Tuesday, July 19, 2016

Brexit and its Impact on Foreign investments in the UK

In the last few articles we have covered the Brexit impact on Public Spending, Immigration and also International Trade in the UK. In this article we are going to take a look at the likely impact Brexit would have on Foreign Direct Investment (FDI) in the UK. 

We will start off  with the current scale of foreign investment in Britain and then explore the probable legal and regulatory environment for foreign investments post Brexit and its potential impact on FDI inflows into the UK. 

Current Foreign Investment Situation in the UK

UK has always been a very popular investment destination for investors world over. The EU is an important source of FDI (short for Foreign Direct Investment) for the British Economy. Accurate stats for FDI are not available freely on the internet but based on what I could find, approximately 46% of the UK’s FDI inflows were from the EU. FDI Inflows from the EU have been slowing down (at a slow pace) over recent years and more investment has been flowing from rest of the world. Again, accurate stats are not available on the internet so apologies for not mentioning hard figures. 

The Impact of Brexit on FDI Inflows

The UK has been a sought after investment choice for EU investors because of the zero-tariff environment coupled with free movement of labor and capital. So, if the UK leaves the EU, there is going to be a direct impact on FDI Inflows. There are fears that many foreign companies may even close their shops in the UK and move somewhere else. You might have seen numerous articles that reflect this fear in social media because most multi-national companies that operate in the EU have set up UK (more specifically London) as their headquarters for their EU operations. If the UK is no longer part of the EU, they may have to move their shop to another EU member nation or risk losing the competitive advantage to continue doing business with EU nations. 

To add to the Brexit woes, foreign multinational cos bring with them new technologies and management practices along with them. A drying up of this investment into the UK could be damaging for the country’s long-term growth potential. 

Of all the industries in the UK that could potentially be impacted by this Brexit vote, the Financial Services industry seems to be the one with the most impact at least in the short-term. About One-third of the FDI inflows by non-EU countries into the UK is accounted for by financial services. Another major impact bearer could be manufacturing industries like car production where foreign investments play a vital role. 

Are these Fears Valid?

To a certain extent Yes, these fears are valid. However, they would materialize in full-effect only if the UK is unable to negotiate a decent relationship agreement with the EU nations. As I explained in the previous article about “Brexit Impact on International Trade in the UK”, the UK is a vital trading partner for many EU (and non-EU) nations and hence the chances of the UK getting a raw-deal are slim to none. 

Moreover, these fears don’t take into account the fact that multinational cos chose to invest in Britain for a variety of reasons, not just for its access to the single market, and that they do not just invest in projects for the production of physical goods. If you check out the World Bank’s Doing Business survey (which ranks countries according to the ease of doing business in them), Britain ranks highly in areas such as attaining credit, dealing with construction permits and protecting minority investors. I doubt these would change post Brexit and hence the UK would continue to remain an attractive destination. 

Post the Brexit Referendum, the GBP has taken a beating and has fallen by over 10% making investments in the UK cheaper for people from other countries like USA for example. This will be an added incentive for investors seeking to invest in the UK.

Plus, the UK benefits from good transport connections, a stable political environment, a good law & order situation and the English language. This would explain why the UK has been more successful than other European Union countries in attracting inward foreign direct investments. Approx. 28% of all FDI Inflows into the EU actually ended up in the UK in 2014. 

Some Last Words

As with any radical decision or development, we can expect a short-term dip in FDI Inflows into the UK. However, things should return back to status-quo (or closer to what it was prior to Brexit) once things settle down. Of course, this is under the assumption that the UK can negotiate a favorable trading agreement with the EU which would most likely happen. 

Disclaimer: All views presented in this article are those of the Author and are not endorsed by anyone. While every effort has been made to ensure that the data quoted and used in this article is reliable, there is no guarantee that it is correct, and the Author accepts no liability whatsoever in respect of any errors or omissions. This article is only economic research and is not intended to constitute investment advice, nor to solicit dealing in securities or investments.

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