Foreign direct investment in UK could dry up post-Brexit

14 June 2018 Authored by Consultancy.uk

Globally foreign direct investment is set to continue to grow, with North America sitting at the top, while China has slid three spots to fifth overall. While a weakened pound continues to make the UK a target for bargain hunters in 2018, the country faces considerable hurdles from Brexit’s impact on its economic outlook, something which threatens the optimism of its investors in the future. 

In recent years, foreign investment has continued apace in the UK. The nation’s capital saw the largest number of retail brand arrivals in 2017, with London outpacing rivals such as Paris and Vienna. The city also continues to post strong results in its real estate scene, thanks in part to the deflated value of the pound, which has enabled record levels of foreign investment from China and Asia.

However, as Britain braces for Brexit, and the potential seismic realignment of Europe’s economy which this could well cause, foreign direct investment (FDI) could quickly cool. According to analysis from A.T. Kearney Britain still boasts the world’s fourth highest level of confidence among foreign direct investors, behind Germany, Canada and the US.

The report, based on data from 500 of the world’s largest companies and covering 29 distinct regions, found that the resurgent US took the number one spot in terms of FDI Confidence, a spot the country has held for the past three years running, on the back of its strong economic performance, while uncertainties around market access due to protectionist rhetoric has further boosted inward investment. Canada meanwhile climbed three spots on last year to number 2, reflecting strong positive sentiment about the future of growth in the country.

Optimism high for most developed markets

However, while the immediate future remains bright for the UK, the country also finds itself among the worst performers in terms of how the economic outlook has changed in the past year. Investors are 22% less optimistic now than at the same juncture in 2017, the worst percentage of any nation in A.T. Kearney’s analysis.

The nation’s balanced net change still sees a boost in positivity of 11%, however this change still sees the UK fourth least well regarded, just ahead of Mexico, Portugal and Brazil. Two of those nations face extreme uncertainty and political deadlock in the coming year, while just ahead of the UK is Spain – a country which at the time of the poll, was facing a constitutional crisis caused by government corruption. The UK’s association with this grouping of economies hardly breeds confidence, in this case, as the nation continues to shuffle ever closer to the tumultuous conclusion of Brexit negotiations in 2019.

Top destinations for FDI

In terms of where FDI is currently heading, total investment has generally declined over past three years. This has been most notable in the European Union, which has seen FDI fall from a high of $500 billion in 2016 to $370 billion a year later – undoubtedly relating to the fallout of the UK’s shock referendum result, which threatened to destabilise the Eurozone, as it prompted Eurosceptics in countries such as Italy to follow suit. Following a number of far-right electoral triumphs in EU nations, this has become a real possibility.

Changes to monetary policy, particularly in the US and Europe, may well have wide ranging global impacts in the future, too, with tariffs threatening to spark a trade war between the EU, China and the US at present. In terms of investment strategy, few are currently not planning to invest in developed and emerging markets (4% each), while those currently invested but seeking to divest in such markets stands at 15% and 16% respectively.

The status quo remains dominant in developed markets, with 42% of those currently invested seeking to maintain the levels of investment, followed by 37% for emerging markets. Meanwhile 29% of both developed market and emerging market strategy for investment sees those currently invested in the markets seeking new investment opportunities.

Reasons for investors to increase FDI

When it comes to investment, the majority are planning to up their targets – with 46% projecting moderate increases while 30% say that they will bring significant increases. The respondents note however that the availability of funds and the availability of targets will influence their decisions – with the latter in particular a concern as a good deal of investment will be for businesses and units that are being fished for by others, such as PE or other corporate interests.

Commenting on the results, Paul A. Laudicina, Partner at A.T. Kearney, said, “The world continues to change in fundamental ways. Amid such changes, however, we often miss what in retrospect seems clear. A few years ago we released our From Globalisation to Islandisation report, foreshadowing a more protectionist world. Many observers expressed scepticism about our conclusions, believing globalisation to be immutable, and irreversible as a phenomenon. Now, our FDI Confidence Index indicates that investors have accepted globalisation is being challenged, and are seeking practical ways to ensure continued access to key markets.”

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