Brexit likely to hit FDI into the UK

The UK’s departure from the EU single market may reduce the stock of foreign direct investment from Germany, France and the Netherlands by as much as 30%. That is one of the findings of research by Ray Barrell and Abdulkader Nahhas presented at the Royal Economic Society's annual conference at the University of Sussex in March 2018. Their results also suggest that the UK has no special labour market or competitive environment advantage when attracting foreign investment.

The new study investigates bilateral stocks of foreign direct investment (FDI) from the 14 largest high-income OECD countries to all OECD countries between 1995 and 2015. This covers the period of intense globalisation and European integration that began after the establishment of the World Trade Organization (WTO) and the completion of the single market in Europe. Among the findings:

The single market has raised flows of FDI within the member states by around 40%. The formation of the North American Free Trade Area (NAFTA) has not had a similar impact.

If two countries are both members of the EU, then bilateral FDI stocks are likely to be 40% higher than they would otherwise have been.

Setting up a new free trade area is no substitute for the single market, as there is no evidence that NAFTA had an impact on FDI stocks.

Gravity theory - FDI stocks are significantly influenced by relative country size and their distance apart. Distance effects may be dying, but it is happening very slowly.