A TENTATIVE EXPLORATION
OF THE EFFECTS OF BREXIT ON
FOREIGN DIRECT INVESTMENT
VIS-À-VIS THE UNITED KINGDOM
Ana de Almeida, Teresa Sastre,
Duncan van Limbergen and Marco Hoeberichts
Documentos Ocasionales
N.º 1913
2019
A TENTATIVE EXPLORATION OF THE EFFECTS OF BREXIT ON FOREIGN
DIRECT INVESTMENT VIS-À-VIS THE UNITED KINGDOM
A TENTATIVE EXPLORATION OF THE EFFECTS OF BREXIT
ON FOREIGN DIRECT INVESTMENT VIS-À-VIS
THE UNITED KINGDOM
Ana de Almeida
BANCO DE PORTUGAL
Teresa Sastre
BANCO DE ESPAÑA
Duncan van Limbergen and Marco Hoeberichts
DE NEDERLANDSCHE BANK
Documentos Ocasionales. N.º 1913
2019
The Occasional Paper Series seeks to disseminate work conducted at the Banco de España, in the
performance of its functions, that may be of general interest.
The opinions and analyses in the Occasional Paper Series are the responsibility of the authors and,
therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.
The Banco de España disseminates its main reports and most of its publications via the Internet on its
website at: http://www.bde.es.
Reproduction for educational and non-commercial purposes is permitted provided that the source is
acknowledged.
© BANCO DE ESPAÑA, Madrid, 2019
ISSN: 1696-2230 (on-line edition)
Abstract
European Union (EU) integration has boosted inward EU foreign direct investment (FDI)
into the United Kingdom (UK). Within the EU, the UK has a relatively signicant stock of
inward FDI, having reached 61% of its Gross Domestic Product (GDP) in 2017 and risen
strongly since 2005. The exit of the UK from the EU and the Single Market will probably
result in reduced FDI amongst both investment destinations. The aim of this study is to look
at the “real-time” effects of the Brexit June 2016 referendum outcome and its aftermath
on UK-related FDI activity. Although FDI ows are notably volatile and biased by periodic
non-systematic outliers, and despite some caveats on data sources and availability of
time series data, we nd tentative evidence of a post-referendum slowdown in gross FDI
ows between the UK and the EU, notably involving the big EU economies and Ireland.
Regarding a very favoured form of FDI, greeneld FDI, we document a post-referendum fall
in announced projects and capital expenditures into the UK by both other EU countries as
well as one of the most important non-EU partners, the United States.
A different approach is also used to analyse the Brexit effect on FDI activity, based on
estimating the effect of two successive stages in the European integration process
– EU membership and the Euro area launch – and considering Brexit effects as the reversal
of the UK integration into the EU. By using a xed-effect gravity model to estimate the
effects of these integration processes on bilateral FDI activity with the UK, the empirical
results suggest that, on the one hand, this country played a role as a gateway for a
set of international investor countries outside the Euro area to enter European markets and,
on the other, it acted as a hub that reallocated these inows and those coming from Euro
countries across the Euro area itself. Thus the disconnection of the UK from the EU may
have further implications for FAI than just reverting the effect of EU membership. Larger
trade barriers and lower integration between the UK and the Euro area countries’ markets
will likely have a negative impact on FDI activity in the UK and might have, in the short run,
a negative effect in the Euro area.
Keywords: foreign direct investment, FDI, Brexit, EU membership, single currency.
JEL classication: F15, F21.