ATTRACTING foreign direct investment into the UK is seen as a vote of confidence in the economy, with business success stories such as Jaguar Land Rover demonstrating the benefits foreign ownership can bring.
But new research suggests many foreign-owned UK-based SMEs – defined in the report as having a turnover of between £25m and £500m – are underperforming.
The report by private equity firm Endless shows that 41 per cent of foreign-owned SMEs in Yorkshire are either loss making or only marginally profitable.
This also reflects the national picture, with the UK figure matching the Yorkshire one. According to the report, 27 per cent of UK-owned SMEs are identified as under-performing in this way.
Garry Wilson, managing partner at Leeds-headquartered Endless, said: “There is no shortage of evidence that foreign ownership can bring huge benefits to UK firms – Jaguar Land Rover and Cadbury’s being prime examples.
“But this research highlights the large proportion of foreign-owned UK businesses that do not seem to contributing healthy profits to their parents or the UK economy as a whole. While tax planning will certainly play a part in these statistics, many of the underlying businesses have become part of what we call the ‘great unloved’ – businesses that are non-core to their parent group, cut off from investment and failing to realise their potential.”
The study suggested that if those foreign-owned UK SMEs identified as underperforming were performing as well as the average foreign-owned UK SME, they could deliver an additional £8.6bn of annual earnings before interest, taxes, depreciation and amortisation (Ebitda). This would generate up to £2bn in extra tax revenue for the Treasury, claimed the report.
Chris Clegg, managing director at Endless in Yorkshire, said: “Foreign investment without a doubt is usually positive and we’d encourage that ourselves in the UK.
“What this report does highlight though is there are a significant proportion of foreign-owned assets that are underperforming.”
He added: “Increasingly we are acquiring businesses from foreign parents that strategically feel that the UK subsidiary is not performing for them.” Mr Clegg said that the focus has been on China and South East Asia as global firms seek out growth potential.
Previous research has suggested that Yorkshire is attracting less investment by overseas companies than other parts of the UK. A report last year by Ernst & Young, for example, suggested that Yorkshire had seen a marked fall in international investment since the scrapping of the regional development agencies and the introduction of local enterprise partnerships.
Mr Clegg claimed that the region has in the past has suffered as a result of a disjointed approach to attracting foreign inward investment. But he said that the establishment of Marketing Leeds, now Leeds & Partners, has helped give Leeds “one voice”.
This week’s ‘Great Unloved’ research measured the performance of the 2,096 UK SMEs under foreign ownership. These businesses generate more than £188bn in revenue for the UK economy with net assets worth nearly £100bn and Ebitda of more than £19bn, according to the report.
In total, there were 94 businesses in Yorkshire, of which 39 were classified as the ‘great unloved’.
Mr Wilson said: “It is vitally important for shareholders to play an active and fully engaged role by setting out the priorities and financial targets for the business. Management teams’ interests, incentives and strategy must be aligned from the start and closely monitored over time, so that prompt remedial action can be taken whenever the business steers off course.
“Where overseas owners lack the appetite, time or resource to give their full attention, it is in the interest of both the business and UK economy for these unloved orphans to find a new home.”