The following contributions and excerpts highlight the range of views on the Brexit vote among experts in corporate location consulting and FDI.
The reactions to the United Kingdom’s “Brexit” referendum have tended toward the extreme, ranging from jubilation at the UK’s “independence” to pessimism and despondency about the country’s self-imposed isolation. Views on the implications of Brexit for the UK’s status as one of the world’s leading destinations for foreign direct investment (FDI) have reflected these extremes. Will the UK lose its appeal and suffer an exodus of foreign investors? Or will the UK emerge from the European Union with renewed vigor, offering an even more attractive option to companies seeking a European base?
Under the first, negative, scenario, many companies that are currently using the UK as a base for supplying products or services to the European Union will relocate their operations to the European mainland. The UK will no longer be considered as a location for new investments to serve the European market. Companies that currently operate European headquarters in London or other UK cities will find themselves hampered by restrictions on immigration and will move to the continent.
The same applies to companies that are developing pharmaceuticals or other products subject to European Union regulatory approval. The winners in this situation would most likely be Ireland and major European cities that can compete with London as centers of economic activity. Other European locations are not standing idly by, and a number have already started contacting UK-based companies to position themselves as alternatives.
The second, more positive, scenario, sees the UK develop into a kind of “Switzerland on steroids,” with low taxes, business friendly regulations, a network of bilateral free trade agreements and a vibrant domestic market serving as an attractive alternative to the economically stagnant and over-regulated European Union. This is certainly the scenario envisaged by the UK government, or at least the one it is presenting publicly to reassure businesses and voters.
The truth is likely to lie somewhere between these two extremes. Some companies will no doubt close operations and move these to the mainland. However, the UK will still remain an attractive place for investors in a range of sectors. The recent speech by Siemens’ Chief Executive Joe Kaeser at the House of Commons reflects this outcome. Speaking about the company’s plans to build a new wind-energy equipment factory in Hull, Kaeser said, “The Hull investment is not in trouble at all. It was built for the projects we have and for those we anticipate getting.” However, the planned future expansion of the plant to serve Germany, Denmark and other EU countries would no longer be viable without free access to the European market.
To a large degree, the future of FDI in the UK will depend on the outcome of the UK’s negotiations with the EU regarding the post-Brexit movement of goods, people and ideas. Those negotiations have not even begun, as both parties recover from the shock of the referendum outcome. For the time being, uncertainty reigns. And uncertainty is the enemy of business.
— Andreas Dressler is managing director of Conway Advisory, based in Berlin.
Shock and Aftershocks
The last quarter century of the UK’s membership has been a good period for foreign investment into my native city of Glasgow, Scotland. With Britain’s vote to leave the EU that happy period is likely to come to an abrupt end.
I’ve been away from Scotland for over 30 years, but keep in touch with my homeland, particularly its economic performance. In my childhood, Glasgow was one of the world’s greatest industrial cities. In the ‘70s and ‘80s it went into the sort of sharp decline familiar to industry watchers from Baltimore to Bremen. Since then, Glasgow has reinvented itself as a hub for high technology R&D, world class retail, hospitality and business, outstanding universities and financial services and as a globally ranked center for culture and the Arts. Indeed, the city’s renaissance is often seen as dating from the Award of European City of Culture in 1990.
The City of Culture awards is a program of the European Union, one of many economic stimulus initiatives that will now be closed to UK cities.
Glasgow benefited hugely from the EU and now much of that progress is under threat, most obviously in financial services. Quitting the EU may mean that UK-based finance concerns will lose their automatic right to sell their products into the remaining 26 EU countries. This is known as “passporting,” and is part of the Single European Market that is free of tariffs and gives guaranteed legal protections to allow free competition across the continent.
But entry to the market comes with the condition that there will be free movement of labor across the EU. That means that every EU citizen is entitled in law to live and work in any other member nation.
The perception of uncontrollable immigration has become the biggest political issue in Europe and led to the historic UK vote to leave the Union (legal EU immigration is frequently confused with refugees and asylum seekers fleeing war). The British government will now come under huge pressure from business to retain the Single Market and at least as much pressure from those who voted to leave the EU to stop immigration. Managing these competing pressures will require the wisdom of Solomon, the oratorical skills of a Churchill or Lincoln and statesmanship of an order of the greatest rarity.
The consequences of the vote to leave the EU were not slow to come to pass. Already some of the biggest names in finance in London have said jobs will be moved to Dublin or Paris and FDI plans by companies considering a UK investment are said to be revising all their plans. The UK has been consistently the biggest winner in the EU at drawing foreign investment. It is likely that all plans will be on hold until it is clear what comes out of the exit negotiations the EU will now have with Britain. It will take at least two years for all to be known.
The devolved government in Scotland says it is preparing for another referendum calling for Scotland to split from the United Kingdom and remain in the EU. Every referendum counting area in Scotland voted by a handsome margin to stay in the EU. Northern Ireland too voted to remain, and its republican politicians now call for a special arrangement to keep it in the EU and, later, to hold a referendum on reuniting Northern Ireland with the Republic of Ireland.
I perhaps feel the shock of the EU vote in Britain more than many. I am a lifelong supporter of the ideal of European unity. It has been, in my view, the greatest and most successful political union since the creation of the USA. I worked many long hours to try and convince my fellow Britons to vote to stay in the EU.
We in Europe have in the 70 years since the devastation of World War II enjoyed the longest continuous period of peace the continent has known in 400 years. The majority of people enjoy some of the world’s highest living standards. Countries formerly under the iron grip of Russian Communism have joined the EU to cement their new democracies.
For the UK to turn its back on the EU is a decision many who voted to leave are already regretting. We will never again see England as a full member of the EU, and the chances now of Scotland voting to leave the UK are higher than ever.
We need to urgently win back the confidence of markets and inward investors. Every day lost is a day when a mobile investor will look elsewhere for calmer waters and at countries with less confused and confusing politics and economics.
Glasgow had a record year in 2015 for financial services inward investment. Until the earthquake caused by the EU vote subsides and the future is clearer, Glasgow and the entire UK are unlikely to see much in the way of new international investment. Our politicians have politicked long enough. Now they need to get on with the job of keeping the UK the world’s fifth largest economy.
My job now, and that of my colleagues, is to give our clients the best possible advice on how the fallout from the UK’s decision will change Britain and change Europe, and what those changes may mean for their businesses.
— Martin Roche has advised governments worldwide on inward investment marketing, place marketing and economic development communications. He is a partner at geopolitical consultancy Etoile Partners.
I want to invest now, so what should I do?
Most experts, including those on these pages, rightly conclude that it’s too early to say what the long-term effects of Brexit will be. But if you are a North American corporate in the middle of an expansion plan to Europe, and are not prepared to wait two years or whatever it may be, you want to make an informed decision now. So, as an international site selector, what can we say now about the UK’s attractiveness?
Why Choose the UK?
Market Size: Whatever the long-term impact of Brexit, the UK will remain a major market of opportunity, particularly in certain sectors such as financial services. This means that multinational firms still have a strong business case for locating there, even if only to gain UK market access, and can consider the EU opportunity separately.
Language and Culture: For most US firms, the UK is an easy choice. There is no real language barrier, less of a cultural barrier, and therefore the perceived risk of your investment is lower than most other EU countries. This advantage is not going to change.
Cheaper Exports: Who can say how long this will last, but currently, with sterling having significantly fallen, UK exports are cheaper. As a manufacturing firm invested in the UK, this is a clear advantage.
Incentives: EU law dictates that financial incentives are available to less wealthy regions of the bloc, with different maximum ceiling levels depending on the region’s GDP. This means that the most recent accession countries tend to have the greater access to incentives for attracting investors. Therefore, in the UK, many communities in the country are not able to provide incentives, and certainly not to the same level as elsewhere. There is a good chance that some of these communities may well have greater freedom to provide incentives once Brexit is complete, hence they will become a key competitive factor, in the same way they are in the US. While there will be no immediate change, the process of implementing an investment does take time, even for a firm that selects the UK today.
Regulation: It is likely that Brexit will see a reduction in regulation — Indian manufacturer Mahindra is one example of a firm that believes the change could be beneficial.
Stability: Over time, it is arguable that a single country which is able to set its own path is a more stable investor proposition than a bloc where, if one country catches a cold, everyone suffers (see Greece). Hence an investment to the UK is only betting on the circumstances of one country, rather than that of 27 heterogeneous countries.
Why Choose the EU?
Single Market: The big reason has to be that an investment in one EU country is an investment in all 27, as most North American firms will use a European base as a springboard for exporting across the bloc. The Brexit negotiations will decide the UK’s specific access, but it’s hard to see that there will not be restrictions. Particularly as a manufacturer, the argument for the EU becomes compelling.
Skilled Workforce: A major deciding factor on Brexit was reducing immigration. While this may not affect existing workers, it is likely that access to a pipeline of skilled (and unskilled) staff in the UK will be affected.
Irish Competition: The argument of UK language and culture is weak, given Ireland will still be part of the EU. The country is already highly successful in attracting US firms, and IDA Ireland, the national economic development organization, has signified the major opportunity it now sees ahead for its own attraction efforts.
Profit Repatriation: While UK exports are now cheaper, the other side of exchange rate volatility is that profits repatriated back to North America are now reduced.
— Joe Phillips is managing director of consultancy All Out Location.
FDI Impact
The UK has outperformed all the major economies of Europe, with the UK attracting nearly 40 percent of greenfield capital investment in the EU by foreign investors and one-quarter of all greenfield FDI projects in the European Union (EU) in 2015.
The UK’s EU market share of FDI is highest knowledge-based services industries. The UK has captured over one-quarter of greenfield FDI in the EU in Creative Industries, Financial Service, Professional Services, and ICT & Electronics. The Centre for European Performance expects that FDI in the UK will decline by 22 percent due to Brexit.
FDI primarily serving the UK domestic market, such as FDI in energy, construction, retail, and transportation sectors, will be least impacted by Brexit, while FDI in operations serving the EU market, including HQs, R&D and outsourcing, is likely to be most impacted.
The impact of Brexit will depend on the UK’s new agreement with the EU: If the UK joins the single market with its four freedoms, we expect the long-term impact of Brexit on FDI into the UK to be minimal given the UK’s underlying competitive strengths and attractiveness for FDI.
If the UK establishes a free trade agreement with the EU, we expect that up to 40 percent of job creation being considered by foreign investors in the UK will be at medium to high risk due primarily to removal of the freedom for EU nationals to work in the UK, which will severely impact the attractiveness of the UK for strategic knowledge-based operations.
— Excerpted from the executive summary of a report by Dr. Henry Loewendahl, CEO of global FDI consulting firm WAVTEQ Limited