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The Impact of Brexit on Foreign Investment and Production

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  • Ellen R. McGrattan
  • Andrea Waddle

Abstract

Using simulations from a multicountry neoclassical growth model, we analyze several post-Brexit scenarios. First, the United Kingdom unilaterally imposes tighter restrictions on FDI and trade from other EU nations. Second, the European Union retaliates and imposes the same restrictions on the United Kingdom. Finally, the United Kingdom reduces restrictions on other nations during the post-Brexit transition. Model predictions depend crucially on the policy response of multinationals' investment in technology capital, accumulated know-how from investments in R&D, brands, and organizations used simultaneously in their domestic and foreign operations.

Suggested Citation

  • Ellen R. McGrattan & Andrea Waddle, 2020. "The Impact of Brexit on Foreign Investment and Production," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(1), pages 76-103, January.
    • Handle: RePEc:aea:aejmac:v:12:y:2020:i:1:p:76-103
    Note: DOI: 10.1257/mac.20170399
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    References listed on IDEAS

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    1. Steinberg, Joseph B., 2019. "Brexit and the macroeconomic impact of trade policy uncertainty," Journal of International Economics, Elsevier, vol. 117(C), pages 175-195.
    2. Campos, Nauro F & Coricelli, Fabrizio & Moretti, Luigi, 2014. "Economic Growth and Political Integration: Estimating the Benefits from Membership in the European Union Using the Synthetic Counterfactuals Method," CEPR Discussion Papers 9968, C.E.P.R. Discussion Papers.
    3. Thomas J. Holmes & Ellen R. McGrattan & Edward C. Prescott, 2015. "Quid Pro Quo: Technology Capital Transfers for Market Access in China," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 1154-1193.
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    Cited by:

    1. Richard Harris & John Moffat, 2020. "The impact of product subsidies on plant‐level total factor productivity in Britain, 1997–2014," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(4), pages 387-403, September.
    2. Joseph B. Steinberg, 2020. "The macroeconomic impact of NAFTA termination," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(2), pages 821-865, May.
    3. Anderson, James E. & Larch, Mario & Yotov, Yoto, 2017. "Trade and Investment in the Global Economy," School of Economics Working Paper Series 2017-9, LeBow College of Business, Drexel University.
    4. Campos, Nauro F., 2019. "B for Brexit: A Survey of the Economics Academic Literature," IZA Discussion Papers 12134, Institute of Labor Economics (IZA).
    5. Benjamin Born & Gernot J. Müller & Moritz Schularick & Petr Sedlacek, 2017. "The Economic Consequences of the Brexit Vote," Discussion Papers 1738, Centre for Macroeconomics (CFM).
    6. Bloom, Nicholas & Bunn, Philip & Chen, Scarlet & Mizen, Paul & Smietanka, Pawel & Thwaites, Gregory, 2019. "The impact of Brexit on UK firms," Bank of England working papers 818, Bank of England.
    7. Tarek Alexander Hassan & Stephan Hollander & Laurence van Lent & Ahmed Tahoun, 2020. "The Global Impact of Brexit Uncertainty," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-332, Boston University - Department of Economics.
    8. Hassan, Tarek Alexander & Hollander, Stephan & Tahoun, Ahmed & van Lent, Laurence, 2019. "The Global Impact of Brexit Uncertainty," CEPR Discussion Papers 14253, C.E.P.R. Discussion Papers.
    9. Steinberg, Joseph B., 2019. "Brexit and the macroeconomic impact of trade policy uncertainty," Journal of International Economics, Elsevier, vol. 117(C), pages 175-195.
    10. Juan Carlos Conesa & Matthew J. Delventhal & Pau S. Pujolas & Gajendran Raveendranathan, 2019. "Trade and Catching Up to the Industrial Leader," Department of Economics Working Papers 19-04, Stony Brook University, Department of Economics.
    11. Ben Broadbent & Federico Di Pace & Thomas Drechsel & Richard Harrison & Silvana Tenreyro, 2019. "The Brexit Vote, Productivity Growth and Macroeconomic Adjustments in the United Kingdom," Discussion Papers 1916, Centre for Macroeconomics (CFM).
    12. Pitsoulis, Athanassios & Schwuchow, Soeren, 2018. "Though this be madness: A game-theoretic perspective on the Brexit negotiations," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181635, Verein für Socialpolitik / German Economic Association.
    13. Carrère, Céline & Mrázová, Monika & Neary, J Peter, 2020. "Gravity without Apologies: The Science of Elasticities, Distance, and Trade," CEPR Discussion Papers 14473, C.E.P.R. Discussion Papers.
    14. Céline Carrère & Monika Mrázová & J Peter Neary, 2020. "Gravity Without Apology: the Science of Elasticities, Distance and Trade," Economic Journal, Royal Economic Society, vol. 130(628), pages 880-910.
    15. Paul J. J. Welfens & Fabian J. Baier, 2018. "BREXIT and Foreign Direct Investment: Key Issues and New Empirical Findings," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 6(2), pages 1-21, April.
    16. Fetzer, Thiemo & Wang, Shizhou, 2020. "Measuring the Regional Economic Cost of Brexit: Evidence up to 2019," The Warwick Economics Research Paper Series (TWERPS) 1280, University of Warwick, Department of Economics.
    17. Fetzer, Thiemo & Wang, Shizhuo, 2020. "Measuring the Regional Economic Cost of Brexit: Evidence up to 2019," CAGE Online Working Paper Series 486, Competitive Advantage in the Global Economy (CAGE).
    18. Anderson, James E. & Larch, Mario & Yotov, Yoto V., 2019. "Trade and investment in the global economy: A multi-country dynamic analysis," European Economic Review, Elsevier, vol. 120(C).
    19. Renato Faccini & Edoardo Palombo, 2019. "News Uncertainty in Brexit U.K," Discussion Papers 1921, Centre for Macroeconomics (CFM).
    20. Benjamin Born & Gernot J Müller & Moritz Schularick & Petr Sedláček, 2019. "The Costs of Economic Nationalism: Evidence from the Brexit Experiment," Economic Journal, Royal Economic Society, vol. 129(623), pages 2722-2744.
    21. Adolfo Maza & Paula Gutiérrez‐Portilla & José Villaverde, 2020. "On the drivers of UK direct investment in the Spanish regions: A spatial Durbin approach," Growth and Change, Wiley Blackwell, vol. 51(2), pages 646-675, June.

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    More about this item

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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