Brexit and Implications for FDI

Brexit and Implications for FDI

The looming decision on the UK’s continued membership in the European Union (EU), more commonly referred to as the “Brexit”, has politicians, citizens, and the business community wondering what exactly the implications are for the UK should it decide to leave. Concerning the movements of Foreign Direct Investment (FDI) projects, the data show a high dependence of the UK on other EU member states as markets for FDI,  particularly in terms of inward projects of FDI. For instance, when considering outward projects of FDI, other EU countries account for 23% of all FDI projects from UK companies investing abroad. Clearly, this distribution differs per industry. In the real estate sector, for instance, nearly half of all FDI projects undertaken by UK companies is realized in other EU member countries whilst this is only 14% for financial services.

Regarding inward projects, other EU member states account for a third of FDI projects realized in the UK and function as the main source of FDI into the UK, besides the United States (38%). Additionally, of the 72,904 jobs created in the UK by FDI in 2015, 19,253 new jobs were the result of investment by firms from other EU countries. This represents 26% of total new jobs created by FDI in the UK. Multinationals from other EU states are particularly responsible for UK-job creation in business services, automotive, real estate and software & IT services. The data suggest a staggering co-dependency on FDI between the UK and other EU economies, with the UK more on the receiving end of the equation.

The Brexit could affect the direction of FDI projects in the UK. If the UK were to exit the EU, it would no longer participate within the European Single Market and will lose tariff-free access to one of the world’s largest consumer markets. Thus, any exports from the UK to EU member states would be subject to the Common External Tariff (CET). In an effort to avoid the CET being applied to their exports, multinationals may choose to relocate their operations from the UK to the EU. The UK may have to make big concessions in new rounds of trade negotiations and may also have to negotiate new trade agreements with its existing trade partners under less favorable conditions with limited bargaining power.

In addition, an immediate impact of leaving the EU will most likely be a devaluation of the British pound versus the currencies of the UK’s trading partners, which, in turn, increases the currency risk of UK-based multinational corporations and foreign affiliates. Investment Consulting Associates (ICA) does not take a political stance on the Brexit, but considers its potential implications for FDI as important “Fish-and-Chips” for thought.

Data Source: fDi Intelligence, from the Financial Times Ltd 2016