Hard Brexit could have adverse impact on foreign investment in UK

A hard Brexit, favoured by some members of the current government, could have a significant adverse impact on foreign direct investment (FDI) in the UK, according to new research by Sheffield Hallam University.

Academics in the University’s Business School assessed the different possible outcomes of the Brexit negotiations and the potential impact they would have on FDI in the UK.

The research has been published following a week of key speeches by the Prime Minister and Chancellor.

They looked at four potential scenarios including current models used in Switzerland; the Norwegian model within the European Economic Area (EEA); a Free Trade Agreement (FTA), or the fall-back option of the World Trade Organisation (WTO), which would be the loosest relationship with the EU.

The research concluded that a hard Brexit, the WTO outcome, could lead to 15-20% less FDI into the UK over a 15-year time frame. The negative impact of a softer Brexit, with the EEA outcome, would be in the range of 5-10%, while with a Swiss style or FTA outcome, the negative impact would be in the range of 10-15%.

They also looked at impacts on specific sectors, including the car, technology and financial industries.

The research envisages significant impacts in the car industry, depending on the Brexit outcome, given the integrated supply chains in the sector. Under an FTA outcome, there could also be potential challenges for the UK in terms of different product standards.

A recent study by PwC, referenced in the research, asserted there would also be a negative impact on the financial services industry, with gross value added (GVA) reduced by 5.7% by 2020 under a FTA Brexit outcome, and 9.5% under a WTO outcome.

The research found that a positive impact of Brexit could be some geographical rebalancing of the UK economy, away from London and the south east towards areas such as the Midlands and the North. This is because foreign investments in these latter regions tend to be in order to increase sales in the UK, with such investments potentially less adversely affected by Brexit.

Dr Jeremy Head, lead researcher and principal lecturer in International Business at Sheffield Hallam, said: “The Brexit vote has led to a complex and uncertain situation regarding the future of inward FDI into the UK.

“There are a range of possible outcomes of the negotiations between the UK Government and the EU, which would all have significantly different impacts on FDI in different industries and regions.

“Harder forms of Brexit will have large negative impacts on inward FDI, but even softer forms will have significant impacts in some sectors and some regions.”

The research is an Article in press in Global Business and Economics Review.