scispace - formally typeset
Open AccessJournal ArticleDOI

BREXIT and Foreign Direct Investment: Key Issues and New Empirical Findings

Paul J. J. Welfens, +1 more
- 24 Apr 2018 - 
- Vol. 6, Iss: 2, pp 46
Reads0
Chats0
TLDR
In this paper, a new look at the gravity equation model in relation to foreign direct investment (FDI) of leading industrialized countries is presented, which presents a useful basis for assessing certain potential impacts arising from BREXIT.
Abstract
This contribution takes a new look at the gravity equation model in relation to foreign direct investment (FDI) of leading industrialized countries which presents a useful basis for assessing certain potential impacts arising from BREXIT—the envisaged leaving of the EU by the United Kingdom. The gravity equation estimated subsequently allows one to consider the case of BREXIT and the broader role of EU membership and other variables. Looking at the period from 1985 to 2012 for a dataset which contains 34 OECD (Organisation for Economic Co-operation and Development) countries, Pseudo Poisson Maximum Likelihood (PPML) dyadic fixed estimations take into account a broad set of approaches and variables. Besides the traditional variables of the EU/EU single-market membership of the source country and of the host country, we further consider the role of trade openness as well as corporate tax rates and the ratio of inward FDI stock to total capital stock. The analysis shows that trade openness is a variable which can be largely replaced by the inward FDI stock/capital stock ratio so that gravity FDI modeling with a strong emphasis on trade openness is likely to overstate the role of trade and to understate the role of relative FDI accumulation effects. The implication for BREXIT analysis is that the UK will face three impulses for FDI inflows: (1) leaving the EU single market will strongly reduce FDI inflows; (2) if foreign ownership in UK capital stock should strongly increase in the run-up to the BREXIT year 2019, part of the dampening effects of leaving the EU will be mitigated by the increase of the FDI stock/capital stock ratio, which in turn is likely to reflect a Froot–Stein effect related to real pound depreciation for 2016–2018; (3) to the extent that the UK government will want to reinforce output growth through higher FDI inflows, a reduction of corporate taxation could generate high effects but could also stimulate a downward international corporate tax reduction game.

read more

Citations
More filters
Journal ArticleDOI

Macroeconomic and health care aspects of the coronavirus epidemic: EU, US and global perspectives

TL;DR: In this article, the authors analyzed the impact of the new coronavirus (COVID-19) epidemic on the global economy and the role of health quality and health insurance coverage for endogenous time horizons and economic welfare.
Posted Content

Does corruption matter for FDI flows in the OECD? A gravity analysis

TL;DR: In this article, the effect of corruption on foreign direct investment (FDI) flows is analyzed using a gravity model with dyadic and time-fixed effects, and it is shown that corruption is positively correlated with FDI inflows in the target country and negatively correlated with inflow in the origin country.
Journal ArticleDOI

The international financial implications of Brexit

TL;DR: The authors analyzes the international monetary and financial implications of the UK's potential exit from the European Union, focusing on the impact on cross-border capital flows, on London's status as an international financial center, on the role of sterling and the euro as international and reserve currencies, and on the roles of UK and EU in the institutions of global governance.
Journal ArticleDOI

Trump’s Trade Policy, BREXIT, Corona Dynamics, EU Crisis and Declining Multilateralism

TL;DR: In this paper, the authors proposed an effective anti-corona pandemic policy would mean to organize a consistent EU-ASEAN cooperation or a G20 cooperation with a later extension to UN Organizations, including the IMF, the World Bank and the WHO.
Journal ArticleDOI

Does corruption matter for FDI flows in the OECD? A gravity analysis

TL;DR: In this paper, the effect of corruption on foreign direct investment (FDI) flows is analyzed using a gravity model with dyadic and time-fixed effects, and it is shown that corruption is positively correlated with FDI inflows in the target country and negatively correlated with inflow in the origin country.
References
More filters
Journal ArticleDOI

The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity

TL;DR: This paper developed a dynamic industry model with heterogeneous firms to analyze the intra-industry effects of international trade and showed how the exposure to trade will induce only the more productive firms to enter the export market (while some less productive firms continue to produce only for the domestic market).
Posted Content

Gravity with Gravitas: A Solution to the Border Puzzle

TL;DR: This article showed that the gravity model usually estimated does not correspond to the theory behind it and showed that national borders reduce trade between the US and Canada by about 44% while reducing trade among other industrialized countries by about 30%.
Posted Content

The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity

TL;DR: In this paper, a dynamic industry model with heterogeneous firms is proposed to explain why international trade induces reallocations of resources among firms in an industry and contributes to a welfare gain.
Journal ArticleDOI

Gravity with Gravitas: A Solution to the Border Puzzle

TL;DR: In this article, a method that consistently and efficiently estimates a theoretical gravity equation and correctly calculates the comparative statics of trade frictions was developed to solve the famous McCallum border puzzle.
Journal ArticleDOI

The Log of Gravity

TL;DR: In this paper, the gravity equation for trade was used to provide new estimates of this equation, and significant differences between the estimated estimator and those obtained with the traditional method were found.
Related Papers (5)