Foreign direct investment expected to fall by nearly 40 per cent post-Brexit, according to study by UCL and LSE economists
The UK decision to leave the EU, including the single market and customs union, is expected to result in a fall in foreign direct investment by 37 per cent.
UCL economics professor Nauro Ferreira Campos, one of the authors of the study. Photo by UNU-WIDER inequality conference, 6 Sept. 2014. CC-BY-NC 2.0.
While Brussels and London enter the “final theatrics” of UK-EU trade talks, economists at UCL and LSE have found that foreign direct investment (FDI) into Britain could fall by 37 per cent as a consequence of leaving the EU’s single market.
The study by UCL’s Dr Nauro Campos and Dr Randolph Bruno and LSE’s Dr Saul Estrin suggested that one of the main reasons the UK has had such high levels of global investment is because of the creation of the single market after the Maastricht Treaty was signed in 1992.
The government has, however, already confirmed that leaving the single market will be one essential part in their strategy to dismantle the UK from its 45-year union with Brussels.
Nonetheless, the gravity model economic report suggested that the single market has given Britain “the opportunity to exploit scale economies without hefty tariffs and red tape.”
According to UCL economics professor, Dr Nauro Ferreira Campos, “before the single market there was not much foreign direct investment; after it skyrocketed.”
The report cited that foreign direct investment fell to £49.3 billion in 2018 from £80.6 billion in 2017.
The economists argued that before 2016, Britain’s position as a springboard to trading with the rest of the single market was of great importance to global investors.
The group of economic experts also ran “conservative” estimates during the 2016 referendum campaign. At that time, they predicted that Brexit would result in a 25 per cent decrease in foreign direct investment.
Campos stated that a “vast majority [of FDI] will go from the UK to Europe.”
“The amount of foreign direct investment will sink substantially, but it is unclear in what sectors,” he added.
Campos explained that the value of the single market comes from reducing the cost of exporting goods into Europe. In the car industry, he said the single market “revived” investment in automobiles.
When asked about the effect of the pandemic on foreign direct investment, Campos stated that it is “reasonable to expect this is a very drastic, incredibly severe shock, but the effect will not be as lengthy as Brexit.”
He estimated that the cost of leaving the single market would be two to three times that of coronavirus.
With trade talks ongoing, Campos stated that the importance of foreign direct investment and the services industry is being “completely downplayed”.
The UCL-LSE study has come under criticism from other economists.
Capital Economics chairman Roger Bootle, who recently wrote in the Telegraph that the “broken” single market places “shackles” on Britain, explained to Pi Media that if Brexit is “accompanied by trade deals and deregulation then FDI should pick up, perhaps strongly”.
In fact, after years of speculation, the UK has received fresh news of European and global companies relocating to London.
In September, the capital managed to significantly close the gap on New York as the two cities competed to lead the world’s financial markets. The Big Apple now records just a four-point lead over London. By comparison, the EU’s top city, Luxembourg, lags behind in 12th place.
In recent weeks, one of Belgium’s largest pharmaceutical companies, UCB, announced that it would invest £1 billion into new British facilities over the next five years.
Earlier this year, the shareholders of Anglo-Dutch consumer goods company, Unilever, agreed that it would be setting up its headquarters in London rather than Rotterdam.
The Japanese car company, Nissan, announced in May that due to restructuring, its 3,000 workers in Barcelona would be laid off and jobs would relocate to Sunderland.
Professor Patrick Minford, of Cardiff University, described the conclusions made in the gravity model as “neo-protectionist”, saying they downplay Britain’s potential to enter economic agreements with emerging and growing markets.
“What this means is had gravity modellers used the true underlying causal model of trade and the economy, together that: in computing the effects of Brexit, with the full free trade assumptions about policy, they would have come to a strongly positive conclusion about the post-Brexit economy”, Minford added.
This article is published as part of The Commons Man series, written by Pi Media columnist Jack Walters.