A Tentative Exploration of the Effects of Brexit on Foreign Direct Investment Vis-À-Vis the United Kingdom

28 Pages Posted: 7 Jun 2019

See all articles by Ana de Almeida

Ana de Almeida

Bank of Portugal

Teresa Sastre

Banco de España

Duncan Van Limbergen

De Nederlandsche Bank

Marco Hoeberichts

De Nederlandsche Bank

Date Written: June 6, 2019

Abstract

European Union (EU) integration has boosted inward EU 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 the “real-time” effects of the Brexit June 2016 referendum outcome and its aftermath 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 tentative 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 favoured 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 as well as one of the most important non-EU partners, the United States.

A different approach is also used to analyse 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 FAI 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 in the Euro area.

Keywords: foreign direct investment, FDI, Brexit, EU membership, single currency

JEL Classification: F15, F21

Suggested Citation

de Almeida, Ana and Sastre, Teresa and Van Limbergen, Duncan and Hoeberichts, Marco, A Tentative Exploration of the Effects of Brexit on Foreign Direct Investment Vis-À-Vis the United Kingdom (June 6, 2019). Banco de Espana Occasional Paper No. 1913 (2019), Available at SSRN: https://ssrn.com/abstract=3399942 or http://dx.doi.org/10.2139/ssrn.3399942

Ana De Almeida (Contact Author)

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Teresa Sastre

Banco de España ( email )

Madrid 28014
Spain

Duncan Van Limbergen

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Marco Hoeberichts

De Nederlandsche Bank

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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