Foreign direct investments (FDI)
is made up of a collection of overseas investments usually to start up a new
company, to expand their existing subsidiaries or take over national companies.
Countries generally allow more inward FDI as it tends to increase productivity
and economic growth which leads to higher output and income. The UK is one of
several major players in receiving FDI with an estimated FDI stock value of
over £1 trillion in 2015 (UKTIP, 2015) with other EU countries holding an
estimate of half that figure. There are direct and indirect advantages of FDI.
Direct benefits include income-earning opportunities created by foreign
companies, higher wages than domestic firms and FDI are generally more
productive. However, this also will mean the country recipient of FDI learns
about new foreign technology and managerial strategies implemented by that
company and can be adopted by domestic firms as well as increasing competition
putting pressure on domestic and foreign subsidiaries to improve the quality of
services they provide. On the 23rd of
June in 2016, Brexit came to a conclusion and the UK voted to leave the
European Union for a number of different motivations such as better trade deals
with partner nations. Uncertainty rose on what will be the new rules and trade
regulations and how was this decision going to affect the single market and the
right of free trade. This has led to panic amongst companies based in the UK
with the need to access the EU market, and many of them were observed building
new infrastructure in EU countries in order to leave the UK. The UK will have a
2 years period to negotiate new regulations with the EU. Regardless, leaving
the EU will still decrease the level of inward FDI into the UK for at least
three different reasons. Firstly, when the UK is fully in the Single market it
makes the country look more attractive as an export platform for MNEs because
of the large costs from tariffs and non-tariffs barriers when they export to
the EU. Secondly, the over-all uncertainty over the future direction the UK is
heading, especially between the UK and the EU also will negatively affect FDI.
Finally, supply chain for MNEs is usually complex and have many coordination costs
between different EU countries (HQ & Branches) making it difficult to
manage if the UK left the EU.