Rethinking the FDI prize: From attraction to enduring value

Foreign direct investment (FDI) is often treated as an unquestioned public good – an economic trophy to be won.

With global flows reaching $1.6 trillion in 2024, competition for capital is intense, and governments frequently prioritise headline-grabbing wins over long-term value creation. Yet not all FDI is equal, and not all investment delivers lasting benefits.

The experience of Hull illustrates both the promise and ambiguity of inward investment. Siemens’ decision to locate its offshore wind turbine blade factory in the city marked a turning point for a region long associated with industrial decline. Public investment of £310 million helped secure the project. A decade on, supply chains have deepened, skills have improved, and a renewable energy cluster has emerged.

But an uncomfortable question remains: was this transformation the result of strategic foresight, or the outcome of an expensive bidding process for an investment that might have arrived anyway?

This question sits at the centre of contemporary FDI policy, explored in The Local and Regional Economic Development Handbook. The issue is no longer whether inward investment matters – it clearly does – but whether it is being pursued intelligently.

Beyond the capital injection

FDI evaluation too often focuses narrowly on capital spending and job creation. While important, these measures miss the broader value that investment can bring. Multinational firms transfer technology, managerial expertise, and access to global value chains that can raise productivity across regions.

When embedded effectively, these capabilities spill into the wider economy through supplier linkages, workforce mobility and collaboration with research institutions. Over time, such spillovers can reshape regional competitiveness.

However, this is not guaranteed. Investment that operates as an enclave – importing inputs, exporting outputs, and engaging minimally with local firms – delivers far fewer benefits.

Whether FDI is embedded or isolated is therefore critical, yet frequently underemphasized in policy design.

The employment paradox

Job creation remains the most visible justification for attracting FDI. Foreign-owned firms often provide higher wages, better training, and more stable employment than domestic firms, particularly in weaker regional economies.

But employment quantity should not obscure employment quality. Some investors pursue low-cost labour strategies with limited skill development, while highly automated facilities may bring large capital investment but few jobs.

The challenge is therefore not simply to maximise employment, but to attract roles that build human capital and align with long-term development goals.

The illusion of incentives

Financial incentives are a central and controversial tool in FDI competition. While subsidies can influence marginal decisions, they rarely offset weak fundamentals such as poor infrastructure or limited skills. In some cases, they simply transfer value to firms that would have invested anyway.

The Hull case reflects this ambiguity. Public support likely influenced Siemens’ decision, but the city’s underlying advantages – particularly its deep-water port – were also decisive. If incentives merely accelerate inevitable investments, their effectiveness is questionable. If they attract highly mobile firms that may relocate later, the risks increase.

Incentives are best used sparingly and strategically, focused on removing specific barriers rather than substituting for competitiveness.

FDI as a process, not an event

FDI is often treated as a one-off transaction, but in reality it unfolds over time. Initial investments may be modest as firms test locations before committing further capital. The largest economic gains often come later, through expansions, reinvestment and added functions.

This has important policy implications. Regions that focus only on attracting new investors risk neglecting their most valuable growth source: existing firms. Evidence suggests established investors account for 60-80% of total investment over time.

Effective strategy therefore requires strong aftercare – maintaining relationships, solving operational problems, and identifying opportunities for expansion. In many cases, the best prospects are already located in the region.

Competing on strength, not subsidy

Global FDI competition is fierce, but successful regions do not compete on cost alone.

Instead, they identify and build on genuine strengths – such as skills, infrastructure, research capacity or market access – and target investments that align with them.

This alignment improves conversion rates and leads to deeper economic integration. It also enhances credibility with investors, who prioritise reliable execution over branding or promotional campaigns.

Investment promotion, at its core, is less about marketing and more about delivery: accurate information, responsive engagement, and confidence in execution capability.

The strategic imperative

FDI will remain central to economic development, but its pursuit must evolve. The key question is no longer how to attract more investment, but how to extract more value from it.

This requires shifting focus from volume to quality, from attraction to integration, and from short-term wins to long-term transformation.

It also demands more disciplined targeting, more rigorous evaluation of incentives, and sustained engagement with investors beyond initial commitments.

Hull’s experience offers cautious optimism. Where FDI aligns with local strengths and is supported by strategic policy, it can drive meaningful change. But without that alignment, it risks becoming an expensive illusion.

FDI is not a prize to be won – it is a tool to be used. The challenge lies in using it well.

Dr Glenn Athey is author of The Local and Regional Economic Development Handbook.

The Local and Regional Economic Development Handbook is full of practical reflections and implications like this across all the functions of economic development, including enterprise, innovation, skills, infrastructure, and sustainability.