Leaving the European Union would reduce flows of foreign direct investment (FDI) into the UK by more than 20%, damaging productivity and lowering people’s incomes, according to new research by the Centre for Economic Performance at the London School of Economics.
“Taking a very cautious approach, which suggests only a 22% fall in FDI following Brexit, there will be an estimated decline in UK income levels of 3.4%,” said the report.
“This represents about £2,200 of GDP per household.”
Cars and financial services would receive less investment from foreign firms that use the UK as a base to access EU markets, the report warned.
And the UK’s ability to negotiate concessions from regulations on EU-related transactions would be seriously eroded, the researchers warned.
The report said FDI raises national productivity and therefore output and wages.
“Multinational firms bring in better technological and managerial know-how, which directly raises output in their operations,” the report said.
“FDI also stimulates domestic firms to improve — for example, through stronger supply chains and tougher competition.”
Being fully in the European Single Market makes the UK an attractive location for multinationals as their exports to the EU do not face potentially large costs from tariff and non- tariff barriers, said the report.
And uncertainty over the shape of future trade arrangements between the UK and EU would also tend to dampen FDI, the researchers warned.
One of the report’s authors, Prof John Van Reenen said: “The evidence shows that EU membership has helped substantially drive up foreign investment in the UK.
“Brexit will inflict collateral damage on foreign investment, causing further losses to productivity and making us poorer as a nation.”
Another, Dr Thomas Sampson said: “It’s pie in the sky to think that a free trade deal with the EU, like the Swiss or Canadian arrangements, would solve the FDI problem.
“One reason that foreign banks, including the Swiss, flock to the City of London is that they have free access to the European Single Market.
“We put this in jeopardy by jumping ship.”
And another, Dr Swati Dhingra, said: “We estimate that British people could be 3.4% worse off due to lower FDI, which is about £2,200 per household.
“The car industry has been a British success story, but it will suffer a big blow if we leave.”
The report analysed bilateral FDI flows between 34 OECD countries including the UK over the last three decades to assess the likely impact of Brexit on FDI and found that:
- Estimated inflows of FDI into the UK are about 28% higher thanks to membership of the EU
- Striking a comprehensive trade deal — following Switzerland, for example, in the European Free Trade Association — does not replicate the benefits of EU membership
- Estimates of the impact of Brexit on the UK’s car industry imply that UK production would fall by 181,000 cars (12%) and prices would rise by 2.5%
- The UK’s financial services industry is the largest recipient of FDI. If ‘single passport’ privileges are restricted following Brexit, this would lead to big cuts in activity
- The UK would also be unable to challenge EU regulations at the European Court of Justice