Master's Thesis from the year 2017 in the subject Economics - Case Scenarios, grade: 2.1, Sheffield Hallam University, language: English, abstract: Foreign Direct Investment (FDI) has been a complex topic, however its fundamental features have enabled it to shape the world we live in and is the backbone of many countries who would not survive without it. Being part of the European Union (EU), the United Kingdom (UK) was cocooned in a union full of rules and regulations that did not please its residents. The decision to leave the EU was taken and therefore these rules and regulations are not applicable and this in turn will drastically affect FDI.
Despite being one of the world's greatest powerhouse, Brexit offers a great threat to its industries that have had solid foundations within the EU as well as the workforce it holds as the UK holds over 3 million EU nationals. The UK offers an abundance of incentives for investors although these have been affected by 3 the UK's top industries, Banking and Finance, Oil and Gas and Manufacturing with many companies in these industries agreeing that Brexit will have a negative impact on their business practices even with the government trying to get the best Brexit deal.
This dissertation will critically analyse the literature on FDI and how the host country determinates will be used in order to analyse their affect and how it would differ after Brexit. The UK's attractiveness for FDI was evident in the results that were obtained, which provided a similar theme to variables within the host country determinates that in turn allowed for recommendations to be made on the industries and how future practices could be handled.
Foreign direct investment (FDI) has long been the driving force for improving economic conditions of many countries worldwide, and therefore it has been highly scrutinised and debated in academic literature. The intentions of this chapter is to illustrate the importance of this academic topic and its significance to Brexit with reference to the industries in question. Furthermore, this chapter will look at the research question in greater detail alongside its related objectives which will outline the idea and the construction of this dissertation.
The international movement of money otherwise known as capital flows have been the backbone incentive of international trade for centuries in order to improve a host countries development. With appraisal to the widespread liberalisation across the world in the last few decades, (FDI) has recently exploded. The ease of doing international business made simpler with improved skills alongside the technological advances and the approval of free market economies has lured the use of FDI in this period of globalisation (Rahman, 2015).
In this era, it is essential that firms capitalise on the resources, markets and new technology that is available all over the world in order to be competitive. These incentives of foreign investment highlight how FDI is trending towards globalisation as current data supports and illustrates this statement. With the international migration of capital from nation to nation, come various luxuries to countries involved. These come in the form of technological advances to the host countries which would otherwise be highly-priced and difficult to implement within a firm that has limited knowledge, expertise and local funds. FDI also brings in benefits by generating new jobs and increasing local employment along with developing the human capital in the domestic market through training (Michie, 2001).
The benefits that come from FDI flows are increasingly lucrative however each country has their own rules and regulation into how FDI is carried out. This is where the European Union (EU) was developed which provides a stable single market platform to make FDI easier. Due to Brexit this is going to change. In addition, FDI is not evenly shared and the benefits that come from foreign investment are not shared equally across countries and industries. Government policies and regulations have played a big role in determining the attractiveness of FDI, and this has directed highly towards more developed countries where the bulk of FDI seems to circulate (Michie, 2001). Most of these countries belong to the Organisation for economic Corporation and Development (OECD), where a free economy and democratic governance is present.
Furthermore, since the increased use of FDI in the last few decades, the reasons for attractiveness have changed. FDI is considered the powerhouse of world economic stability, enabling improvements in developing countries while simultaneously satisfying domestic economies. Various factors have influenced how and where FDI takes place, factors such as the financial crisis and country instability has pushed FDI towards more developing countries because of the cheap labour and operational costs where a reoccurrence of such crises would not incur high losses (Mariana, 2012).
In addition, with regards to the question of the dissertation it is important to understand that the nature of FDI along with the UK's situation is very complex. Addressing the impact on FDI from Brexit with the focus on three industries requires analysing and evaluating the challenges that are faced when the UK are no longer part of the European Union and recipient of its benefits. Furthermore, the UK needs to address the environment for investment and not lose their FDI attractiveness. With the UK having strong trade relations with the EU it is vital not to lose these links. In 2014 the EU was accountable for 44.6% of UK goods and services exported and an import of 53.2% (Office of National Statistics, 2015). This is a great deal of valuable capital to sustain the businesses and increase FDI flows. However, Brexit will come with implications and policy changes and these high values will not be there forever.
Moreover, there is a great volume of theories and observed studies that highlight the motives and determinates for FDI. Many authors have scrutinised FDI about its negative impact to economies therefore making the idea of FDI very complex. FDI is usually built-up of concepts that regard multinational enterprises (MNEs) strategic decisions in how business is practiced and in order to understand the impact of Brexit there needs to be an analysis on what makes the UK such an attractive place for FDI. Looking at the host country determinates such as its locational advantages will illustrate the impact such a historical decision could have.
Throughout a globalising world there are various organisations that are trying to develop different countries with regards to international investment. The United Nations Conference on Trade and Development (UNCTAD) has been focussing on the expansion of trade in many developing countries by helping local businesses build up the value chains. The UK falls in with one of the countries that are high in providing aid and support to many countries worldwide as well as its European neighbours (UNCTAD, 2016). They indicate that policy makers should be alert as the worry of such unforeseen event can affect the world and not just the EU zone. Until now there is little empirical study on how Brexit will impact the UK in its FDI flows but for some that are recent, they are speculative publications.
Organisations deliberate international chase in search of better ways to nourish themselves through FDI, has become more of a compulsive obligation rather than a choice in order to gain access to better resources, technologies, new markets and a cheaper workforce to increase their competitive advantage. Focussing on one of the industries in question, the oil and gas industry is a very lucrative business, in the UK alone there have been extracting 1.42million barrels of oil equivalent per day (boepd) although consumed over 1.5million (boepd) which resulted in importing oil from abroad. It then increased by 16% in 2016 up to 1.73million (boepd) with a remaining of 20bn barrels left to be extracted from UK areas which would take over 30 years (Oil&GasUK, 2017). This then supports the following acquisition, in 2015 Royal Dutch Shell acquired British Gas (BG), the UK's biggest oil and gas company, in a multimillion dollar takeover making it the largest company in the UK (Miah, 2017). It is important to mention that manufacturing in the UK was the biggest in the world, at the start of the industrial revolution, the UK built strong and innovative new technologies that have contributed to the economy significantly. Although now the UK is the ninth largest manufacturing hub of the world, its historical background and already made factories brings in many foreign investments from the likes of BMW and German company BRASF, providing the largest chemical plant in the UK (The Manufacturer , 2017). Finally, the finance and banking industry is contributing a vastly amount to the UK economy, with a contribution of over £176bn in 2015 and employing over 7.3% of the UK workforce. Furthermore, this sector is the UK's leading exporter with over £72bn running trade surplus (Turvil, 2017). In highlight, foreign investors credited £100bn into the UK's financial services as of 2007, more than any other sector (TheCityUK, 2016). Germany's largest bank, Deutsche bank have leased a new London headquarters facility to show its commitment to the UK's financial sector (Evans, 2017).
Generally evaluating the above, it shows that the major factor for investment in the UK is to take advantage of domestic foundations. With a growing market to satisfy and the utilisation of a highly educated workforce along with modern technology, it makes sense too takeover rather than build hence making the UK a lucrative opportunity for investment which soon, could all change.
The aim of this research is to try and answer what is the impact of Brexit on foreign direct investment (FDI) within the UK with a focus on the Manufacturing, banking and finance, and Oil and gas industries. The importance of research lies in the focus and the sustainability of its objectives (Jankowicz, 2006). Consequently, the most important aspect to understand is to look at what makes the UK such an attractive place for FDI by emphasising on its host country determinants and therefore evaluating the impact its separation from the EU will have with reference to specific industries.
In relation to the topic question these are the following objectives. The first is through reviewing the literature taking a critical approach at defining what FDI is. This then leads to the second objective which is, reviewing the relevant theories that comes along with FDI and illustrating recent trends. The next objective is to explore the Host country determinates of FDI within the UK, in terms of what makes the UK an attractive place for businesses and how these would...