Brexit and Foreign Investment in the UK

Abstract

Summary We explore the likely effect of Brexit on inward foreign direct investment (FDI) through its possible effect on the benchmark variables that characterize the macroeconomy. For this we propose the use of a Markov regime switching structural vector auto‐regression to distinguish between the volatile and stable states of the economy and account, among other effects, for the contemporaneous effects that the frequency of FDI innately generates. Our findings suggest that, if Brexit triggers a sterling depreciation in the current economic climate, this will fuel a prolonged negative effect on FDI. FDI flows may be positively affected (at most) by a sterling depreciation after Brexit only if this event drives the UK economy to a period of highly volatile growth, inflation, interest and exchange rates: a scenario that is rather unlikely. And, even then, the sterling depreciation benefits would last for only a short period of time.

The impact of Brexit on the UK inwards FDI

“…The differences-in-differences approach is also a novelty for this topic, the comparison with OECD countries and non-EU states from Europe being necessary to propose the best policies for alleviate the high negative impact of Brexit on FDI. A concrete comparison with other studies cannot be made, because the other researches focused on bilateral flow, but the general tendency of negative impact of Brexit on FDI (presented by also by Campos & Coricelli, 2015;Ebell & Warren, 2016;Driffield & Karoglou, 2016) is also validated in this study. The results are, actually, confirmed by the economists' expectation that support the benefits of economic integration.…”

“…The authors predicted a decrease in the UK's FDI by 12% till 28% and a GDP rate between 1.5% and 3.7% by 2030. Some authors, like Driffield and Karoglou (2016), avoided to provide an exact numerical evaluation of Brexit's effect on FDI as a reference value. The main argument is the high degree of uncertainty of the unstable and very dynamic international framework.…”

“…A more realistic approach would be the comparison of the UK with other countries that did not enter the EU. In this context, contrary to previous studies regarding the Brexit effect on FDI (Campos & Corricelli (2015), Ebell & Warren (2016), Driffield & Karoglou (2016), Simionescu (2016)) we employed the differences-indifferences estimator to measure the impact of the EU membership on FDI in the case of the UK. Differences-in-Differences (DD) estimation became a common way to estimate causal relationships.…”

“…Contrary to previous studies, we focused on explaining the number of FDI projects and number of new and safeguarded jobs ensured by these FDI in the UK. As almost all of the economists anticipated (Campos & Coricelli, 2015;Ebell & Warren, 2016;Driffield & Karoglou, 2016), the UK's Brexit will put problems to labour market that should become more flexible. This aspect is essential, mostly because the evaluation of the Brexit impact on jobs brought by FDI projects has not been made yet in the economic literature.…”

Political Institutions and the Incidence of FDI in South Asia

“…In early eighties theorists started incorporating multinationals into their models of international trade based on industrial organisation approach, with increasing returns to scale and imperfect competition. However, theoretical underpinning of FDI is, to a certain extent, still fragmented, gathering bits and pieces from different fields of business and economics to elucidate the pattern of multinationals overseas investments (Driffield & Karoglou, 2016). In the following sub-section, a short preamble for using Dunning's Ownership, Location and Internalisation (OLI) paradigm is presented.…”