INVESTMENT in Britain by foreign companies nearly quadrupled last year as $78 billion (£44 billion) poured in, putting the country second only to the United States for flows of investment, the United Nations said yesterday.

New investments from America and cross-border mergers and acquisitions helped Britain last year to its third largest inflow of foreign direct investment (FDI), a dramatic improvement from inflows of $20 billion in 2003.

The purchase of Abbey by the Spanish bank Santander Central Hispano for $16 billion, the world’s biggest merger and acquisition deal last year, added to the positive figure for Britain.

Worldwide, inflows of FDI picked up last year to reach $648 billion, the first increase since the end of the dotcom boom in 2000, according to the annual report from the UN Conference on Trade and Development (UNCTAD).

Flows of FDI to developing countries surged 40 per cent but flows to developed nations fell 14 per cent. Particularly badly hit was the European Union, where flows fell by 36 per cent to $216 billion. Germany and the Netherlands suffered net reductions in levels of FDI.

Britain’s FDI stock, the value of all assets held in the country by foreign investors, rose 27 per cent to $772 billion, putting it at the top of the EU league. France had FDI stocks of $538 billion and the Netherlands had $429 billion.

The report said that Germany and Italy had suffered because of their weak economic growth and rigid labour markets, while Britain had enjoyed relatively strong economic growth last year and France had worked to actively promote inward investment.

The US enjoyed inward investment flows worth $96 billion, while China followed Britain in third place with FDI flows of $61 billion.

UK Trade and Investment, the Department of Trade and Industry body that promotes inward investment, noted that nearly 40 per cent of the increase of stocks of FDI received by the EU last year went to Britain.

William Pedder, the body’s head of investment, attributed the strong levels of inward investment to “a policy that genuinely welcomes internationalisation and sees it as an opportunity rather than a threat”.

He said: “Businesses and even trade unions understand that one has to keep up the pace of change and stay ahead of the game rather than lagging it.”

UNCTAD said the prospects for a further increase in levels of FDI around the globe next year were “promising”, provided that economic growth was maintained. “For 2006, global FDI flows can be expected to rise further if economic growth is consolidated and becomes more widespread, corporate restructuring takes hold, profit growth persists and the pursuit of new markets continues,” it said.

It said that outflows of FDI increased by 18 per cent last year, with almost half of all outward investment originating in the US, the UK or Luxembourg.

The report also drew attention to the growing trend for multinationals to site their research and development (R&D) activity in developing countries, as nations like China, India and Brazil play a greater role in the knowledge economy.

Khalil Hamdani, head of investment, technology and enterprise development at UNCTAD, said: “In order to remain competitive as a location for R&D activity, (UK) policymakers should give attention to human resource development and . . . innovation.”

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