Will inward investment hit a roadblock with Brexit?

What are the likely effects of Brexit on inward foreign direct investment (FDI), and what can the UK do to keep capital coming?

The complex relationship between inward foreign direct investment (FDI) and employment restructuring may become even more or after Brexit kicks in.

This according to new research from Warwick Business School, which looked at the impact of foreign investment on job loss and job creation.

Inward investors have 40 per cent higher productivity and pay 20 per cent higher wages than the average for UK firms, and it’s associated with both innovation and export performance.

This makes sustaining FDI and attracting further foreign funding crucial for the UK economy post-Brexit.

The report, Job Loss and Job Creation – Pitfalls and Opportunities summarises recent research from the University of Warwick on the likely effects of Brexit on inward foreign direct investment (FDI).

The paper was written by Professor Nigel Driffield from Warwick Business School and Dr Erika Kispeter from the University of Warwick Institute for Employment Research. It finds that compared to other G7 countries, the UK has the highest percentage of inward FDI as a proportion to GDP, at 64 per cent of GDP.

Firms that have come to the UK to sell into the single market from outside, such as Japanese car-makers, seek uncomplicated tariff-free trade with the EU, which may be dampened when the UK and EU face a potentially new trade dynamic.

Investors operating supply chains that cross between the UK and the EU will face challenges if the UK leaves the customs union.

The depreciation in the pound has attracted inward investment in the short term from investment vehicles looking to acquire cheap assets, but recent data suggest this is being choked off.

A post-Brexit FDI strategy should be UK-wide, and be part of a broader economic policy which considers local and regional economies as a whole and supports good-quality job creation.

“Inward investment is of vital importance to the UK economy, not least because of the employment opportunities foreign firms create, often in areas of high unemployment. Foreign firms are also the most productive, and on average, the best paying firms in the UK,” Professor Driffield said.

“What inward investors, and indeed all firms, like is stability and certainty, and what we have at the moment is the opposite.”

According to Driffield, it is important that the UK does not return to the days prior to the single market, when regions effectively competed with each other for foreign investment.

“Nor do we want to see a ‘race to the bottom’ competitiveness in the labour market. It is not enough simply to create jobs – better jobs are needed,” he added.

The Warwick Brexit Briefings on Employment are designed to help policymakers navigate the monumental task of disentangling UK and EU employment regulation, and designing a wholly new UK system.

The first briefing covered migration and skills. Future papers will address unemployment and training, and employment rights. The briefing papers are presented to an invited audience of parliamentarians, employment organisations and other stakeholders in Westminster each week between now and 7 December, and will be free to download from the CREW website.

Praseeda Nair

Kellen Rempel

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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