Question

From the perspective of Investment to analyze the impact of the Brexit. Investment includes Foreign Direct Investment (FDI) Stocks, Foreign Direct Investment (FDI) Flows, Portfolio Equity Stocks, and Portfolio Equity Flows. Give data to support.

Answer 1

Amongst the European Union United kingdom is the top recipient of the FDI .As estimated by the OECD the inward FDI in US$1.55 trillion. There are several factors on which the FDI depends. Bigger and high purchasing power leads to more FDI . The UK has strong Law and order, flexible labour markets and a highly educated workforce, all of which make it an attractive FDI location .EU membership reduces trade and investment costs, But after Brexit it is likely to have an impact. The London schools of Economics estimated that with a Brexit there will be a 22% decrease of FDI in next decade. the study looked a FDI flows across all 34 OECD countries over the past 30 years and analyzed how investment is affected by EU membership after controlling for other FDI determinants. Being a member of European union provide companies who had invested in United kingdom a Single Market and makes the UK an attractive export platform for multinationals as they do not bear potentially large costs from tariff and non-tariff barriers when exporting to the rest of the EU. Multinationals have complex supply chains and many co-ordination costs between their headquarters and local branches. These would become more difficult to manage if the UK left the EU. For example, component parts would be subject to different regulations and costs; and intra-firm staff transfers would become more difficult with tougher migration controls. There is uncertainty that what is going to be the condition of trade arrangements between the UK and the EU and it reduces FDI in UK .So all these factors will decrease FDI.Let us take an example of a car industry. Total UK car production is predicted to fall by 12% or almost 180,000 cars per year. This is mainly because European car manufacturers such as BMW move some production away from the UK. Prices faced by UK consumers also rise by 2.55% as the cost of imported cars and their components increase. Let’s us take another example of Financial services .it have the largest stock of inward FDI in the UK (45%)and constitute 12% of tax receipts . The single market allows a bank based in one member of the EU to set up a branch in another, while being regulated by authorities in the home country. This “single passport” to conduct activities in EU member states is important for UK exports of financial services. Pass porting means that a UK bank can provide services across the EU from its UK home. It also means that a Swiss or an American bank can do the same from a branch or subsidiary established in the UK.

The UK might be able to negotiate some of these privileges after Brexit. Members of the European Economic Area outside the EU enjoy them, but they also have to contribute substantially to the EU budget, accept all EU regulations without a vote on the rules and must allow free labour mobility with the EU. And even for these countries, like Norway who must “pay and obey with no say”, there seem to be greater difficulties in doing business than a full EU member.

Staying in the EU also gives the UK the ability to challenge new regulations in the European Court of Justice, a right that was successfully exercised when the European Central Bank wanted to limit clearing-house activities to the euro area. If the UK leaves the EU, it would lose its leverage in negotiating and challenging future EU regulations.

There are lot of anticipations and final picture will be clear only after the final Brexit .