12 March 2019

Research pick: Brexit’s impact on inward international investment - "An analysis of different Brexit outcomes and their effect on inward FDI to the UK"

In June 2016, the UK voted to leave the EU in a national referendum vote. At the time of writing, the economic implications of the so-called British Exit from the EU, “Brexit” are yet to be fully clarified. Writing in “Global Business and Economics Review”, Jeremy Head of the International Business and Economics Research Group (IBERG), Sheffield Business School, Sheffield Hallam University, analyses the possible impacts of different Brexit scenarios on inward foreign direct investment (FDI) to the UK.

Head demonstrated that the “harder” forms of Brexit are likely to have worse outcomes in terms of inward FDI to the UK. He also suggested that the export platform FDI will be potentially significantly affected too. “The effects of Brexit could also be diverse in different industries, given the different motives for FDI, and also diverse in terms of the type of activity of the FDI,” explains Head. He also points out that the effects will not be evenly spread across the UK given the patterns of FDI in the UK. There are clear policy implications…

Even though there was slow economic growth in the UK between 2010 and 2015 following the 2018 economic crash, FDI remained an important component of the UK economy. It was reported in 2016, that FDI amounted to the equivalent of almost US$40 billion for 2015. The flows led to a stock of inward FDI in the UK of $1.5 trillion by 2015. Most studies suggest that inward FDI boosts gross domestic product (GDP). Indeed, there is broad agreement that the UK’s membership of the European Union led to greater inward FDI than the country would otherwise have experienced and it is a matter of record that GDP increased. A 2015 report suggested that EU membership enhanced UK inward FDI by 25 to 30 percent.

However, there is some research that suggests that countries outside the EU benefit in terms of inward FDI and thence GDP significantly and that it may well be that the UK would have been better off outside the EU in some economic sense. Unfortunately, there is no way to carry out randomized, double-blind, placebo-controlled studies in the world of economics. Moreover, how things might have been is generally an irrelevant consideration in future prosperity or otherwise, especially given political machinations and the personal and partisan agendas of those playing out the script on behalf of the electorate.

Head, J. (2019) ‘An analysis of different Brexit outcomes and their effect on inward FDI to the UK‘, Global Business and Economics Review, Vol. 21, No. 2, pp.139-155.

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