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A tentative exploration of the effects of Brexit on foreign direct investment vis-à-vis the United Kingdom

Teresa Sastre
Marco Hoeberichts
Duncan Van Limbergen
Ana de Almeida
Ano de Divulgação 
European Union (EU) integration has boosted inward foreign direct investment (FDI) into the United Kingdom (UK). Within the EU, the UK has a relatively significant stock of inward FDI, having reached 61\% of its Gross Domestic Product (GDP) in 2017 and risen strongly since 2005. The exit of the UK from the EU and the Single Market will probably result in reduced FDI amongst both investment destinations. The aim of this study is to look at data developments to assess whether the Brexit June 2016 referendum outcome and its aftermath have had an impact on UK-related FDI activity. Although FDI flows are notably volatile and biased by periodic non-systematic outliers, and despite some caveats on data sources and availability of time series data, we find preliminary evidence of a post-referendum slowdown in gross FDI flows between the UK and the EU, notably involving the big EU economies and Ireland. Regarding a very favored form of FDI, greenfield FDI, we document a post-referendum fall in announced projects and capital expenditures into the UK by both other EU countries and one of its most important non-EU partners, the United States. A different approach is also used to analyze the Brexit effect on FDI activity based on estimating the effect of two successive stages in the European integration process - EU membership and the euro area launch - and considering Brexit effects as the reversal of the UK integration into the EU. By using a fixed-effect gravity model to estimate the effects of these integration processes on bilateral FDI activity with the UK, the empirical results suggest that, on the one hand, this country played a role as a gateway for a set of international investor countries outside the euro area to enter European markets and, on the other, it acted as a hub that reallocated these inflows and those coming from euro countries across the euro area itself. Thus the disconnection of the UK from the EU may have further implications for FDI than just reverting the effect of EU membership. Larger trade barriers and lower integration between the UK and the euro area countries’ markets will likely have a negative impact on FDI activity in the UK and might have, in the short run, a negative effect as well in the euro area.
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