The document analyzes the potential impact of Brexit on foreign direct investment (FDI) in the United Kingdom. It examines several market-seeking factors that influence FDI, such as market size, openness, labor costs and productivity, infrastructure, taxation, and compares the pre-Brexit and post-Brexit scenarios. While factors like openness and taxation may be mitigated, Brexit will likely negatively impact the UK's market size, labor costs and productivity, and infrastructure financing, reducing FDI inflows. The overall impact on FDI will depend on how the UK addresses these challenges in areas beyond its direct control compared to remaining in the EU single market.

1. Ketan Vira , Associate Professor - GNVS Institute of Management,
Mumbai.
Impact of Brexit on Foreign Direct
Investment in United Kingdom

2. Introduction
The United Kingdom leaving European Union or its exit
from EU is Brexit. The Brexit referendum was such first
ever global development.
The United Kingdom has an FDI stock of over £ 1
trillion, about half of which is from members of EU. Part
of the UK’s attractiveness for foreign investor is that
EU’s single market.
After Brexit, higher trade costs with EU would be likely
to depress FDI

3. .
Introduction
Study on the bilateral FDI flows between 34 OECD
countries (including EU) over last 30 years. Controlling
for many other factors, the baseline estimated 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 set of matched control countries

4. Introduction
Assessing the impact of lower FDI on income is complex.
Using the 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.
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%.

5. Introduction
FDI in the UK from the EU comes disproportionately
from a small number of host countries, including
France, Germany, Spain and Ireland, although the
picture is distorted by FDI routed through a third
countries, such as the Netherlands and Luxembourg.
The EU share of FDI is much higher in the energy,
retail and wholesale trade, transportation and
manufacturing sectors than it is in financial and
professional services.

6. Literature Review
Global Counsel (2015) studies the attractiveness of the UK as a gateway to Europe and analyses
the reduction in investment from the rest of the EU. The study highlights the impact of Brexit on
investment prospects using parameters like FDI in the UK, ability to attract investment from EU,
UK’s international competitiveness, investment intentions and ability to attract investment from
outside EU.
Capital Economics Ltd (2015) report looks at the likely impact of Brexit on foreign direct
investment into the United Kingdom. First it outlines the scale of investment into Britain from
the European Union. Second, it explore the probable legal and regulatory environment for
foreign investment following Brexit and its impact on flows of foreign direct investment .
Erdal Demirhan (2008) in its study have highlighted the determinants of FDI flows to
developing countries and has identified the factors which are more market seeking like market
size, openness, labour cost and productivity, infrastructure, growth and tax. Study helps to relate
these factors in terms of pre and post Brexit

7. Objectives of the Study
• To identify and analyze the market seeking factor
that will have impact on UK FDI flows due to Brexit.
• To develop the framework comparing the scenario
on impact of the factors pre and post Brexit

8. Analysis
Market Seeking Factors
Source: Prepared
Factors Focus Impact on UK Justification
Market Size GDP The CEP at LSE estimates that
the GDP will reduce by at
least 2.2% in its optimistic
scenario and between 6.3% to
9.5% in its pessimistic one
UK will continue its trade with
EU countries by joining
European Free Trade
Association. UK is under a
fifth of the economic size of
the EU Single Market it
`Would have less bargaining
power in trade negotiations
than the EU does. And being
outside the EU would mean it
no longer automatically
accessed the benefits from the
EU’s trade deals, such as the
current ones being negotiated
with the US and Japan worth
around 0.6% of GDP

9. Analysis
Market Seeking Factors
Source: Prepared
Factors Focus Impact on UK Justification
Openness Openness is
measured mostly
by the ratio of
exports plus
imports to GDP, in
determining FDI,
as well
Open Europe estimates that, if
the United Kingdom embraced
protectionism in the wake of a
Brexit, this could cost 2.2% of
GDP by 2030. By contrast, if
it followed a path of economic
openness, Britain could
outperform the European
Union. In that case, Brexit
could add at least 1.6% to
national income by 2030
The UK accounts for just one
sixth of the EU economy.
One-tenth of EU exports are to
the UK, whereas half of UK
exports are to the EU.
However, the imbalance in the
trade relationship is such that
the UK is an important source
of demand for the rest of the
EU

10. Analysis
Market Seeking Factors
Source: Prepared
Factors Focus Impact on UK Justification
Labour Cost
and
Productivity
Wage Rate, Migration
and Productivity due to
changes in labour force
Net migration from European
Union countries would almost
certainly fall if Britain was outside
the single market, reducing the
growth rate of the British labour
force (though the extent of the fall
would obviously depend on the
new arrangements put in place).
This may lead to upward
pressure on wages and inflation,
benefiting some workers but to the
detriment of some employers.
UK’s new relationship with the
EU leads to a contraction in the
labour force. Post-Brexit, they are
likely to find it difficult to attract
talented continental Europeans as
employees, since immigration
rules will inevitably tighten
compared with the current system
of free movement of labour. The
combined impact of restrictions on
migration and the likely relocation
of firms (particularly in the
services sector) would mean that
the UK’s labour force would
decline in 2019,
exacerbating existing problems
with weak productivity

11. Analysis
Market Seeking Factors
Source: Prepared
Factors Focus Impact on UK Justification
Infrastructure FDI in Infrastructure Financing of electricity
infrastructure may become
more costly in the event of
Brexit owing to the level of
investor uncertainty
concerning the prospective
new terms of the UK-EU
relationship
A post-Brexit scenario that
affects the UK’s ability to
attract investment in energy
infrastructure will complicate
the linkage with the European
internal energy market and
reduce the UK’s influence in
the formulation of European
energy regulations. This could
make it more problematic for
the UK to realize its goals of
maintaining a reliable and
affordable energy supply.

12. Analysis
Market Seeking Factors
Source: Prepared
Factors Focus Impact on UK Justification
Taxation Tax Structure Half of all European headquarters
of non-EU firms are in the UK,
with the UK hosting more HQs
than Germany, France,
Switzerland and the Netherlands
put together.
This could become harder
following Brexit given the
favourable tax treatment available
to member states through the
Parent-Subsidiary Directive. The
UK would either need to negotiate
third-country treatment under the
directive or a series of new double
taxation agreements with member
states. That would take a
considerable amount of time
The UK would almost certainly
seek ways to restore the
competitiveness of the FDI offer.
The UK might attempt to
‘undercut’ the EU further on social
regulation and taxation

13. Analysis
Pre- Brexit and Post- Brexit Impact
Source: Prepared
Pre- Brexit Factor Post Brexit
Single Market Market Size EFTA
High Openness Reduction on account of
Exports
Moderate Labour Cost and
Productivity
Labour Cost may increase
due to decline in labour
force further resulting into
decline in productivity
FDI Inflows Infrastructure Dependence will increase
Standard Taxation UK may reduce to continue
attracting investment.

14. Findings & Conclusion
The overall impact on FDI flows considering the market
seeking factors will be due to infrastructure and labour cost
as it is beyond the control of UK.
Whereas other factor of Openness can taken care by
increasing the trade with non EU countries.
Taxation will not have much impact as UK has scope of
doing Ireland way by reducing the taxes and finally the
market size can be taken care of as UK will trade with EU
being the member of EFTA.
The study can be taken forward by using hard data and
treating it with statistical tools to understand the exact result.

15. References
Erdal & Masca (2008). Determinants of FDI flows to developing countries: A
Cross Sectional Analysis.Prague Economic Paper, pp.356-369.
www.globalcounsel.co.uk/sites/default/files/specialreports/downloads/Global
%20Counsel_Impac_of_Brexit.pdf (retrieved on 26.12.16)
http://cep.lse.ac.uk/pubs/download/brexit02.pdf
https://woodfordfunds.com/economic-impact-brexit-report/
http://www.eiu.com/public/topical_report.aspx?campaignid=Brexit

16. Thank You