The Impact of Brexit on FDI: Implications

February 9, 2017, Toronto, Canada

Presentation at EDCO by Chris Knight, Global Commercial Director, fDi

Intelligence, Financial Times US

About the presentation

Brexit was one of the major events of 2016

My presentation will provide the latest evidence on its impact for FDI

I will look at how Brexit has impacted FDI into the UK – very relevant re. current NAFTA uncertainty

I will also look at how Brexit has impacted outward FDI from the UK and how this may impact FDI in Canada with UK the 2nd largest foreign investor in the country

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Monthly Inward FDI Projects to UK

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2016

Vote to leave EU Hard Brexit looks

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Latest data for January 2017: FDI in UK down 30% on Jan. 2016 compared to Jan. 2015 levels

Inward FDI projects to UK by Top Sectors

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2015 2016

Sectors serving the fast growing UK economy have increased. Sectors serving EU market have declined

Inward FDI job creation in UK by Top Sectors

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2015 2016 Major decline in automotive FDI – exports to EU account for about 70% of UK automotive production! Similar to Canada-NAFTA….

Monthly Outward FDI projects from UK to the world

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Vote to leave EU Hard Brexit looks

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2016 UK outward FDI has declined since Brexit vote. UK companies held back investments and focused on faster growing UK market

FDI job creation overseas by UK companies by Top Sectors

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2015 2016 Software & IT, Real Estate and Consumer Products fastest growing outward FDI sectors in 2016

UK Market share of FDI Jobs within the EU

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2010 2011 2012 2013 2014 2015 2016

Number of Jobs and UK market share

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UK market share of FDI in EU is declining to levels more in line with the relative size of the UK economy

UK Market share of outward FDI Jobs from EU

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2010 2011 2012 2013 2014 2015 2016

Number of Jobs and UK market share

 UK   % share

UK companies are massive net job creators overseas – despite decline in FDI, the UK is one of the most important countries to target

UK companies searching for access to regional markets following Brexit & technology for IT projects

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00% 10% 20% 30% 40% 50%

Infrastructure and logistics

Industry Cluster / Critical Mass

Attractiveness / Quality of Life

Technology or Innovation

Regulations or business climate

Skilled workforce availability

Domestic Market Growth…

Proximity to markets or…

H2 2016

H2 2015

Location motives for UK FDI overseas

Source market predictions

FDI from Europe – expected to decline only moderately as they are primarily investing in the UK to access the UK market and customers. SMEs in particular are likely to continue to invest as they are driven by customer access

FDI from China – likely to remain strong, as it is mainly domestic market driven and as asset prices in UK declines.

FDI from India – also likely to be resilient for asset-seeking FDI but is likely to decline moderately for knowledge-based operations serving the EU market, if the UK does not join the single market

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Source market predictions

FDI from Japan – is primarily about retention and re-investment of existing UK operations. A free trade agreement with the EU maybe sufficient to retain and expand manufacturing investment, although not joining the single market will have a negative impact on most Japanese investors. Japanese investors in the UK are also concerned about access to non-EU markets. Turkey, for example, is a key export market for Japanese manufacturers based in the UK who can currently export tariff-free due to the customs union between the EU and Turkey

FDI from Korea – is at serious risk, with major Korean companies already relocating operations out of the UK and new investments being postponed or eliminating UK as a location option As the EU also has a FTA with Korea, Korean investors are particularly concerned

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Recommendations for investment promotion

Re-align sector and market strategy to focus on the sectors and source countries that are likely to continue to offer the strongest FDI prospects

Strengthen investor intelligence-gathering activities to ensure IPAs are aware of companies that have continued plans to invest and to ensure they are realised

Develop a “multiplier strategy” to generate FDI referrals from the investment advisory community – a cost-effective method of investment attraction

Focus on investor enquiry handling to improve conversion rates and identify key policy options for strengthening investment facilitation services, especially around talent attraction, immigration and investment incentives

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Recommendations for investment promotion

Develop a world class inward investment website to generate inbound enquiries

Ensure the existing investment pipeline is fully engaged to ensure that IPAs win the FDI once companies make the decision to invest

Focus more resources on account management “aftercare” activities for existing investors

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Conclusions

Membership of a single market/FTA is very important for FDI – looks like FDI in UK will permanently decline by around 20-30% due to Brexit

The impact of leaving a regional agreement varies by sector – domestic market seeking sectors more resilient while export-oriented manufacturing FDI at high risk

Faced with a major decline in enquiries by foreign investors, EDOs in UK are re-focusing their Lead Generation on the domestic market and targeting intermediaries

The UK remains a key global overseas investor, creating a staggering 120,000 new jobs overseas in 2016 – UK is a key market for Canadian EDOs to target. UK Software sector especially strong in overseas FDI as are consumer focused sectors

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