Archive for the ‘cep’ Category

Voting with their money: Brexit and outward investment by UK firms

Are firms moving investment abroad because of Brexit? Holger Breinlich, Elsa Leromain, Dennis Novy and Thomas Sampson (LSE) use a ‘doppelganger method’ to estimate how foreign direct investment would have evolved without the vote for Brexit. They find a 12% increase in the number of new investments made by UK firms in EU countries, and an 11% fall in new investments made by EU firms in the UK. Moreover, there is no sign of a ‘Global Britain’ effect that would have seen UK firms investing elsewhere in the world.

The UK’s vote to leave the EU has generated fears that UK firms are moving investment abroad because of Brexit. For example, media reports have documented that both large UK companies such as Barclays, HSBC and EasyJet, and smaller companies such as Crust & Crumb, a Northern Irish pizza maker, have invested in the EU27 in response to Brexit.

Has the threat of reduced access to the EU market after Brexit pushed British firms into setting up shop in the remaining EU member states, rather than serving those markets from the UK?

In new research (Breinlich et al. 2019), we study whether the anecdotal evidence is representative of a wider pattern. We measure new FDI activity through a count of announced greenfield and M&A (mergers and acquisitions) transactions. Greenfield activity refers to investments that create new establishments or production facilities from scratch, for example setting up a new factory. M&A transactions refer to the acquisition of existing facilities. Our analysis focuses on the period from 2010 to 2018, during which we observe around 100,000 transactions in total.

The doppelganger method

We employ the ‘doppelganger method’ to analyse the impact of the Brexit vote. This is a way to estimate how UK FDI to the EU27 would have evolved after the June 2016 referendum if the UK had not voted for Brexit.

We construct a doppelganger for UK FDI as a weighted average of FDI transactions between other developed countries, with FDI into the EU27 from Switzerland and the United States receiving the biggest weights. If the referendum outcome had no discernible impact on UK FDI, then the doppelganger and the actual series should be similar not only before, but also after the referendum.

The referendum increased foreign investment from the UK to the EU27

Figure 1 shows our results. The number of FDI transactions from the UK into the EU27 goes up substantially after 2016 Q2 compared to the synthetic doppelganger, which remains at 2014 and 2015 levels.

Figure 1: UK-EU27 FDI counts (actual vs. doppelganger). Figure 1 plots the actual count of FDI transactions from the UK to the EU27 (solid line) and the corresponding doppelganger series (dashed line). Source: fDi Markets, Zephyr and authors’ calculations.

In terms of the cumulative difference, we find that 181 greenfield and M&A transactions from the UK into the EU27 had taken place by 2018 Q3 that would not have occurred in the absence of Brexit. This represents a 12% increase in new FDI projects by UK firms in the EU27.

In further analysis we find that the increase in outward FDI from the UK to the EU27 is entirely driven by the services sector. This result is consistent with the view that the UK government has prioritised the interests of manufacturing over services in the Brexit negotiations by focusing on reducing customs frictions, while ruling out membership of the EU’s single market.

In terms of value, we estimate that these additional FDI outflows from the UK to the EU27 are worth approximately £8.3 billion in total by 2018 Q3. Moreover, the persistence of the gap in Figure 1 shows that the referendum effect has not yet died away, meaning the increase in outward FDI due to Brexit is likely to grow further as more data becomes available.

As a note of caution, we stress that the FDI outflow can only be interpreted as ‘lost investment’ for the UK under the assumption that the investment transactions would have taken place in the UK, instead of the EU27, were it not for the leave vote. It could also be that the referendum outcome simply triggered additional investment by UK firms in the EU27. We therefore regard £8.3 billion as an upper bound on lost investment.

No ‘Global Britain’ effect

Is the increase in FDI from the UK specific to the EU27 as a destination, or do we observe similar changes in UK investment flows to other countries? To evaluate this possibility, we construct a doppelganger for UK investment into non-EU OECD countries.

In contrast to the EU27 as a destination, we do not observe an increase in UK investment activity into these non-EU OECD countries. That is, UK investment in advanced economies outside the EU27 has not experienced a post-referendum surge. In other words, we find no sign of a ‘Global Britain’ effect.

Finally, we show that increased outward investment in the EU27 has been accompanied by lower investment coming into the UK from the EU27. We estimate that the referendum reduced the number of new EU27 investments in the UK by 11%, amounting to £3.5 billion of lost investment.


We show that the Brexit vote has led to a 12% increase in the number of new investments made by UK firms in EU27 countries. We find no such increase in UK investment in countries outside of the EU.

Although it is not possible to be certain about the reasons behind firms’ investment decisions, our results are consistent with the idea that UK firms are offshoring production to the EU27 because they expect Brexit to increase barriers to trade and migration, making the UK a less attractive place to do business. In the event of a no-deal Brexit, more firms are likely to activate contingency plans for moving production abroad, accelerating the outflow of investment from the UK.

This post represents the views of the authors and not those of the Brexit blog, nor the LSE. The full report is available here.

Holger Breinlich is a Research Associate in the Trade Group of the Centre for Economic Performance, LSE. He is also a professor at the University of Surrey and a Research Fellow at the Centre for Economic Policy Research.

Elsa Leromain is a research officer in trade at the Centre for Economic Performance, LSE.

Dennis Novy is an associate in trade at the Centre for Economic Performance, LSE and an Associate Professor of Economics at the University of Warwick.

Thomas Sampson is an Associate Professor of Economics at the LSE and a CEP Trade Research Programme Associate.

Long read: Brexit uncertainty must not prevent strategic planning and longer-term economic re-orientation

Brexit is not a simple story of disruption. Policy-makers in the throes of Brexit should not forget another driver of structural economic transformation: the so-called ‘Fourth Industrial Revolution’. Analysing the two drivers of labour market disruption together demonstrates the unique challenge of reconciling future planning with handling immediate shocks. Current uncertainties must not prevent strategic scenario planning and longer-term economic re-orientation, write Christopher Pissarides, Anna Thomas (IFOW), and Josh De Lyon (LSE).

The UK economy is experiencing two major forces of disruption. The first, Brexit, will involve a sharp change in the structure of economic activity. Membership of the European Union has shaped the British model of capitalism and the structure, and operation, of core industrial sectors. Factors listed in the World Bank ‘Ease of Business’ index, including those that influence trade across borders, are a stark reminder that the UK’s high current rating is linked to near-frictionless trade and investment flows with the European Union. Whichever form Brexit takes, this is set to change.

The impact of technological disruption, the second great force behind change in the British economy, is less immediate but nevertheless drives a different sort of structural transformation. In the longer run, technological innovation ought to be our main driver of growth. The positive and negative effects of technological disruption are not, however, evenly distributed across sectors and regions. Evidence of this unequal distribution can be seen in the recent experiences of communities formerly dependent on traditional manufacturing, who have suffered the impacts of deindustrialisation since the 1980’s. Research suggests that voting and turnout patterns in the Brexit referendum may well have been linked to this: the relationship between our two forces runs deep.

This article discusses how differentials are likely to be exacerbated by the onset of Brexit. As the ‘double disruption’ works together, the challenges will be deeper than those faced by other European countries that have only technological disruption to deal with. Further, they will be experienced at an individual, community and national level, inviting a period of policy activism by Government targeted at our most vulnerable regions. This will need to address the dampening of technological progress, as well as the growth of in-work poverty, and will demand critical shock management combined with a range of longer-term policies aimed not only at generating good local jobs in new and growing sectors, but also at supporting worker transition.


It is now common knowledge that a No Deal Brexit is likely to cause living standards to fall sharply, with a probable reduction in UK income per capita by around 8%. The economic effect of other forms of Brexit are less certain, but the Government’s analysis predicts that GDP would be 1.6% lower if the UK remains in the Single Market compared with 7.7% lower in the WTO scenario over a 15-year period. This will impact individuals mostly through lower wages but is likely to affect other aspects of ‘good work’ too. These are identified in the Institute for the Future of Work’s Charter for Good Work and include: access to work, terms and conditions of employment, conditions of work, work quality, and choice.

The short-term adjustment process will be profoundly disruptive, especially in the case of a No Deal Brexit. Transitions tend to involve job change or displacement across sectors and regions as resources are reallocated and the economy adjusts to its new structure. Inevitably, this has implications for the skills that employers demand, as well as productivity and salaries. It is concerning that wages and job-related education and training have already been cut in sectors most likely to be exposed by Brexit and therefore are most in need of these policies [Centre for Economic Performance, research not yet published]. Other Brexit-related trends already biting include a rise in prices due to devaluation of the pound, which has caused real wages to shrink; and businesses cutting back on EU exports due to increased uncertainty.

The UK labour market will be affected in two main ways. First, downward pressure on labour demand is anticipated due to rising trade barriers and a fall in the inflow of foreign investment. Evidence to date suggests this will hit some industries dramatically: manufacturing, retail and transport stand out. These adverse effects will be most severe in the event of a No Deal Brexit. The consequences of other scenarios are less clear but foreign investment and trade flows will almost certainly decrease in the immediate aftermath.

Second, British migration policy is set for an overhaul. The Government has proposed a “skills-based immigration system” based on an independent report by the Migration Advisory Committee. The thrust of the proposal is to encourage high skill workers to immigrate to the UK and restrict immigration of low skill workers. An example can be seen in the new ‘tech talent’ visa scheme. In theory, this approach could put upward pressure on the wages of resident lower income workers. However, as we explore below, potential benefits are likely to be offset by a significant overall contraction.


Meanwhile, technological innovation continues to affect the UK economy at an increasing pace as costs diminish and rapid adoption continues. This should be good: technological progress increases aggregate productivity and is the main driver of long-term economic growth, as our Industrial Strategy recognises. Under appropriate conditions, technological innovation ought to translate into higher pay, increased average living standards and a reduction in poverty. But change and gains from technological progress are not spread evenly, meaning that technological disruption has important implications for both regional and wage inequality: technology grows the economic pie but alters the way in which the pie is cut. Managing a smooth transition for displaced workers, re-distributing resources into growing, more productive industries and redistributing new wealth and benefits are key. Focus on building a sustainable future of good work across the UK is central the success of these objectives.

The economic outcomes of workers displaced by technology are a good indicator of current trends and trajectories. Workers in shrinking occupations tend to experience a significant hit to their earnings relative to comparators in constant or growing occupations. The need for investment in human capital to facilitate training, reskilling and other support so that displaced workers can adapt to new lines of work is already increasingly pronounced. If and when Brexit kicks in, this need will become acute.

Brexit and technology

The exact manifestation of these shocks, and their interaction, is impossible to predict. We can, however, identify and map the UK sectors and regions already which are fielding the adverse effects of technological disruption, and are set to be hardest bit by Brexit (and therefore most likely to suffer the ‘double disruption’ we have identified). Brexit and technology, acting together, will increase the speed and process of disruption to the UK labour market. Divisions will be exacerbated, whilst the positives of technological change will be muted in the immediate aftermath. Growing in-work poverty experienced in front-line sectors is set to increase further. Those feeling the pain most sharply may be further exposed by employment law provisions that may not survive Brexit: protection for collective redundancy, working time, and agency work.

Restriction on immigration may well cause a tighter labour market, increasing the cost of labour and encouraging the adoption of technology. Bank of England intelligence has already observed that tight labour markets have encouraged the adoption of new technologies in some sectors, even though the UK has lagged behind its neighbours over the last decade. Were this increase in adoption a stand-alone trend, it would be very welcome.

Falling inward investment linked to Brexit will, however, dampen this positive emerging trend. The resultant economic contraction is likely to result in a fall in labour demand. This will stretch the labour market, making it less tight, exerting downward pressure on wages, and reducing incentives to adopt new production technologies. Inward transfer of technology may also fall because technology is known to move with firms. Increasing trade barriers and the greater administrative cost of trade may erode profitability and reduce the potential market size for British businesses. The absence of trade agreements is likely to add barriers to the exchange ideas, information and to conducting internationally collaborative work beneficial to technological innovation on a global playing field. Together, this will the hamper adoption and innovation use of technology, and the UK’s ability to respond to disruption with agility will be impaired. The UK’s ranking on the new ‘Global Labour Resilience Index’ (Whiteshield Partners in collaboration with the Institute for the Future of Work, Oxford, HSBC and ManPower Group) will fall.

In short, recent progress the UK has made with regard to technological innovation, and leadership in AI-related technologies in particular, is likely to reverse.

The two major outcomes of this reversal are very significant for the future of work in the UK, and the national economy after Brexit: firstly, technological growth will be muted, and secondly, existing regional inequalities will worsen.

Sectoral analysis

We have analysed the ‘double disruption’ in 3 major UK sectors and identified regional spread.


Traditional manufacturing employment has been declining for nearly four decades, with  many struggling regions never recovering. Technology has repeatedly altered the way in which production has taken place, and facilitated the fragmentation of the production process, so that labour-intensive tasks can be moved off-shore. Although the quality of remaining jobs may have improved with the reduction of more routine tasks, it is no coincidence that many Leave-voters reside in the areas most affected by deindustrialisation.

The story of British manufacturing does not end there though. The manufacturing industry is heavily dependent on international supply chains across the globe, especially for the production of more complex goods. If tariffs are introduced for border-crossing then the cost of importing and exporting final and intermediate goods will increase. In the short run, this will mean higher costs to firms, and reduced foreign demand for exports, both of which will put more jobs at risk. In the medium and longer term, there are abundant signs that manufacturing firms may decide to locate production plants outside the UK to reduce the frictional costs of trading. For example, Nissan has just chosen Japan as its location to build the next X-trail car and Airbus (which employs 14,000 people in the UK) has threatened that it could leave the UK in the case of No Deal, and a recent survey suggested that nearly a third of businesses are considering moving operations overseas due to Brexit. Pay and quality of work in remaining jobs will be at risk, likely leading to a higher level of in-work poverty. More research is needed on in-work poverty trends by sector, but pay and work quality are known to be key indicators.

The map below shows the proportion of employment in manufacturing and motor trades for each Parliamentary Constituency. Regions with high dependence on manufacturing employment are particularly exposed to the changes described above. Some constituencies in the North East, Midlands and Wales have over 30% of their employment in manufacturing.

Manufacturing and motor trades employment in 2017 by Parliamentary Constituency[1]


[1] The map plots employment in the manufacturing and motor trades industries as a share of total employment in the Constituency in 2017, using data from the ONS Business Register and Employment Survey (BRES).

Manufacturing and motor trades employment in 2017: Top 10 Constituencies


The transport sector operates hand-in-hand with manufacturing: a decline in the manufacturing sector caused by technological disruption will also put pressure on the transport sector. A particular threat facing workers in the industry is driverless vehicles. In spite of significant developments in trialling autonomous vehicles, the timing of this shift and the proliferation of the technology remains unclear. Employment in the sector has settled over the last decade.

This is likely to change. Transport is particularly susceptible to Brexit where, for example, just two extra minutes spent on each vehicle at the border could triple queues on the M20 and see nearly 5 hours of delays in Kent at peak times. This may result in a vicious circle, impacting on manufacturing costs which translate back to the transport sector. The double disruption will bite vulnerable transport workers twice over. We note that a high proportion of transport workers, logistics and couriers are precarious workers outside the basic floor of protection for employees. At the time of writing, the future of the additional protection afforded by some EU-based rights, including the Temporary Agency Work, Working Time Regulations and the Information and Consultation of Employees Regulations, is unclear. Early scoping suggests these protections are of particular relevance to this sector.

For more than half of Constituencies, transport and storage comprises less than than 5% of total employment. But many constituencies rely heavily on the sector, with as much as 31% of employment deriving from jobs in transport.

Transport and storage employment in 2017 by Parliamentary Constituency[2]

[2] The map plots employment in the transport and storage industry as a share of total employment in the Constituency in 2017, using data from the ONS Business Register and Employment Survey (BRES).

Transport and storage employment in 2017: Top 10 Constituencies


The retail sector has already undergone a series of major shifts as the way people purchase good changes from in-store to on-line. This has caused a move away from high-street jobs towards lower-quality warehousing and delivery jobs. On top of this, the sector is dependent on consumer spending which will reduce as real wages fall. Added trade costs could also push up prices which may filter through to the retail sector. The textiles, clothing and footwear industry will be among the hardest hit of UK industries, with Brexit likely to reduce the gross added value by up to 7%. Trust for London analysis notes that in-work poverty in retail appears to be growing.

Wholesale and retail employment is above 10% for most areas of the UK. It is crucial to the UK economy, with the retail sector alone worth £92.8 billion in 2017. Yet some areas are still significantly more exposed than others, as shown in the map.

Wholesale and retail employment in 2017 by Parliamentary Constituency[3]

[3] The map plots employment in the wholesale and retail industries as a share of total employment in the Constituency in 2017, using data from the ONS Business Register and Employment Survey (BRES).

Wholesale and retail employment in 2017: Top 10 Constituencies


By looking at the effects of two major structural changes in the round we are able to identify two major challenges. First, that immediate downward pressure on wages caused by Brexit against the background of technological disruption will impact industries and regions extremely unevenly. In particular, there is likely to be a reduction in employment and an increase in in-work poverty in key sectors such as transport and retail. Low-skill workers in these sectors across the country are most exposed, facing a ‘double disadvantage.’

Second, Brexit is highly likely to dampen the adoption of technology and technological progress, at least in the short term. This will interfere with the progress of a main pillar of Industrial Strategy. At the same time, the UK’s resilience and ability to respond with agility to technological disruption will be reduced, benefiting our competitors. In both instances, the impact of No Deal Brexit will be more pronounced.

In these demanding circumstances, how can policy makers cope with immediate demands from the double disruption, whilst re-orientating the economy to address the underlying flaws that are the backdrop to the Brexit vote? We think that only bold and targeted policy-making will work. The need to create good new jobs and to facilitate the transition of workers must drive long-term planning. But the immediate area for attention should be critical social, economic and educational support for, and investment in, our most vulnerable communities and countering in-work poverty. This is not a tactical matter. These areas should be prioritised and integrated as we reposition good work to be at the centre of a ‘moral’ British economy.

The Good Work Plan is a good start and an excellent pointer. But to plan for a future of good work, we will need to extend our remit to all those things we discuss in this paper on top of emergency measures: training, reskilling, new job creation across the regions, immigration and trade by sector incentivising private investment, increasing public investment and opening access to finance. We will also need to discuss the infrastructure needed to achieve sustainable good work in our post-Brexit world, including how we pay for and administrate these measures. We anticipate that increased Government investment (including widespread use of beefed-up transformation funds across all vulnerable regions and piloting new types of incentivised private-public partnerships aimed at re-skilling workers) will feature heavily.

A comprehensive, forward-looking vision and strategy aimed at future good work is a prerequisite to addressing the twin challenges of double disruption. Whatever the outcome of Brexit, the best way to start this process is to draw from Germany’s Work 4.0 framework, and initiate a White Paper on the Future of Work.

This post gives the views of its author, not the position of LSE Breixt or the London School of Economics. It is an extended version of the article that appeared on LSE Business ReviewFor the full report and sectoral analysis please visit and read here.

Christopher Pissarides is the Regius Professor of Economics at LSE, a professor of European studies at the University of Cyprus, chairman of the Council of National Economy of the Republic of Cyprus and the Helmut & Anna Pao Sohmen Professor-at-Large of the Hong Kong University of Science and Technology. 

Anna Thomas is founding director of the Institute for the Future of Work (@_futureofwork). 

Josh De Lyon is a Research Fellow at the IFOW and a PhD student in economics at Oxford University. He is also a research assistant in trade at LSE. He tweets @joshdelyon.

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