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The Impact of Brexit on Foreign Investment and Production

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  • Ellen R. McGrattan
  • Andrea L. Waddle

Abstract

In this paper, we estimate the impact of increasing costs on foreign producers following a withdrawal of the United Kingdom from the European Union (popularly known as Brexit). Our predictions are based on simulations of a multicountry neoclassical growth model that includes multinational ?rms investing in research and development (R&D), brands, and organizational capital that are used nonrivalrously by their subsidiaries at home and abroad. For the main simulation, we assume that U.K. investments in the European Union face the same restrictions as Norway?s and that E.U. investments in the United Kingdom are treated reciprocally. We ?nd a signi?cant fall in foreign investment and production by U.K. ?rms, and a small but positive welfare gain for U.K. citizens. Following the Brexit, the United Kingdom increases international lending, which ?nances the production of others, both domestically and abroad. In the European Union, declines in investment and production are modest, but the welfare of non-U.K. citizens is lower. If, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, domestic production and investment in the United Kingdom fall by less, and the welfare of U.K. citizens rises by more.

Suggested Citation

  • Ellen R. McGrattan & Andrea L. Waddle, 2017. "The Impact of Brexit on Foreign Investment and Production," Staff Report 542, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:542
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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.
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    3. 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.
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    More about this item

    Keywords

    European Union; United Kingdom; Brexit; FDI; foreign investments;
    All these keywords.

    JEL classification:

    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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