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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 204 July 17, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
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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,[1] Laza Kekic suggested that UK inward investment will remain robust post Brexit. We beg to differ.
Japanese inward investors, backed by the Japanese government, have been keen to stress that future investment in the UK depends on tariff-free and barrier-free trade with the EU that is as uncomplicated and predictable as possible. A Japanese government memorandum has expressed concerns over the continued viability of Japanese investment in the UK in the event of a hard Brexit without access to the Single Market. Nissan has also commented that it will review its decision to build the next generation of the Qashqai model in the UK when the form of Brexit is clearer. Meanwhile, Toyota’s recent investment announcement only follows through on a decision to build the next generation Auris and Avensis that was made well before the Brexit vote last year. Those that are household names (such as Nissan and Toyota) are lobbying hard to cut special deals with the government.
When the Single Market was created, many commentators speculated that intra-EU FDI would plummet. This turned out to be far from the case, as firms took advantage of the opportunities to coordinate resources across countries, and location advantage dominated issues relating, for example, to 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.
Finally, we have already seen a big devaluation in sterling. On the one hand, this makes domestic assets cheaper for foreign investors, and there has been some investment into the UK on the back of this. On the other hand, devaluation lowers the expected returns from UK investment when translated into the home country’s currency. An analysis of 50 years of time-series data for UK inward investment suggests that in (typically brief) periods of uncertainty, a depreciated sterling offers a temporary, albeit positive, effect on FDI.[2] But when the economy returns to being stable once again (the much more common state, at least over the past half century), the effect is not only annulled, but becomes both reversed and persistent. In other words, a weaker currency will eventually lead concerns over lower future returns to dominate strategic thinking. This, in turn, will inevitably drive investment elsewhere.
Nevertheless, there are some big projects that will take place in the UK irrespective of Brexit—the HS2 train line or Hinckley Point Power Station are examples. Foreign investors will be attracted by such activity. Still, they are not bringing new business as such activity is proceeding independent of Brexit.
More realistically, locations need to consider the nature of their value proposition to inward investors, backed up by land availability, which possibly involves some difficult decisions regarding opening greenbelt land. Part of this proposition needs to involve building more robust supply chains to support inward investors; addressing skill shortages in overheated labor markets; and working with firms and universities such that they become anchors for both foreign and domestic investment. Some of these will require a more activist industrial policy in terms of, say, rebuilding supply chains in the UK and encouraging “reshoring.” It is possible that UK regions may be able to be more proactive in attracting inward investment—although one hopes that this does not herald a return to the excessive subsidies that were paid in the 1990s.
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-1992 regarding 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.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** David Bailey ([log in to unmask]) is a professor of Industrial Strategy at Aston Business School, Aston University; Nigel Driffield ([log in to unmask]) is a professor of International Business at Warwick Business School and Deputy Pro Vice Chancellor, Warwick University; and Michail Karoglou ([log in to unmask]) is a senior lecturer in economics at Aston Business School, Aston University. The authors are grateful to Andrew Hilton, Henry Loewendahl and Sarianna Lundan for their helpful peer reviews.
[1] Laza Kekic, “FDI to the UK will remain robust post-Brexit,” Columbia FDI Perspectives, No. 195, March 13, 2017.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “David Bailey, Nigel Driffield and Michail Karoglou, ‘Inward investment will fall in the UK, post Brexit’, Columbia FDI Perspectives, No. 204, July 17, 2017. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Matthew Schroth, [log in to unmask].
- No. 203, Karl P. Sauvant, “A new challenge for emerging markets: the need to develop an outward FDI policy,” July 3, 2017.
- No. 202, Felipe Hees and Pedro Mendonça Cavalcante, “Focusing on investment facilitation - is it that difficult?”, June 19, 2017.
- No. 201, Gabrielle Kaufmann-Kohler and Michele Potestà, “Challenges on the road toward a multilateral investment court,” June 5, 2017.
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On September 20, 2017, CCSI and the UN Sustainable Development Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs, Special Adviser to the UN Secretary-General on the SDGs, and Laurent Fabius, President of the Constitutional Council of the French Republic, will host a one-day conference to present and discuss the blueprint for a Global Pact for the Environment. Coinciding with the 72nd Session of the UN General Assembly, this Conference will offer a high-level opportunity to explore the complex legal and political challenges of the Global Pact in light of existing agreements and soft law principles on the environment, and the current global political scene. The event is free and open to the public, but advance registration here is required. For more information, please visit our website here. Delivering a message to government and business leaders at the Paris launch of the Global Pact for the Environment on June 24, 2017, Prof. Jeffrey Sachs affirmed the critical importance of the Global Pact for the Environment to put the protection of the environment on a rigorous, sound, clear and universal legal basis. View the video here.
- On May 16, 2017, The New Frontiers of Sovereign Investment was published by Columbia University Press. Edited by CCSI Fellow Malan Rietveld and CCSI Head of Extractive Industries Perrine Toledano, the volume combines the insights and experience of academic economists and practitioners from several sovereign wealth funds (SWF) to survey a diverse financial landscape and to establish the challenging topical questions facing a broad range of SWFs today: Should they serve both economic development and financial returns—and how? Will responsible investment will enhance long-term returns? How can fiscal rules for SWFs be improved to meet emerging economic challenges? The book considers these questions as they apply to both long-established and newer SWFs. Featuring contributions from sovereign wealth practitioners from Alberta’s AIMCo, the Nigerian Sovereign Investment Authority and the New Zealand Superannuation Fund, as well as analysis by scholars at the forefront of sovereign investment, this volume provides timely and much-needed information on these rapidly evolving institutions.
- In April 2017, CCSI launched a series of short videos from the authors of Rethinking Investment Incentives: Trends and Policy Options (published by Columbia University Press in July 2016), summarizing the important messages from each chapter. New videos are posted weekly. The use of incentives to attract investment is connected to and impacts the most pressing challenges facing us today, including climate change, corruption, conditions/availability of employment, harmful competition, and inefficient public spending. How, when, where, and why governments use incentives to attract, keep and influence investment is therefore critically important to whether and how society benefits from investments and to other public policy decisions and trade-offs. It is increasingly apparent, however, that the use of incentives is not well understood—including by the policy makers who use them—which necessitates a closer look and, in many cases, a policy response.
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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