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The Imact of Brexit on Foreign Investment and Production

Author

Listed:
  • Andrea Waddle

    (University of Richmond)

  • Ellen McGrattan

    (University of Minnesota)

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 firms investing in research and development (R&D), brands, and other intangible capital that is used nonrivalrously by their subsidiaries at home and abroad. We analyze several post-Brexit scenarios. First, we assume that the United Kingdom unilaterally imposes tighter restrictions on foreign direct investment (FDI) from other E.U. nations. With less E.U. technology deployed in the United Kingdom, U.K. firms increase investment in their own R&D and other intangibles, which is costly, and welfare for U.K. citizens is lower. If the European Union remains open, its citizens enjoy a modest gain from the increased U.K. investment since it can be costlessly deployed in subsidiaries throughout Europe. If instead we assume that the European Union imposes the same restrictions on U.K. FDI, then E.U. firms invest more in their own R&D, benefiting the United Kingdom. With costs higher on both U.K. and E.U. FDI, we predict a significant fall in foreign investment and production by U.K. firms. The United Kingdom increases international lending, which finances the production of others both domestically and abroad, and inward FDI rises. U.K. consumption falls and leisure rises, implying a negligible impact on welfare. In the European Union, declines in investment and production are modest, but the welfare of E.U. citizens is significantly lower. Finally, if, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, U.K. inward FDI and welfare both rise significantly.

Suggested Citation

  • Andrea Waddle & Ellen McGrattan, 2017. "The Imact of Brexit on Foreign Investment and Production," 2017 Meeting Papers 710, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:710
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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. 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.
    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," IZA Discussion Papers 8162, Institute of Labor Economics (IZA).
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    Cited by:

    1. 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.
    2. 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.
    3. Campos, Nauro F., 2019. "B for Brexit: A Survey of the Economics Academic Literature," IZA Discussion Papers 12134, Institute of Labor Economics (IZA).
    4. Benjamin Born & Gernot J. Müller & Moritz Schularick & Petr Sedlacek, 2017. "The Economic Consequences of the Brexit Vote," Discussion Papers 1738, Centre for Macroeconomics (CFM).
    5. 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.
    6. 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.
    7. 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.
    8. Steinberg, Joseph B., 2019. "Brexit and the macroeconomic impact of trade policy uncertainty," Journal of International Economics, Elsevier, vol. 117(C), pages 175-195.
    9. 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.
    10. 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).
    11. Pitsoulis, Athanassios & Schwuchow, Soeren, 2018. "Though this be madness: A game-theoretic perspective on the Brexit negotiations," Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181635, Verein für Socialpolitik / German Economic Association.
    12. 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.
    13. 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.
    14. 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.
    15. 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.
    16. Renato Faccini & Edoardo Palombo, 2019. "News Uncertainty in Brexit U.K," Discussion Papers 1921, Centre for Macroeconomics (CFM).
    17. 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.
    18. 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.

    More about this item

    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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