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BREXIT and FDI: Key Issues and New Empirical Findings

Author

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  • Paul J.J. Welfens

    () (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))

  • Fabian J. Baier

    () (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))

Abstract

Summary This contribution takes a new look at the gravity equation model in relation to foreign direct investment of leading industrialized countries which presents a useful basis for assessing certain potential impacts arising from BREXIT. The gravity equation estimated allows considering the case of BREXIT and the broader role of EU membership and other variables. Looking at the period from 1985 to 2012 for a dataset which contains 34 OECD countries: The PPML dyadic fixed estimations take into account a broad set of approaches and variables, respectively. Besides the traditional variables of the EU/EU single market membership of the source country and of the host country, we further consider the role of trade openness as well as corporate tax rates and the ratio of inward FDI stock to total capital stock. The analysis shows that trade openness is a variable which can be largely replaced by the inward FDI stock/capital stock ratio so that gravity FDI modeling with a strong emphasis on trade openness is likely to overstate the role of trade and to understate the role of relative FDI accumulation effects. The implication for BREXIT analysis is that the UK will face three impulses for FDI inflows: (1) leaving the EU single market will strongly reduce FDI inflows; (2) if foreign ownership in the UK capital stock should strongly increase in the run-up to the BREXIT year 2019, part of the dampening effects of leaving the EU will be mitigated by the increase of the FDI stock/capital stock ratio which in turn is likely to reflect a Froot-Stein effect related to a real Pound deprecation 2016-2018; (3) to the extent that the UK government will want to reinforce output growth through higher FDI inflows, a reduction of corporate taxation could generate high effects – but could also stimulate a downward international corporate tax reduction game. Zusammenfassung: Dieser Artikel leistet einen neuen Beitrag zur Analyso von Direktinvestitionsflüssen führender Industrieländer mithilfe des Gravitationsmodells, was eine nützliche Grundlage für die Bewertung bestimmter potenzieller Auswirkungen von BREXIT darstellt. Die Gravitationsgleichung ermöglicht die Berücksichtigung des BREXIT-Falles, der umfassenderen Rolle der EU-Mitgliedschaft und anderer Variablen. Betrachtet wird der Zeitraum von 1985 bis 2012 für einen Datensatz, der 34 OECD-Länder enthält: Der dyadische PPML-Fixed-Effects Schätzer berücksichtigt eine breite Palette von Ansätzen bzw. Variablen. Neben den traditionellen Variablen der Mitgliedschaft der EU bzw. des EU-Binnenmarktes im Herkunfts- und im Empfängerland, betrachten wir die Rolle der Handelsoffenheit sowie der Körperschaftssteuersätze und des Verhältnisses der FDI-Bestände zum gesamten Kapitalbestand. Die Analyse zeigt, dass die Handelsoffenheit eine Variable ist, die weitgehend durch die FDI-Aktien- / Kapitalstock-Quote ersetzt werden kann, so dass die FDI-Modellierung mit Schwerpunkt auf Handelsoffenheit die Rolle des Handels überbewerten und die Rolle der relativen kummulierten FDI-Effekte unterbewerten. Die Analyse zeigt, dass der BREXIT für das Vereinigte Königreich drei Effekte für die FDI-Zuflüsse haben wird: (1) wenn der EU-Binnenmarkt verlassen wird, werden die FDI-Zuflüsse stark sinken; (2) Sollte die ausländische Beteiligung am britischen Kapitalstock im Vorfeld des BREXIT-Jahres 2019 stark ansteigen, wird ein Teil der dämpfenden Auswirkungen des EU-Austritts durch die Erhöhung der FDI-Aktien-/Kapitalstockquote gemildert, dies reflektiert einen Froot-Stein-Effekt, der sich auf eine reale Pfund-Abwertung 2016-2018 bezieht; (3) In dem Maße, in dem die britische Regierung das Produktionswachstum durch höhere FDI-Zuflüsse verstärken will, könnte eine Senkung der Unternehmensbesteuerung hohe Auswirkungen haben – könnte aber auch eine Senkungsspirale des internationalen Steuersatzes stimulieren.

Suggested Citation

  • Paul J.J. Welfens & Fabian J. Baier, 2018. "BREXIT and FDI: Key Issues and New Empirical Findings," EIIW Discussion paper disbei241, Universitätsbibliothek Wuppertal, University Library.
  • Handle: RePEc:bwu:eiiwdp:disbei241
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    References listed on IDEAS

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    1. Shige Makino & Chung-Ming Lau & Rhy-Song Yeh, 2002. "Asset-Exploitation Versus Asset-Seeking: Implications for Location Choice of Foreign Direct Investment from Newly Industrialized Economies," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 33(3), pages 403-421, September.
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    More about this item

    Keywords

    Foreign direct investment; BREXIT; gravity equation; corporate taxation; EU single market;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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