Authors: Swati Dhingra, Gianmarco Ottaviano, Thomas Sampson and John Van Reenen. CEP Brexit Analysis No. 3
Thursday 26 May 2016, by Carlos San Juan
The UK has an FDI stock of over £1 trillion, about half of which is from other members of the European Union (EU). Part of the UK’s attractiveness for foreign investors is that it brings easy access to the EU’s Single Market. After Brexit, higher trade costs with the EU would be likely to depress FDI.
• Our new empirical analysis looks at bilateral FDI flows between 34 OECD countries (including the UK) over the last three decades. Controlling for many other factors, the baseline estimate is that EU membership has raised FDI by about 28%.
• The positive effect of EU membership on FDI is robust, ranging between 14% and 38% under different statistical assumptions. The size of these effects is also consistent with comparisons between UK FDI flows and a set of matched control countries.
• Striking a comprehensive trade deal – for example, joining Switzerland in the European Free Trade Association – would not significantly reduce the negative effects of Brexit on FDI, according to the data.
• Assessing the impact of lower FDI on income is complex. We use existing macroeconomic estimates of how FDI affects growth combined with a very conservative estimate of the impact of Brexit – a 22% fall in FDI over the next decade. We calculate that a Brexit-induced fall in FDI could cause a 3.4% decline in real income – about £2,200 of GDP per household. The income losses due to lower FDI are larger than our estimates of static losses due to lower trade of 1.3% to 2.6%.
• Estimates of the impact of Brexit on the UK’s car industry imply that UK production would fall by 181,000 cars (12%) and prices would rise by 2.5%. Even if the UK manages a comprehensive trade deal and keeps tariffs at zero, production would fall by 36,000 cars.
• The UK’s financial services industry is the largest recipient of FDI. Restrictions on ‘single passport’ privileges following Brexit, would lead to big cuts in activity. Furthermore, the UK would be unable to challenge EU regulations at the European Court of Justice.
See full pap below in downlable pdf