Brexit and FDI

It’s now been six months since the referendum. The future is no clearer now than it was then

There are essentially two schools of thought on how Brexit will affect the UK’s ability to attract investment, and sustain trade levels. The first - optimistic view - is that the UK will be released from the shackles of bureaucracy, and will have more freedom to attract businesses from around the world, particularly emerging markets. The second – pessimistic view – is that the UK becomes a less significant world market, as investment will relocate to other parts of the EU.

Uncertainty

While my own view leans towards the latter, the key concern for business is uncertainty, and the risk that comes with that. While some UK companies have expressed anxiety on what the Brexit deal will eventually look like, others appear more relaxed. However, that sanguine view may not remain if a lack of clarity continues, up to and beyond the March trigger deadline. Although the UK government has decided that a minimum level of information is the most effective approach to “getting the best deal”, it’s difficult to understand how that view actually works in the negotiations. Ministers have used the poker hand metaphor, but the difference is that you never show your hand in that game until the end, while in the negotiations both sides will have to show hands – otherwise there is no negotiation to be had!

From the EU point of view, Brexit’s investment impact could be mixed. While on the one hand there is the potential to attract investment that would otherwise have gone to the UK, it should also be remembered the UK is one of the “big five” foreign investors itself. Hence, UK companies may now consider an investment elsewhere in the world rather than the EU, depending on the eventual Brexit deal.

Incentives

A final point is around the Nissan deal. We don’t know what the agreement involves, but it is thought there may well be an incentives dimension, as the Brexit deal may mean the UK is no longer subject to EU state aid rules. If incentives-driven UK economic development becomes common in the future, there could be two effects. The first is that economic development in the country moves towards the US model, where locations competing on incentives is the norm.

 

The second is that investment may become further concentrated on cities, who have more budget to offer incentives. Many of the country’s Local Enterprise Partnerships, particularly those without a larger city, have very limited inward investment budgets. Therefore, a market predicated on incentives will look very different. The Department for International Trade could act as a national distributor of incentives to help offset these effects, but nevertheless economic developers will need to be equipped to handle a new environment.

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