Foreign direct investment (FDI) is well known as a driver of economic development and job

creation. FDI enhances efficiency, improves the allocation of capital and is a crucial element
in global value chains. It also promotes competition, trade, creativity and technology
transfer. This is often regarded as a more stable source of international capital flows. FDI
offers a means of creating strong, stable, and long-lasting economic linkages. Thus, FDI is a
type of cross- investment made by a resident in one economy (the direct investor) with the
intention of creating a lasting interest in an enterprise (the direct investment company)
resident in an economy other than that of the direct investors.

Net cross- investment in the EU remained negative in 2016 and with outward FDI higher
than inward investment in the first three quarters of 2017, in line with trends in EU capital
flows. Through extra- mergers and acquisitions (M&A) of European companies, the EU
remained the most focused investment destination globally in 2017. Owing to intra- activity,
cross- M&A continued to increase in the EU in 2017 as opposed to the rest of the world. In
addition, European integration has improved the FDI flows across borders. Different studies
show that the impact of EU integration on FDI inflows estimates high flows from EU
membership that boosted FDI inward. Having hit 61% of its Gross Domestic Product (GDP) in
2017 and rising sharply since 2005 (31%), the UK has a fairly large stock of incoming FDI
within the EU. The UK is looking more appealing to FDI than the EU since 2009 (Figure 1).
The value of other EU countries as sources of investment for the UK is demonstrated by
(Figure 2), which shows the origins of the inward FDI stock in the UK for 2017, when 43% of
the inward FDI stock in the UK originated from the other EU countries. Bruno et al (2016)
found that FDI inflows rose by 28% on average since entering the EU. Similarly, leaving the
EU and the single market is projected to have adverse effects on FDI inflows into the UK. The
UK is a less attractive investment destination if it becomes a dramatically limited trading
partnership with the EU and drop net migration.

Figure 1
Having hit 61% of its Gross Domestic Product (GDP) in 2017 and rising sharply since 2005
(31%), the UK has a fairly large stock of incoming FDI within the EU. The UK is looking more
appealing to FDI than the EU since 2009 (Figure 1). The value of other EU countries as
sources of investment for the UK is demonstrated by (Figure 2), which shows the origins of
the inward FDI stock in the UK for 2017, when 43% of the inward FDI stock in the UK
originated from the other EU countries.

Figure 2

Analysing EU and non- FDI flows via UK in light of the June 2016 referendum vote. No
wonder that FDI flows in the UK were influenced by the Brexit vote at the end of 2016 Q2.
Under principle, for two reasons, the UK may have been a less suitable destination for the
FDI. Firstly, with Brexit, the UK's risk of losing the EU Passport and thus entry to the single
market has increased. Second, with trade barriers expected to grow, which may push
companies to divert FDI to other markets.

Although the inflows in the years leading up to the Brexit referendum averaged more than
EUR 20 billion on a quarterly basis, the four most recent quarters (2017-Q4 to 2018-Q3)
indicate an annual outflow of more than EUR 2 billion. A similar trend appears for UK FDI
flows to EU-27, the quarterly pre- figure averaged outflows of EUR 15 billion, compared with
an average outflow of EUR 3 billion in the four most recent quarters.

However a decline in gross FDI is seen coming into the UK from the major EU economies and
Ireland. By separating the four largest economies of the euro area, Germany, France, Italy
and Spain as shown in (Figure 3).
 Figure 3

Gross FDI flows from these 'Big 4' to the United Kingdom (to the tune of EUR 5.5 billion)
dropped to a considerably lower post-referendum level (EUR 0.5 billion until Q4 2017).
There's a strong rebound to an average of EUR 10 billion in the last three quarters, while the
trend is downward for the EU-27. The referendum result also seems to have influenced
gross FDI flows from the UK to the Big 4. Before and after the referendum they shared EUR 5
billion, and EUR 2 billion.

Trends in Greenfield FDI

In the late 1990s, FDI grew sharply, consisting largely of mergers and acquisitions of
established companies in developing countries (including privatization deals) relative to
Greenfield investment. For the new Central European countries, this form of investment
was significant but the importance of such investment is low compared to the bulk of total
FDI.

Among the various types of FDI (mergers and acquisitions, capital expansion and financial
restructuring), Greenfield FDI is considered to be very favourable and likely to contribute to
the economy of the destination country. It is a form of FDI in which new undertakings are
formed through direct investment. This particular form of FDI could also have an influence
on Brexit.
 Figure 4

Figure 5

A decline in announced Greenfield FDI projects and post-referendum capital expenditure is

seen with respect to European flows to the UK. This is illustrated in (Figures 4 and 5).

This decline in the post-referendum was also visible in the EU and UK data on US Greenfield
FDI. UK's relative share of US Greenfield FDI capital investment in the EU dropped from pre-
referendum (2015) to post-referendum (2017) 32 per cent. Thus, Brexit can be seen as a
warning to the world's major economies, to the degree that countries are increasingly
connected to the global economy, domestic political instability becomes important
internationally.
CONCLUSION

The UK's exit from the EU and the single market would undoubtedly lead to decreased FDI
investment between the EU and the UK. Post-referendum trends in FDI vis-à-vis the UK show
a downturn in gross FDI flows from the four largest EU economies to the UK, as well as a fall
in Greenfield FDI projects announced by EU and US countries. It seems that the United
Kingdom has played a double role: on the one side as a conduit for certain foreign countries
to join European markets; and, on the other, as a platform for reallocating these inflows and
those coming from Euro countries through the euro area itself. This makes it relatively
difficult to project Brexit results. The UK's disconnection from the EU may have more
consequences for foreign direct investment, rather than merely reversing the impact of EU
membership. Larger trade barriers and fewer mobility of capital between the UK and the
Eurozone are likely to have a negative effect on UK FDI investment.