Toyota chairman Hiroshi Okuda has warned that Britain and the rest of Europe face an inward investment crisis as foreign companies flock to the more attractive business environments in China, the Daily Telegraph reported.

The newspaper said the warning from the boss of Toyota would set nerves jangling at the annual conference of the Confederation of British Industry, which began in Manchester today.

In an interview with the Daily Telegraph, Okuda said: "I would not say that the UK is in danger now, but the British should have some sense of crisis. In fact, all countries which are market oriented must be aware of the growing China.

"In the past four to five years, China has grown dramatically and its infrastructure and labour quality is improving. So, in 10 years time. China may be able to catch up with the UK."

According to the Daily Telegraph, Okuda has been warning senior UK politicians and business leaders for many months that Europe's inflexible labour markets and business tax regimes are increasingly a disincentive to invest.

"To be very candid, the worldwide market used to be controlled by the developed countries - comprising around 1 billion people. But if you think of the worldwide market as a pond, and all of a sudden another 1.3 billion people jump in, it is bound to be more crowded and there is bound to be more competition," Okuda said.

CBI director general Digby Jones told the Daily Telegraph that Okuda's words must be heeded urgently. "I really hope it will not take a wake up call in the form of a major multinational leaving Europe to make Brussels, Germany, France and Britain realise we cannot go on encouraging labour market rigidity," he said.

The Daily Telegraph said Okuda's comments came just days after the publication of a report by Ernst & Young which showed that Britain's share of inward investment in Europe fell sharply in the first six months of this year. The report also showed that central and eastern Europe have become more popular locations for business investment than the west, the newspaper noted.

Many multinational companies are taking advantage of cheap, well-educated labour forces in China and Eastern Europe when siting new factories. This has become a more important consideration for some of them than the creation of a single currency area in the eurozone, the Daily Telegraph said.

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