With the Conservative government restored to an outright – and substantial – majority, what does that mean for Foreign Direct Investment (FDI) into the UK?
In October, Boris Johnson told the Conservative Party conference that FDI into the UK was at a record high of £1.3 trillion, the highest of any EU member state.
This raised some eyebrows ahead of the then-deadline of October 31st on which the UK was scheduled to leave the EU with or without a deal.
But with Brexit now appearing likely to happen once again, is FDI set to fall or can those record highs be sustained?
Like many economic indicators, there are several different methods used when calculating the official total FDI into the UK by overseas investors.
Two of the main measures used are:
- Stock: The amount of equity held by foreign investors at a specific time.
- Flow: The value of investments made overseas during a given period.
The key difference between the two is that flow is a total overtime, for example over a period of 12 months, whereas stock is a snapshot of foreign investors’ equity at a moment in time, typically the end of a year.
In actual fact, the stock value for the end of 2018 calculated by the UN Conference of Trade and Development and published in June 2019 was nearly £1.5 trillion – well over the £1.3 trillion figure quoted by Johnson in October.
He was correct to say that this was the highest in the EU, and worldwide only Hong Kong and the US secured greater FDI in 2018 in stock terms.
Go with the flow
The flow measure for 2017-18 in the UK makes slightly less positive reading – in fact, the calculated value was a net decrease of 36% over the year.
UN figures showed new equity investments down by half off the back of larger falls in the previous year.
Taken together, the drop in FDI flow into the UK in 2016-18 was over £100 billion, a fall of nearly two thirds.
But this too was off the back of a significant year, as FDI flow into the UK had spiked substantially in 2016.
Flow is by definition a measure over time, and not a snapshot, so it’s sensible to look at the bigger picture when interpreting this value.
Over the long term, the results for 2017 and 2018 were not so bad when considered as part of the historical data, rather than in isolation.
What happens next?
The dust of the general election result is still settling, but data from the Department for International Trade published earlier in the year hints that 2018-19 could be another poor year for UK FDI flow.
Its research showed that major FDI investment projects in the UK fell 14% between 2017-18 and 2018-19, creating 24% fewer new jobs along the way.
Political uncertainty is generally a negative influence on investment. Following the Conservatives’ substantial gains in the general election, the value of the pound rose significantly overnight and on the morning of Friday, December 13th, 2019.
An outright majority indicates that there should be greater political stability in the UK in the months ahead.
That increases the likelihood that Brexit will be completed early in 2020, whether with or without a deal and decreases the chance of another general election until the end of the new parliamentary term in 2024.
For overseas investors, all of that should, in theory, increase confidence and could help to attract greater levels of FDI into the UK once again.
Brexit and beyond
Assuming the general election result leads to a relatively rapid resolution of the ongoing Brexit debate, the UK will soon cease to be an EU member state.
There may be a transition period if the UK government votes to accept Johnson’s Withdrawal Agreement, and negotiations will begin on future trade arrangements with the EU and third-party countries.
It’s still impossible to predict what this will all mean for the UK economy; however, it appears the appetite is still there among overseas investors.
For those outside of the EU, the UK’s departure could make it even more appealing as a destination for FDI, particularly depending on any tax deals that are struck as part of future trade negotiations.
The decisive election result has put to bed the UK’s hung parliament, at least until the next fixed-term parliamentary session comes to an end; now as Brexit comes to a head, the future landscape for UK FDI should finally take shape too.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.