In the Next Silicon Valley, we often highlight policy decisions that affect or influence inward investment decisions in today’s globalized knowledge-based innovation economy. One of the biggest current political topics in Europe is the self-inflicted harm that the UK seems to be pursuing by leaving the European Union (EU), otherwise referred to as ‘Brexit’.
The latest Columbia FDI perspectives paper published by the Columbia Center on Sustainable Development argues that inward investment will fall in the UK, post Brexit. The authors, David Bailey, Nigel Driffield and Michael Karoglou, say, “Both in the run up to the referendum, and since the UK voted to leave the EU, there has been a good deal of speculation over the likely impact on inward FDI into the UK. In a timely recent Columbia FDI Perspective, Laza Kekic suggested that UK inward investment will remain robust post Brexit. We beg to differ.”
The authors explain why, citing the example of Japanese inward investors backed by the Japanese government now having reservations about investing in the UK unless there is tariff-free and barrier-free trade with the EU ‘that is uncomplicated and predictable as possible’. They say that at the time of the creation of the single market, firms found they were able to take advantage of the opportunities to coordinate resources across countries, and enable economies of scale.
“The single market, through EU regional policy and structural funds, allowed firms to take full advantage of location economies where labor was available in low-cost locations. Supply chains cross borders several times before components go into, say, a final assembled car, which could happen in several EU countries. Equally, as firms redesign their production systems to a more compartmentalized network system, free movement of labor also becomes important, allowing firms to move labor quickly and cheaply to respond to short-term changes or to address skill shortages. The UK has chosen to cut itself off from much of this.”
The authors go on to explain the effect of the big devaluation of sterling (the UK’s currency), in both the short term (cheaper domestic assets for foreign investors), and the long term, in terms of lower returns on investment based on the investor’s home country currency.
They conclude, “Above all, however, the government needs to avoid a hard Brexit that sees tariff barriers returning, and, ideally, to execute a trade deal that prioritizes access to the single market for as many sectors as soon as possible. It is possible that digital tracking of goods may offset many of the concerns expressed pre-1992regarding goods awaiting physical customs clearance between the UK and EU, that may in turn protect some supply chains. The importance of such costs and delays must not be underestimated. This however is potentially incompatible with the desire of the UK to prevent free movement of labor between the UK and EU, which may in itself deter FDI.”
Extracts from the paper by David Bailey, Nigel Driffield and Michail Karoglou, ‘Inward investment will fall in the UK, post Brexit’, Columbia FDI Perspectives, No. 204, July 17, 2017, are reprinted with permission from the Columbia Center on Sustainable Investment. The full paper can be accessed here.
David Bailey is a professor of industrial strategy at Aston Business School, Aston University; Nigel Driffield is a professor of international business at Warwick Business School and deputy pro vice chancellor, Warwick University; and Michail Karoglou is a senior lecturer in economics at Aston Business School, Aston University.