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 speech by Siemens’ Chief Executive Joe Kaeser at the House of Commons this week 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 European Union 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. He has advised in the field of FDI for 18 years. Visit www.conwayadvisory.com.