UK is significant recipient of foreign investment
Within the EU, the UK has a relatively significant stock of inward FDI, which reached 61% of gross domestic product (GDP) in 2017. Of its inward FDI, 43% originated from the other EU Member States, with North America ranking second, at 27%.
Brexit effect makes UK less attractive FDI destination
FDI flows are notoriously volatile, meaning that a few quarters worth of figures provide no conclusive evidence of the impact of the impending Brexit. Nonetheless, we found it worthwhile to study post-referendum FDI flows into and from the UK.
With Brexit on the cards, the UK may become a less attractive destination for foreign investment, for two reasons. First, the UK could lose access to the EU's single market. Second, as UK-EU trade barriers are likely to emerge, its participation in value chains will become less straightforward.
As Figure 1 illustrates, FDI flows between the EU27 and the UK were below pre-referendum levels in the most recent quarters analysed. Whereas the UK's FDI inflow averaged well over EUR 20 billion per quarter before the referendum, the four most recent quarters (2017-Q4 to 2018-Q3) show average outflows of more than EUR 2 billion per quarter. A similar pattern emerges for the UK's FDI flows to the EU27: the pre-referendum quarterly figure averaged EUR 15 billion in inflows, against average outflows of EUR 3 billion in the four most recent quarters analysed.
Figure 1. FDI flows between EU27 and UK, four-quarter moving averages, 2008-2018-Q3