Signs of a Brexit impact on UK foreign direct investment

29 March 2018

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  • No dramatic collapse in sentiment towards the UK as an attractive destination for foreign investment in the aftermath of the EU Referendum vote.
  • Around a fifth of foreign investors have changed their investment plans in the UK since 2016; either increasing, reducing or holding spend.
  • After 2020, research by EY across Europe suggests that around 50% of foreign companies might move assets out of the UK.

The attractiveness of the UK as a place for foreign investors to locate may be waning slightly, according to a report released by EY today – a year after the UK triggered Article 50 (29th March 2017).

EY’s recent survey of 440 foreign investors, shows positive sentiment towards the UK hasn’t dramatically collapsed, as some commentators feared, but there are early signs that inbound flows are slowing.

Steve Varley, UK Chairman at EY, commented: “Whilst investor sentiment towards the UK has dipped in the immediate aftermath of the EU Referendum, our analysis shows that many businesses are willing to wait before making any significant investment decisions. What that means is that there is time for the UK to craft policy responses, to mitigate any long-term adverse effects on foreign direct investment into the UK.

“However, time is of the essence. The preliminary agreement on transition, announced last week, may well spark action from businesses.”

The report, entitled ‘Inward investment after Brexit’, is part of EY’s UK Attractiveness Survey which is released annually in the summer (2018 full report to be published in May). The perception element, carried out last month, gauged the sentiment of foreign investors towards Brexit.

Out of the 440 business leaders surveyed, 21% said they had changed their UK investment plans since the EU Referendum vote in 2016 - a third (7%) of this group had actually increased their investment in the UK since that time, whilst 6% had reduced their commitment and 8% had put their plans on hold.

However, the research revealed a disparity in confidence between those already with a base in the UK and those yet to invest. 11% of existing investors said they had increased their stake, compared to only 1% of new investors who had committed to the UK since 2016.

EY’s Chief Economist, Mark Gregory, commented: “The findings demonstrate how difficult it is to predict the impact of Brexit. The main effects on growth are likely to be investors pausing projects and new investors staying away from the UK. But the position is complex. 

“The UK consumer is clearly a valuable asset and some companies appear to be moving assets into the UK to ensure they can continue to access their customers after Brexit. Conversely, those with an export focus are moving assets out, anticipating changes to trading arrangements.”

North American investors most positive post referendum

Looking at specific groups, Asian investors appear to have had the most negative response to the 2016 referendum result - 13% reportedly reduced their investment and 14% put activity on hold. Meanwhile, 9% of North American investors increased their investment compared to 4% from Western Europe.

By sector, business services and financial services companies have been the most cautious, with 12% putting their investment plans on hold. In comparison, consumer goods companies have been the most active with 13% increasing their investment in the UK. 11% of hi-tech companies reduced their investment, but 10% increased it.

Gregory added: “The differences in response can be explained, to a large extent, by the characteristics of individual industries. Services companies can turn investment on and off more easily than other sectors. By contrast, manufacturing decisions, requiring long lead times and planning, are much more all-or-nothing decisions. With that in mind, their strategy appears to be one of waiting as long as possible for maximum clarity before committing resources.”

8% of existing assets at risk in the next three years

When asked about their plans within the next three years, 8% of the foreign investors surveyed said they expect to move assets out of the UK – 1% down on last year (9%) – but closer analysis reveals wide variations in opinion by geography.

Just 1% of Western European investors - down from 11% twelve months ago - foresee moving their UK assets, suggesting their concerns over Brexit are easing to some extent. However, this compares to 25% of Asian investors predicting a similar move; perhaps reflecting that they are more exposed to any potential changes in trading relations, as a result of Brexit.

There is a similar degree of variation across sectors. 16% of chemical and pharmaceutical businesses and 16% of financial services and 14% business services companies expect to move facilities in the next three years, compared to only 4% of manufacturers.

Gregory comments: “Again, these results offer a positive message for policymakers. Despite the risks to future investments there is still time to introduce policy to help combat any long-term negative effects of Brexit on FDI. The analysis shows which groups are most at risk and where efforts should be initially targeted.”

Half of foreign companies will contemplate UK exit beyond 2020

Beyond the three year horizon the outlook appears significantly more challenging for the UK. Research by EY* across Europe suggests that around 50% of foreign companies, currently in the UK, might move assets out of the UK at some point in the future, but are waiting for more clarity before making major decisions.

Gregory adds: “The variations in investor sentiment by geography, company size, and sector offer the UK Government clear information on how the trade-offs in the negotiations will differentially impact foreign direct investment, and hence the relative value of alternative outcomes.”

For example, beyond the appeal of the strength of the UK economy, access to the European market is 50% more important to Asian investors than the global average, according to the report. The same is true for: existing UK investors; medium-sized businesses; financial services; consumer goods; and chemical and pharmaceutical companies. Meanwhile, the cost of imports is a more significant concern for the consumer goods sector, manufacturers, and high-tech businesses; whilst labour mobility is very important to all services companies.

Gregory concludes: “Our overall findings suggest that while things may be bumpy for the UK in the short-term, there is still a great deal to play for in respect of FDI. But what is clear is that the time to act is now. A more targeted FDI strategy, focussing on quality not quantity and addressing investor concerns, will be essential in helping maintain and grow UK competitiveness.

“The size of the UK market and the disruption caused by moving assets, means the UK Government has time to design policy to mitigate any adverse effects of Brexit.”

Notes to Editors

* 502 respondents from multinational companies based in Europe were interviewed for EY’s European Attractiveness Survey 2018 — due out in May 2018.

About EY’s Attractiveness programme

EY’s attractiveness surveys are widely recognised by our clients, the media and major public stakeholders as a key source of insight on foreign direct investment (FDI). Examining the attractiveness of a particular region or country as an investment destination, the surveys are designed to help businesses to make investment decisions and governments to remove barriers to future growth. A two-step methodology analyses both the reality and perception of FDI in the respective country or region. Findings are based on the views of representative panels of international and local opinion leaders and decision-makers.

The UK Attractiveness Survey is part of EY’s Economics for Business programme which provides knowledge, analysis and insight to help business understand the economic environments in which they operate, both in the UK and globally. We work with both the private and public sectors, facilitating the debate between business and government, supporting economic development, growth and regeneration.