set out the Government's commitments, including "creating a skilled workforce so you have the best talent on tap – and the broadest possible talent pool to choose from".

But, despite the claims of conference organisers, Britain is slipping down the league table of foreign direct investment recipients.

You would not guess from the propaganda being pumped out yesterday, for example, that foreign direct investment to the UK (excluding mergers and acquisitions) slumped by a disturbing 90 per cent last year. According to the latest bulletin on Global Investment Trends produced by the United Nations Conference on Trade and Development, the UK felt the benefit of a mere $7bn (£4.5bn) in direct investment in 2009, down from the $96.9bn pumped in during 2008.

Part of this decline is, of course, down to the global slowdown in trade and investment flows that followed the credit crunch. Companies and financial institutions around the world, sometimes under implicit, subtle pressure from governments, practiced a form of economic nationalism. In France, President Nicolas Sarkozy explicitly told his car companies that the investment grants they would receive were not intended to end up in Eastern Europe. Trade barriers went up again and, all over the world, banks were encouraged to lend to the home team. With the cost of finance spiralling through 2007 and 2008, the cost of funding foreign investment was also inflated. And the general collapse in business and consumer confidence left many projects on hold. So global direct investment flows were left two-thirds off their 2007 peak of $300bn or so by the end of 2009; and 38.7 per cent down on 2008.

However, there are other, more worrying questions. One is why the UK had such a poor showing even though sterling depreciated by 25 per cent over that period, which ought to make Britain a much more attractive location. Another is what, if anything, Britain can do to compete with the low cost and increasingly well- educated workforces of China, India and other emerging economies. Their investment flows also fell in 2009, but nowhere near as badly as in the advanced economies. The high savings rate and domestically generated investment spending in East Asia makes their reliance on western funding less vital (though the typical Sino-Western joint venture usually involves a more intangible, and important, transfer of technology and know-how). FDI in China fell by just 2.6 per cent and in India by 19 per cent in 2009, against an EU average drop of 29.2 per cent and 57 per cent in the US.

There may be other special factors at work. The City suffered from an extraordinary degree of disruption over the past couple of years, with a number of foreign investment banks either closing (most famously Lehman Brothers) or slimming their London operations. Yet it had been one of the great success stories of foreign direct investment. After the scene was transformed by the "Big Bang" reforms of 1986 the way was clear for massive foreign investment, and it pretty much made the City what it is today, for good or ill.

That year also saw the first Japanese "transplant" factory in Europe, the Nissan factory established in Sunderland (see box). Today there are more than 75,000 foreign-owned companies in the UK and they account for around 40 per cent of GDP. It is difficult to see FDI repeating that success.

Car which set the wheels in motion

The factory that Nissan built, and that Margaret Thatcher opened, in Sunderland in 1986 was not the first FDI project in the UK, nor the largest, but it was probably the most important.

It showed that car making in the UK was not doomed, despite the somewhat patchy record of the UK motor industry up to then, and Nissan's new factory soon became one of the most efficient in Europe, as it still is. A wave of others followed, including Honda and Toyota, and BMW too, its unhappy experience with Rover in contrast to the continuing Mini success story.

A transfusion of Japanese, German and American capital and management was just what financial services and the motor industry needed in the 1980s, and, until very recently, both were remarkable success stories. They proved (pace the recent Cadbury/Kraft battle) that the nationality of their owners need not matter to the output or the job creation of the companies themselves.

A quarter of a century ago the French government eyed these developments with a mixture of anxiety and envy, and dismissed the UK as an economic "aircraft carrier" for the Japanese. Today it is Renault, through it shareholding in Nissan, that owns the Sunderland plant, and France is proud to have Toyota and other strangers on her soil.

That 1986 Nissan Bluebird, the first made at Sunderland, really was a remarkable car.