100 days since Brexit: The UK’s self-inflicted wound
After several years of increasing FDI, Brexit has caused inbound investment to dip in the UK. Will the country's advanced Covid-19 vaccine roll-out give it an advantage that will bring back the investors?
Since the financial crisis in 2008, global foreign direct investment (FDI) has been volatile. The UK witnessed a decline in inbound investment projects from 2008–09 to 2011–12. From 2011–12, the UK had been on an upward trajectory until 2016–17, growing at a compound average annual growth rate of 8.3% a year. The Brexit referendum result, announced in June 2016, coincided with inward investment peaking. An immediate impact was not felt because companies needed time to prepare for what to do next. A new FDI project typically takes between 18 and 24 months to complete so it was always going to take some time for the impact to be felt. Additionally, the vote to leave came as a surprise to many.
In 2017–18, the number of FDI projects coming into the UK fell by 9.3%, and in 2018–19 it fell again by a further 16.3%. However, in 2019–20 there was a small rebound (up 3.8%). This could be attributed to companies wanting to retain some form of presence in the UK after Brexit, which was officially announced at the end of 2020.
Although project numbers of all three FDI types – new investment, expansions and mergers and acquisitions (M&A) – have fallen in the UK since the Brexit vote, the largest impact has been seen in expansions. Since 2016–17, the number of foreign companies expanding their UK operations has declined significantly. In 2019–20, only 504 expansion projects were recorded, compared with 822 in 2016–17, a 38.6% decline. Companies were understandably cautious regarding expanding in a market that had so many unanswered questions at the time and looked to explore other markets. European companies showed a particular reluctance to expand in the UK given that the terms of the exit agreement were unknown until December 2020.
Although new investments dipped in both 2017–18 and 2018–19, they did grow by 10.2% in 2019–20. This is potentially due to foreign companies wanting a domestic presence in the UK post-Brexit.
M&A was the least impacted area. Although the trend line for M&A deals is relatively flat, the initial Brexit shock was certainly felt as M&A deals declined by 15.1% in 2017–18. However, deal numbers increased by 7% and 1% in 2018–19 and 2019–20, respectively.
Less FDI received from some key source markets
Between 2017–18 and 2018–19, job creation from FDI into the UK declined by almost one quarter. This was due to two primary reasons – less FDI projects from key source markets and a more global trend of declining project sizes due to, in part, technological advancements.
The UK has also seen falling project numbers and job creation from key source markets, in particular those in North America (the US and Canada) and Asia (China, Hong Kong and Japan). France has also showed declining investments in terms of both projects and jobs.
The UK also found it more difficult to safeguard jobs as foreign companies looked to move operations out of the country. The falling trend of both new and safe jobs was already apparent pre-Brexit, but Brexit certainly amplified the slump.
Brexit has had a varying impact on UK regions
Scotland, the East of England and the South West have had the largest sustained decline in FDI project numbers since the Brexit vote. Scottish inbound projects spiked to 183 in 2016–17, only to fall in each of the following years, bottoming at 121 in 2019–20. Likewise, the East of England has seen its lowest number of inbound projects in this five-year period in 2019–20 (79), while projects in the South West totalled 70 in 2019–20, falling from 101 in 2016–17.
FDI projects into London, the UK’s leading region for inbound FDI by some margin, fell by 16.9% in 2017–18 and then by a further 15.3% in 2018–19. The UK capital recovered marginally in 2019–20, growing by 1.8%.
Wales witnessed the largest negative impact in 2017–18, with project numbers falling by one-third. Even with its upturn in 2019–20 (to 62 projects), levels are far below pre-Brexit years.
The least-impacted regions appear to be the North West and Northern Ireland. FDI projects dipped slightly in the North West in 2017–18 to 139; however, they increased to 142 in 2018–19 and then to a five-year peak of 154 in 2019–20. Similarly, Northern Ireland attracted its highest number of projects (40) in 2019–20.
In comparing 2019–20 project numbers with pre-Brexit years, arguably the north of England has been minimally impacted, with project numbers in or around the same levels before the Brexit result. One reason for this may be the north being more manufacturing orientated (which means facilities and jobs are harder to move) compared with the south, which has a more serviced-based offering (where projects are easier to move). Many financial service companies quickly relocated to other EU countries upon hearing the Brexit result.
Most sectors have been negatively impacted
Of the 16 sectors for which the Department for International Trade provides an FDI breakdown, 13 had a lower number of projects in 2019–20 compared with 2016–17. Only chemicals, aerospace, and advanced engineering and supply chains had higher volumes of projects. Several sectors had significant declines of more than one-third, such as renewable energy (-57.5%) and electronics and communications (-41.7%).
When looking at job creation, only four sectors had a higher number of jobs being created through FDI in 2019–20 than they did in 2016–17: extraction (248.9%, from a low base in 2016–17), electronics and communications (61.2%), wholesale (11.9%), and food and drink (+2.8%).
Interestingly for electronics and communications, it had one of the largest declines in projects yet one of the largest increases in job creation, signifying some large-scale investments in 2019–20.
Can the UK recover from its slump?
The results for 2019–20 showed an upturn in FDI project numbers for the UK, albeit to a lower level than pre-Brexit times. However, with global FDI falling by 42% in 2020 due to Covid-19, the UK, like many other countries, faces the difficult task of reopening its economy and getting back to normal.
The Department for International Trade is expected to release its 2020–21 FDI figures for the UK in June or July. They are expected to show a significant decline in project numbers and jobs. Furthermore, ongoing Brexit negotiations such as those settling the final deal for data and financial services with the EU will be extremely important for key UK sectors. Trade deals with other countries are also important for the UK’s FDI capacity.
The UK has the skill set to benefit from the continuing emergence of several sectors, particularly those in tech and renewable energy. It is also an industry leader in others, such as financial services. On top of this, the UK should be able to capitalise on its accelerated Covid-19 vaccine roll-out and reopen quicker than other countries. If a business-friendly environment can be presented to investors, there is no reason why the country’s fortunes cannot take a turn for the better in 2022.
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