Brexit consequences for the United Kingdom: The role of multinationals

Several economic studies conclude that Brexit will affect the UK and the Rest of EU members, negatively. However, most of them derive the impact of Brexit focusing only on trade restrictions. The few studies that focus on migration and capital movements, do not include trade (see Busch and Matthes, 2016; Latorre et al., 2018; for reviews). According to HM Treasury (2016) “three-quarters of foreign investors cite access to the European market as a reason for their investment in the UK”, therefore, Brexit will probably affect the interest of other regions to invest in the UK. Due to, leaving the EU would reduce access to the Single market. According to the literature, FDI to the UK could experience reductions between -10% and -26% (HM treasury, 2016) or of -34% (Clausing and Dorobantu, 2005). We consider these reductions in the entry of FDI in the UK and simulate the impact of foreign direct investment inflows and interpret them as the forgone effects from FDI. This study is conducted using a multi-sector, multi-regional Computable General Equilibrium (CGE) Model, which integrates a number of different economic dimensions to provide a complete description of an economy. We disaggregate the world economy in 21 sectors, 5 economies (UK, EU, US, China, and ROW), and 4 factors (skilled and unskilled labor, land, and capital). We assume that factor endowments are fixed. Capital is introduced as sector specific, while labor is considered fully mobile across sectors within the economy. Our previous results suggest that a reduction of FDI inflow of 10% would imply a forgone benefit of 0.55% of GDP and a loss of 0.32% of welfare which is equivalent to US$7,775.00 million loss. While in our worst scenario, estimates of the foregone benefits from the FDI would be of 1.64% of GDP and a welfare loss of 0.93% (i.e., US$ 22,790.00 million).