Sunday, April 03, 2016
Britain would struggle to maintain inward investor appeal after Brexit
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The referendum on Britain’s membership of the EU is still more than two months away, though the campaign seems to have been going on forever. Given that most election campaigns do not get properly in their stride until the final weeks, I cannot offer any early relief.

Instead, as promised, I will continue my series on the economic aspects of Leave and Remain. Shortly before the referendum, all these will be pulled together in a single piece and a verdict.

So far I have done five pieces. I began last November with trade, pointing out if you leave the EU then, unless you replicate the conditions of membership (including free movement of people and a budget contribution) you lose the single market. There is a lot of misunderstanding about that, mainly because many do not appreciate the difference between a trade agreement and the single market.

At the start of the year I warned, even when talk was of global risks to the recovery, that the referendum represented the biggest threat to Britain, a theme that has since been widely taken up. In February I looked at migration, under the heading economically beneficial, politically toxic.

I also examined in February at how Britain’s relative economic performance had improved since we joined the European Economic Community (EEC), the EU’s forerunner, in 1973. Mark Carney, the Bank of England governor, got into trouble with some Tory MPs for making a similar point. Finally, ahead of the budget, I wrote about how the chancellor would be seeking to emphasise the economic dangers of Brexit, while presenting a safety-first budget to minimise referendum risks. Whether or not he succeeded with the first, he failed with the second.

Today, let me examine another aspect of the economic debate, inward investment into Britain. The starting point, overwhelmingly supported by the evidence, is that EU membership has been good for inward investment, particularly foreign direct investment (FDI), for entirely logical reasons. The question is whether Britain’s attractions for inward investors could be maintained outside the EU.

Foreign companies have been attracted to invest in Britain, over decades, because of the combination of a less regulated and taxed economy and access to the European market. The phenomenon goes back at least as far as the 1970s, and decisions by American multinationals to increase investment when this country joined the EEC.

It accelerated in the 1980s with Japanese car manufacturers – starting with Nissan in Sunderland - establishing operations in this country. It has increased further since the single market began in 1993.

Over this period Britain has regularly been the biggest European recipient of foreign direct investment from outside the EU, though often vying with Germany for top slot. A process that began with America, then shifted to Japan and Korea, has moved more recently to the new economic giants of China and India.

The ‘voice of Indian business and industry’, the Federation of Indian Chambers of Commerce & Industry (Ficci), put it straightforwardly last month. “Britain is considered an entry point and a gateway for the EU by many Indian companies,” its secretary-general said.

Inward investment from distant nations like India creates a lot of attention, and in examples like Tata and Jaguar Land Rover, and much more challengingly in recent days in steel and Port Talbot, deservedly so. But, importantly, about half of the stock of foreign direct investment in Britain is from closer to home: the rest of the EU. Britain is integrated with the EU economy via investment as well as trade.

Let me make one thing clear. EU membership is not the only reason why there is foreign direct investment in Britain. Britain’s attractions include openness, a flexible labour market with pools of particular skills, the English language and the English legal system.

In many cases, such as much-needed foreign investment in Britain’s energy or transport infrastructure, it is hard to see that there would be very much difference whether we were in or out, except to the extent that Brexit reduces future growth prospects.

But it would also be folly to deny that EU membership is an important determinant of inward investment. EY, the accountancy and professional services firm, provides the most comprehensive annual survey of FDI. In its 2016 survey, to be published next month, it will look specifically at the potential effects of Brexit.

In the meantime, we have last year’s survey to go on. It showed a record 887 inward investment projects in Britain in 2014, up 11% on the previous year, and an increased European market share of 20.4%. It also found that 72% of inward investors cited access to the single market as important in their decision.

The question can be asked why, with the referendum on the horizon, inward investment in 2014 was so strong. The answer is that at that time business put a very low probability on Brexit.

What impact would Brexit have? We will await EY’s verdict next month but its rivals PWC had a stab in its work for the CBI, predicting that there would be an overall negative effect on inward investment even if a free trade agreement for trade in goods were to be swiftly negotiated. Service sector inward investment would still be “negatively affected”. The Bank of England, while stressing the many reasons why there has been foreign investment in financial services in Britain, also highlighted the importance EU’s “passporting” regime for banks.

Do we need inward investment? Yes. It makes for a more successful and dynamic economy and, while we are now in the middle of a period of productivity disappointment, foreign-owned businesses have made an important contribution to Britain’s economic performance over decades.

Could steps be taken to maintain Britain’s appeal to inward investors after Brexit? Yes, though some of them would involve a possibly tortuous renegotiation in order to try to re-establish what we already have, and at a cost. Whatever was negotiated in terms of access to the single market would probably not be as good as now. Impressions count, and the impression from afar – let alone from the rest of the EU – would be that Britain had moved from being semi-detached to being detached from the rest of Europe.

In my younger days I used to enthuse about the idea of Britain as the Hong Kong of Europe, free of eurosclerosis, with low taxes and with the most deregulated economy. As I have grown older I have become more realistic. Britain already has among the most deregulated product and labour markets in the advanced world, according to the OECD. There is red tape but much of it is home-grown. Her Majesty’s Revenue & Customs does not get its instructions from Brussels.

As for tax, George Osborne is already aiming for the lowest corporation tax rate, 17%, in the G20. He could aim to reduce it to 12.5%, matching Ireland, but the public finances are still not fixed, and voters – already pretty fed up with what they see as sweetheart tax deals for multinationals – would look askance at tax cuts intended to make life even easier for them.

As well as this, inward investors know that business tax cuts or supposed bonfires of red tape are prey to shifts in the political wind – the next government could reverse them at the drop of a hat – but EU membership and access to the single market have been regarded as permanent. If it ceases to be so, it seems inevitable inward investment will suffer.