Monitoring the EU-UK FDI links following Brexit

This article provides an overview of recent developments in the EU-UK foreign direct investment (FDI) relationships since Brexit. We begin with a conjunctural analysis that looks at recent trends in EU-UK FDI at a broad level, which includes detail at the sectoral and geographical level. Also included in the conjunctural analysis is a breakdown of foreign affiliates and an investigation of new FDI projects and jobs in the UK. We then look at recent developments in the financial sector, in terms of the real economy, FDI flows, banks, insurance companies, pension funds, and its evolving status as a leading global financial centre. The final part of the article turns to non-conjunctural analysis and provides an econometric investigation into the potential impact of Brexit in EU-UK FDI using a gravity-modelling approach. The formal analysis is a non-trivial exercise because the Brexit period overlaps with other significant events, such as the COVID-19 pandemic. Compared to a no-Brexit scenario, we find that Brexit contributed to a decline in EU FDI flows between the EU and the UK of around 4 per cent. Furthermore, business relocations involving temporary capital flows among important European financial centers marked the significant challenge the UK exit from the EU brought to the financial sector.