Foreign investment into the UK could fall by 37% post-Brexit

Before the Brexit vote, foreign investors used Britain as a platform to export to the rest of the Single Market. Photo: Getty

Foreign investment into the UK could decline by 37% post-Brexit, according to a study by University College London (UCL) and London School of Economics (LSE).

The latest estimate is up by 50% on previous predictions as a result of Britain’s departure from the EU single market and customs union.

In 2018, foreign direct investment (FDI) into the UK was worth £49.3bn ($38.2bn), down from £80.6bn in 2017. Before the Brexit vote, foreign investors used Britain as a platform to export to the rest of the Single Market.

FDI is an investment in an enterprise operating in a foreign economy which gives control of the management to the overseas firm. It’s not just a flow of capital but of technology, knowledge and innovation with long-lasting benefits.

Professor of economics at UCL, Nauro Campos, said: “Over the last 20 years the UK has been the largest recipient of inward FDI in the EU.

“Access to the single market and customs union has been instrumental; with entry into a larger market and the opportunity to exploit scale economies without hefty tariffs and red tape. With Brexit we estimate a significant and substantial decrease in FDI.”

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Prior to the 2016 Brexit referendum, a group of researchers including, Campos, UCL professor Randolph Bruno and LSE professor Saul Estrin estimated that FDI would decrease by 25% after Brexit.

At the time, they warned this was a conservative estimate due to — among other things — data and methodological constraints.

But, that estimate played a large role in the Brexit debate, with the UK Treasury, the Centre for Economic Performance and National Institute of Economic and Social Research using it for their calculations of the long-term costs associated with Brexit.

Associate professor of economics at UCL, Randolph Bruno, said: “In 2016 we said we are using extremely conservative estimates. Now we have better data, more countries, years, more robust methodology.

“Our new estimate comes at a crucial time in the Brexit trade talks and we expect it could play a part in the UK’s longer term strategy for inward and outward investment alike,” Bruno added.

The report also reveals that EU membership did not have a significant impact on FDI before the implementation of the Single Market.

To assessed the impact of Brexit on former FDI’s, researchers used a structural gravity framework on annual bilateral FDI data for almost every country in the world, from 1985 to 2018.

Its main findings were:

  • The impact of EU membership on FDI into the host economy is always positive, significant and quite large in the long-run; in the order of 60% for inward investment from outside the EU, and about 50% FDI within the EU

  • The effect of EU membership on FDI is significantly larger than membership of Free Trade Area agreements (FTA’s), such as NAFTA, EFTA and Mercosur — and much larger than an “exit on WTO terms”

Thirdly and crucially, the report identifies the reason for the findings: the Single Market.

Professor at LSE, Saul Estrin, said: “By their very nature, the effects of FDI are deeper and more long lasting than those of trade in goods. In order to counterbalance this and continue attracting FDI, the UK government will need to focus investment in technology and research and development (R&D) to support the growth of our high-tech companies.”

READ MORE: One in four UK firms stockpiling for Brexit disruption

It comes as one in four UK business said they are stockpiling goods while half are building up cash reserves in the run-up to the end of the Brexit transition period.

The Institute Of Directors (IOD) warned Brexit disruption would “compound the pain” of COVID-19 for firms, and called for government vouchers to fund advice or tax relief to cover preparation costs.

A member poll by the IOD found just 21% of the 958 leaders surveyed last month described their companies as “fully prepared.” Another 21% said they had more to do but would be ready by the end of the year, while another 24% said they were uncertain if they would be prepared.

The peer-review, which will be published in the Journal of Common Market Studies highlights that the single market, since its implementation in 1992, has been the “cornerstone” for additional FDI.

On Friday, prime minister Boris Johnson received backlash from UK business leaders after he told them to prepare for an “Australian-style” Brexit, or No10 code for no-deal.

Watch: What is a no-deal Brexit and what are the potential consequences?