The global political, economic and investment landscape has entered an exceptional period of transition. In the US, President Donald Trump has promised to recast US policies in ways likely to have profound effects both on the US economy and upon investment flows in the US and worldwide.
Our first step, however, is to look at the impact of the UK's historic decision to leave the European Union upon the European investment landscape within this backdrop of continent wide change. On 23 June 2016, the citizens of the UK voted by 51.9% to 48.1% for their country to leave the European Union (EU).
Michel Barnier, the Chief Negotiator appointed by the European Commission to handle the process, has said that a deal must be struck by October 2018. The transition will coincide with wider changes in the political landscape as President Donald Trump begins to recast US policies.
Implementing Brexit will be extraordinarily complex. Theresa May, the UK Prime Minister, said she hopes to retain partial membership of the customs union, backed by a free trade agreement (FTA) with the EU. But continuing full membership of the single market was not an option. The UK Government wishes to balance the needs of the UK economy with the desire for control of borders and laws expressed by its citizens.
EU leaders are clear and consistent that membership of the single market is incompatible with restrictions on the free movement of their citizens. Business leaders must start preparing their analyses and plans for life after Brexit. To help them in this process, EY commissioned a survey to investigate what impact the referendum and resulting uncertainties are having upon foreign direct investors and their European ambitions.
Foreign direct investment (FDI) is vital to the economic well-being of the UK and the rest of Europe. The impact of Brexit on investment mobility and location is therefore a critical issue for companies and policymakers. Last year, foreign investors made 5,083 decisions to set up or expand operations in Europe, building or renewing productive assets and creating 217,666 jobs.
Historically, the UK has been Europe's top FDI destination. According to our calculations, the UK secured a record 1,065 FDI projects in 2015 (20.9% of the European total), which created over 40,000 jobs in the country in that year.
There appears to be a growing likelihood that companies located in the UK will lose seamless access to the single market. And it also appears likely that some companies — and not just those in the financial services sector — will reshape, transfer, downsize or transform some of their operations both in the UK and sometimes, in consequence, elsewhere in Europe. However, some business leaders have already said that the current context will not change their plans to invest in the UK.
How we designed the research
- We interviewed 254 senior business executives representing firms with foreign investments in Europe.
- The survey covers the 28 states of the European Union (EU28), and their neighbors.
- We interviewed more than 50 EY professionals who together have in-depth knowledge of many sectors, competencies and geographies.
The lines of Europe’s foreign direct investment map are starting to shift
Heightened geographic and political risks across Europe and the UK are prompting 1 in 10 companies with a presence in Europe to review their geographical footprint. However, the survey finds that the UK’s EU referendum result is a far bigger concern for foreign companies established in the UK (33%), compared with those that are not (15%). Companies not established in the UK cite geopolitical and wider EU instability (31%), coupled with the slowdown in trade flows (30%) as more urgent concerns.
Fourteen percent of foreign investors with a presence in the UK plan to change or relocate some of their European operations in the next three years should the UK leave the European single market. Overall, 11% plan to modify their UK presence in Europe following Brexit. Germany was identified as the preferred destination for those investors moving out of the UK (54%), followed by the Netherlands (33%) and France (8%).
Brexit impact on financial services, technology and mid-sized companies
Financial services (FS) companies are the least optimistic about their growth prospects in Europe over the next three years: only 12% anticipate strong growth, while 6% expect to “slightly reduce” their existing presence in the region. FS firms are also nearly twice as likely as manufacturing firms to identify EU instability (51%) and Brexit (41%) among the top three growth risks, with volatility seen as a much less severe risk.
The technology sector is leading growth into Europe with 72% of respondents planning to invest in Europe in the next three years, and of those, 33% expecting to grow their presence significantly — identifying Europe as a powerhouse in emerging technologies such as artificial intelligence (IA), the Internet of Things (IoT) and robotics. Mid-sized companies1 are also driving growth, with more than two-thirds expecting to grow their presence in Europe and 26% planning significant expansion.
Brexit reshaping boardroom agendas
More than 70% of foreign investors say they have already felt some impact following the UK’s referendum on EU membership. These investors have seen an impact in at least one area of their business operations in Europe and have cited operating margins, cost of purchase and sales, in particular. Companies with a strong presence in the UK were hit the hardest, with 31% reporting an increase in purchase costs and the same percentage identifying operating margin pressures.