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Foreign Direct Investment Post Brexit

Foreign Direct Investment (FDI) has fallen since the financial crisis but at over 9% of GDP it remains a significant proportion of the UK economy. The Brexit vote brought predictions of a big drop-off in this figure with the slump expected to begin almost immediately. However, so far there has been no sign of a fall.

Many overseas companies have actually increased their investment in the UK since the vote and there has been no decline in FDI with the UK confounding expectations and continuing to prove attractive. So what is it that makes the UK so attractive and will this continue post Brexit?

We don’t know what the landscape of Brexit Britain will look like but it is almost certain that the UK’s access to the free European market will be restricted.  You would expect that many businesses may well be taking a wait and see approach to Brexit negotiations with regards to their investment decisions but what is clear is that is not the case for all. There are a number of factors driving this.

The drop in Sterling since the vote makes investing in the UK a cheaper option. I’ve seen a number of US firms set up UK subsidiaries with the sole objective to supply their US holding company with services for a cost less than these services could be obtained at home. For larger companies, making acquisitions of UK companies can also be cost effective.

The UK remains a business friendly environment with a low level of restrictive rules and red tape. Despite a hung parliament at the last election, the political landscape remains relatively stable and we have a legal system that can be relied upon.

The rate of corporation tax in the UK is currently 19% which is the lowest in the G7. Further reductions to 17% have been announced and the UK government clearly see low corporation tax as an inducement for investment. The tax allowances for Research and Development (R&D) are generous and with foreign owned companies more likely to invest in R&D, this is likely to have had a very positive effect on FDI.

Whilst previously overseas companies invested in Europe, often the UK, to give access to the European markets, in future we will see companies invest in the UK just to give access to UK markets. In time we will see trade agreements with overseas nations outside Europe and European companies will want to use the UK to give access to these markets.

Whether the UK will ultimately gain or not from Brexit remains to be seen. There is no doubt that the country’s economic performance and its ability to attract FDI has confounded critics to date. A post Brexit Britain will remain an attractive proposition to many investors.

If you would like to discuss any aspect of investing in the UK, I would welcome you to get in touch with me or your usual contact at Mercer & Hole.

 

 

Date: 12th October, 2017
Author: Andy Crook

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