Mitigating the impact of Brexit: potential FDI policy responses

Brexit poses a risk to UK FDI …

I have previously written about how the responses of 440 investors to EY’s 2018 UK Attractiveness Survey show that there is a significant risk that Brexit could hit Foreign Direct Investment (FDI) flows into the UK. However the survey also reveals that investors are generally waiting to see what happens before making major decisions.

… with investor characteristics driving issues …

Our survey results also provide guidance on the potential appeal of policy responses to investors. Overall, access to the European market, the risk of tariffs on imports and the costs of customs and border delays are the priority issues. Businesses seem to be more confident of their ability to adjust and address any changes in labour supply as a result of changes in the regulation of the free movement of people.

This high-level view masks significant differences however:

• For Asian investors, access to the European market is 50% more important than average and this factor is also the most important for existing UK investors, medium-sized businesses and for financial services, consumer goods and chemical and pharmaceutical companies.
• The cost of imports is a more significant concern for consumer goods, manufacturing, chemical and pharmaceutical and hi-tech businesses and for medium-sized businesses.
• Borders and customs costs matter significantly more to consumer goods and chemicals and pharmaceutical companies than the average, almost 50% more in some cases.
• Labour mobility is very important for all services companies, manufacturers and chemicals and pharmaceutical businesses and medium-sized businesses.

… providing the basis for policy responses.

These insights can help inform both the UK’s negotiating strategy and the potential domestic and trade policy responses to mitigate adverse impacts. The priority areas identified in our research are:

• Identifying the scope to sign trade deals with countries to compensate for any reduced access to the EU – a sector perspective will help inform value assessments of each geographic market. For example, financial and business services companies are likely to see the US as a major source of opportunity.
• The industrial strategy provides a platform to develop responses to mitigate the effects of any import tariffs or disruptions to customs processes on supply chains. Policy initiatives to be assessed include investment in infrastructure at ports and road and rail to speed up goods movements, incentives for reshoring of supply chain activities and support for investment in technology to minimise friction in customs.
• Developing a tailored offer for business and financial services companies who view loss of access to the European market, reduced labour mobility and divergent regulation significantly more negatively than other sectors. These are important sectors for the UK economy and proposals to help them remain competitive, such as incentives for training and support for managing regulatory divergence, will be important.
• Reaching out to ensure new investors understand the opportunities in the UK and the potential support on offer because this group seem the most at risk in the short- to medium-term due to the uncertainty over the UK’s future trading arrangements. Our research has consistently found that business networks are important to new investors as they seek to learn about new environments.

A window of opportunity.

While there are clear short-term challenges, our findings overall should provide some encouragement to UK policy-makers. It is true that investors are concerned but there appears to be a willingness to wait and see. This means that there is still a great deal to play for in respect of FDI. The size of the UK market and the disruption caused by moving assets means that the UK Government has time to design policy to mitigate any adverse effects of Brexit.

While there are clear short-term challenges, our findings overall should provide some encouragement to UK policy-makers.

This work needs to start in parallel with the negotiations on the UK’s future trading relationship. What is striking is the differences in responses by investor type, with nationality, sector and size all shaping impacts. This does confirm the point we have been making for some time that a more targeted FDI strategy for the UK, with a focus on quality not quantity, will be essential in helping maintain and grow UK competitiveness.

View the EY Inward investment after Brexit report

@MarkGregoryEY

Our Economics for Business programme provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.