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Brexit and foreign investment in the UK

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  • Nigel Driffield
  • Michail Karoglou

Abstract

We explore the likely effect of Brexit on inward foreign direct investment (FDI) through its possible effect on the benchmark variables that characterize the macroeconomy. For this we propose the use of a Markov regime switching structural vector auto‐regression to distinguish between the volatile and stable states of the economy and account, among other effects, for the contemporaneous effects that the frequency of FDI innately generates. Our findings suggest that, if Brexit triggers a sterling depreciation in the current economic climate, this will fuel a prolonged negative effect on FDI. FDI flows may be positively affected (at most) by a sterling depreciation after Brexit only if this event drives the UK economy to a period of highly volatile growth, inflation, interest and exchange rates: a scenario that is rather unlikely. And, even then, the sterling depreciation benefits would last for only a short period of time.

Suggested Citation

  • Nigel Driffield & Michail Karoglou, 2019. "Brexit and foreign investment in the UK," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 182(2), pages 559-582, February.
    • Handle: RePEc:bla:jorssa:v:182:y:2019:i:2:p:559-582
    DOI: 10.1111/rssa.12417
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    Cited by:

    1. MS Hosen & SM Hossain & MN Mia & MR Chowdhury, 2024. "The Effects of COVID-19 and the Russia-Ukraine War on Inward Foreign Direct Investment," Papers 2401.03096, arXiv.org.
    2. Garcia-Lazaro, Aida & Mistak, Jakub & Gulcin Ozkan, F., 2021. "Supply chain networks, trade and the Brexit deal: a general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 133(C).
    3. Čiderová Denisa & Kovačević Dubravka & Čerňák Jozef, 2019. "The Brexitologic of Competitiveness," Studia Commercialia Bratislavensia, Sciendo, vol. 12(42), pages 147-171, December.
    4. Ray Barrell & Abdulkader Nahhas, 2022. "Regional integration and bilateral FDI stocks in the OECD," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3032-3050, July.
    5. Yifei Cai & Angeliki Menegaki, 2021. "FDI, growth and trade partisan conflict in the US: TVP-BVAR approach," Empirical Economics, Springer, vol. 60(3), pages 1335-1362, March.
    6. Federico Carril-Caccia, 2020. "Will the Future EU-UK Free Trade Agreement Affect Foreign Direct Investment?," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(4), pages 266-270, July.

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