This working paper was independently published by WAVTEQ Limited with the objective to understand the impact of Brexit on foreign direct investment (FDI) to the United Kingdom and to provide recommendations for the UK's future investment promotion strategy.
Key findings of the paper include:
- FDI is more important to the UK than for any other G7 economy. Foreign owned companies in the UK account for approximately:
- 30% of UK Gross Value Added;
- Half of UK business R&D spending;
- Half of UK manufacturing investment; and
- One-third of UK manufacturing employment.
- There are over 23,000 foreign owned companies in the UK, which in 2014 had turnover (revenues) of £1.3 trillion. The top three countries with the highest UK turnover were:
- US owned companies with a turnover of nearly £350 billion;
- French owned companies with a turnover approaching £200 billion; and
- German owned companies with £120 billion turnover.
- The UK government has a potentially strong negotiating position vis-a-vis the EU, US and other governments given the huge importance of the UK to "their" companies.
- The UK has outperformed all the major economies of Europe, with the UK attracting nearly 40% of greenfield capital investment in the EU by foreign investors and one-quarter of all greenfield FDI projects in the European Union (EU) in 2015.
- The UK's EU market share of FDI is highest knowledge-based services industries. The UK has captured over one-quarter of greenfield FDI in the EU in Creative Industries, Financial Service, Professional Services, and ICT & Electronics.
- The Centre for European Performance expects that FDI in the UK will decline by 22% due to Brexit.
- WAVTEQ expects that the impact of Brexit on long-term FDI into the UK will depend on the type of operation. FDI primarily serving the UK domestic market, such FDI in energy, construction, retail, and transportation sectors, will be least impacted while FDI in operations serving the EU market, including HQs, R&D and outsourcing, are likely to be most impacted.
- The impact of Brexit will depend on the UK's new agreement with the EU:
- If the UK joins the single market with its four freedoms, we expect the long-term impact of Brexit on FDI into the UK to be minimal given the UK's underlying competitive strengths and attractiveness for FDI; and
- If the UK establishes a free trade agreement with the EU, we expect that up to 40% of job creation being considered by foreign investors in the UK will be at medium to high risk due primarily to removal of the freedom for EU nationals to work in the UK, which will severely impact the attractiveness of the UK for strategic knowledge-based operations.
Our analysis of FDI in each region of the UK, suggests that:
- FDI in Northern Ireland, Scotland and the South East (including London) is most at risk if the UK does not join the single market; and
- FDI in the West Midlands and East Midlands is least at risk.
- Regions of the UK with the highest percentage voting to "remain" and the highest percentage voting to "leave" matches the regions most and least at risk to a decline in FDI; the electorate seem to have understood what Brexit means for their local economy.
In terms of the impact of Brexit on FDI from the UK, key insights from WAVTEQ's FDI teams around the world include:
- FDI from other European countries in the UK is expected to decline only moderately as they are primarily investing in the UK to access to the UK market and customers. SMEs in particular are likely to continue to invest as they are driven by customer access;
- FDI from China is likely to remain strong, as it is mainly domestic market driven and as asset prices in the UK declines. FDI from India is also likely to be resilient for asset-seeking FDI but is likely to decline moderately for knowledge-based operations serving the EU market, if the UK does not join the single market;
- FDI from Japan is primarily about retention and re-investment of existing UK operations. A free trade agreement with the EU maybe sufficient to retain and expand manufacturing investment, although not joining the single market will certainly have a negative impact on most Japanese investors. Japanese investors in the UK are also concerned about access to non-EU markets. Turkey, for example, is a key export market for Japanese manufacturers based in the UK who can currently export tariff-free due to the customs union between the EU and Turkey; and
- FDI from Korea is at serious risk, with major Korean companies already relocating operations out of the UK and new investments being postponed or eliminating the UK as a location option. As the EU also has a FTA with Korea, Korean investors are particularly concerned.
- WAVTEQ has identified eight key policy recommendations for UK investment promotion strategy following the Brexit vote. Our key recommendations are summarised as:
- Re-align sector and market strategy to focus on the sectors and source countries that are likely to continue to offer the strongest FDI prospects for the UK;
- Strengthen investor intelligence-gathering activities to ensure IPAs in the UK are aware of companies that have continued plans to invest in the UK to ensure they are realised;
- Develop a "Multiplier Strategy" to generate FDI referrals from the investment advisory community - a cost effective method of investment attraction;
- Focus on investor enquiry handling to improve conversion rates and identify key policy options for strengthening investment facilitation services, especially around talent attraction, immigration and investment incentives;
- Develop a world-class inward investment website to generate inbound enquiries;
- Ensure the existing investment pipeline is fully engaged to ensure that IPAs win the FDI once companies make the decision to invest in the UK;
- Focus more resources on account management "aftercare" activities for existing investors; and
- Consider promoting M&A and New Forms of Investment (NFI) as key inward investment services to attract much needed foreign capital into the UK, maintain the UK's overall FDI performance as greenfield FDI declines, and to generate business between UK-based and foreign companies. UK IPAs have an opportunity to lead Europe for these types of FDI.