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.

Brexit and its Impact on the UK Economy and Policies

The United Kingdom’s potential decision to leave the European Union, or ‘Brexit’, has been the topic of debate for many weeks or even months now. Experts have highlighted many reasons as to why the UK must stay or leave the EU (of course they have their reasons to justify each option).

In the previousarticle we covered the details pertaining to the impact of the Brexit on the UK on very broad terms. This is going to be the first in the series of articles covering the impact of this Brexit on various aspects of the UK Economy as well as its potential Economic Policies.

Before we Begin:

A Country’s Economy comprises of many different aspects and I cant possible cover the impact this Brexit is going to have on the UK Economy in a single article. In fact, I don't think we can cover everything even if given an opportunity to write for 100 pages. Nevertheless, this article will be the starting point and we will add more info in the subsequent articles.

Will Brexit Benefit or Harm the UK Economy?

Experts from across the globe have been very vocal in their predictions about how this Brexit is going to impact the UK. The Proponents of the Leave EU Movement predict that the UK GDP will grow by as much as 10% in the next decade while the Proponents of the Stay in EU Movement predict the opposite – a fall by 10% in the GDP.

Exactly how much this Brexit benefits or harms the UK Economy would of course be determined by how good an exit deal UK can sign with the EU. Currently the United Kingdom is part of the single market, with free movement of goods, services, people and capital within the European Union’s border. It is likely that Brexit would change this. In an optimistic scenario the UK could get away with a great trading agreement with the EU which could potentially have little to no impact on its GDP. But on the hindsight if the EU nations play hardball and are not in a forgiving mood to budget to the demands put forth by the UK, experts expect a fall in GDP ranging between 6% – 10%

In the upcoming articles we are going to cover the impact of Brexit on various aspects of UK’s Economy. They are:

Impact on UK’s Public Finances

Impact on UK’s Immigration Policy

Impact on Trade and Manufacturing Industry

Impact on Foreign Investments

Impact on the Financial Services Industry

Impact on the Property Market in the UK

Lets get started on the detailed analysis, shall we?

Brexit and its Immediate Aftermath

Recently the citizens of the United Kingdom had collectively voted in favour of Exiting the European Union. During the build-up to the voting day of the Referendum, economic experts worldwide had predicted tough times for the UK as a whole if they chose to exit the EU. But, in spite of all this, the citizens of the UK still chose to leave the EU which has pretty much caused widespread turmoil & uncertainty across the globe. Major Stock Market Indices across the globe have lost a ton of value. 

This is going to be the first among many upcoming articles on this topic. We will be starting with the immediate Aftermath mainly for the UK and the EU Nations. In upcoming articles we will take a deeper look at more topics. 

Before we Begin: Predicting the Aftermath of the Brexit with Accuracy is something that Experts across the globe are scrambling to do and even they are unable to say with certainty as to what will exactly happen. I will try my best to explain the situation in an easy to understand manner and hopefully you will find this article useful… 

What is the European Union? 

The European Union - often known as the EU - is an economic and political partnership involving 28 European countries. It began after World War Two to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other. It has since grown to become a "single market" allowing goods and people to move around, basically as if the member states were one country.

It has its own currency, the euro, which is used by 19 of the member countries, its own parliament and it now sets rules in a wide range of areas - including on the environment, transport, consumer rights and a lot more. 

Why the Brexit? 

Great Britain or United Kingdom as they are commonly referred to has been one of the pivotal members of the EU throughout the existence of the EU. UK is by far the largest and wealthiest members of the EU. Citizens of the UK have been unhappy over their participation in the EU for a few primary reasons:

- People felt that Great Britain was bearing a huge burden by trying to economically support the EU Nations and they would be better off by themselves. They feel that the amount the UK contributes to the EU budget could be useful if spent in the UK itself- People felt that the EU Membership allowed members of other EU nations to freely enter and seek employment in the UK thereby impacting native citizens - People feel that the EU is actually threatening the British Sovereignty because the EU regulations would override national laws 

Is the UK exiting the EU Confirmed? 

Actually, the whole referendum/vote is not legally binding. There are a few ways whereby this whole Exit from EU could actually be blocked or overturned but the chances of this happening are very slim to none. 

Article 50 of the Treaty on European Union establishes the procedures for a member state to withdraw from the EU. It requires the member state to notify the EU of its withdrawal and obliges the EU to then try to negotiate a withdrawal agreement with that state. Britain's "Leave" vote, however, does not represent that formal notification. That notification could take place within days or British officials might wait a few months to pull the trigger. 

Once Britain invokes Article 50, it will have a two-year window in which to negotiate a new treaty to replace the terms of EU membership. Britain and EU leaders would have to hash out issues like trade tariffs, migration, and the regulation of everything from cars to agriculture.

Anyways, it would be political suicide for people who push for the same because it would be considered as if they are going against the will of the majority public.

Now that we have covered the basics, let’s talk about the Immediate Aftermath… 

1. Political Uncertainty in the UK 

As soon as the Leave vote in the Referendum was finalized, the British Prime Minister David Cameron declared that he would resign by October of this year. Cameron was one of the strong supports of Staying in the EU while many members of even his own party were actually against it. 

No one really knows exactly what is going to happen in UK politics. Maybe, he would be replaced by Boris Johnson who was formerly the Mayor of London and one of the strong proponents of the leave EU side. It is also possible that the ruling conservative party could split into groups and may not be in a position to claim a full majority in which case we may see Early Elections. 

Note: UK Just had elections in 2015 when the David Cameron led Conservative Party had won with Majority. Another election this year or even in the next year could cause a lot of problems for UK. 

2. Economic Problems in Britain 

In the short run, uncertainty about Britain’s future relationship with the EU, its largest trading partner, could push the UK into a recession. The Stock Markets in the UK have been extremely volatile over the past week losing a ton of value. The GBP has lost a lot of value too. To help you understand better, 1 GBP was trading @ over 100 rupees last week while as of this writing it is trading at around 89-90 rupees per Pound. That is over 10% erosion in value in just a week – that too against a currency like Indian Rupee. If we compare against a stronger currency like USD the loss is over 11%. Experts predict that this trend will most likely continue. 

This volatility and fall of the Pound reflects the market worries about more severe consequences in the months ahead. With Cameron out of power, Britain’s prospects of negotiating a favourable deal with the EU could be weakened. The EU may decide to strike a hard bargain to discourage other countries from leaving the EU. Or the UK’s new leader might not be willing to accept the kind of restrictions that come with a Norway-style deal. And that could create serious problems for businesses based in the UK. 

Experts predict that this leave EU vote could impact the British Economy sizeably. They are predicting that the British Economy could be smaller by up to 8% by 2030, depending on how well the exit negotiations happen. The actual % varies from one economist to another but everyone unanimously agrees is the fact that the UK Economy isn’t going to grow in the coming decade or so. 

3. Uncertainty for Migrant Workers 

As with any economically advanced nation, the UK has been a hotbed for Immigration. People from across the globe especially the EU Nations have been venturing to the UK for many years. Though citizens of other nations have to go through a lengthy visa formality in order to be eligible to work in the UK, citizens of EU Nations did not. A citizen of one EU Nation is free to live & work in any other EU nation. This Exit from EU could change all that.

Statistics indicate that about 3 million immigrants from different EU nations actually live & work in the UK. Considering the fact that immigration has been one of the key driving forces behind this leave EU. On the other side, the same statistics also indicate that about 1.2 million Brits are actually living/working in various EU Nations. 

It’s possible, of course, that Britain could negotiate a new treaty with the EU that continues to allow free movement between the UK and the EU. However, one of the key driving forces behind this leave EU referendum has been the rising resentment against immigrants especially from poorer & economically struggling nations like Poland or Lithuania. So, the British Government will be under immense pressure to tighten the rules on immigration. But, on the flip side, if Britain restricts EU Nationals, they would reciprocate the favour which would impact the Brits who are employed in the EU. The EU Nations may go one step further and make it harder for British businesses to operate in the EU Region.

4. A Potential Break-up of the United Kingdom

Most people think that the names United Kingdom, England, Britain are pretty much one and the same. Actually, Not many people are actually aware of the fact that the United Kingdom actually is comprised of 4 countries.

1. England

2. Scotland

3. Wales &

4. Northern Ireland 

The overall vote on the Referendum was 52% in favour of leaving the EU while 48% voted to stay in the EU. England voted strongly for Brexit, by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%. However, Scotland and Northern Ireland both backed staying in the EU. Scotland backed Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2% Leave. Now with this overall vote in favour of Brexit, leaders from both Scotland and Northern Ireland who voted to stay in the EU could want to split away from the UK. 

One key Scottish Leader has already indicated that Scotland would like to hold a referendum about whether Scotland should become an independent nation and be separated from the UK. If that votes succeeds, Scotland could potentially petition for an EU membership as a separate nation. 

The situation on the Irish side is even more troublesome. Ireland has long been divided between a protestant North that's part of the UK and an independent Irish republic in the South. Tensions across the border have been minimized by EU rules guaranteeing the right to move across the border. But if the UK withdraws from the EU, the border could become more important and tensions over territory could flare up once again. There's a chance that a UK exit from the EU could provide renewed momentum for Northern Ireland to try to leave the UK and unify with the rest of Ireland.

Some Last Words:

As you can see, this Brexit is going to have serious consequences to the United Kingdom. Though the citizens of the UK have the right to be unhappy about their membership in the European Union, I feel this was more of a knee jerk reaction by the citizens of the UK who weren’t entirely aware of the consequences of this EU fallout. Am gathering data/statistics on a more detailed impact to the UK as well as the EU as a result of this Brexit and you can expect a few more articles soon. 

Until then, let’s hope for the best…