Brexit could cause 'serious damage' for foreign investment into the UK, new study says

Key Points
  • Foreign direct investment into the U.K. has fallen by almost 20 percent since the EU referendum.
  • Since the vote, the U.K. has experienced its sharpest decline in overseas investment since records began.
  • Germany overtook the U.K. last year to become the European country receiving the most foreign investment.
Ben Stansall | AFP | Getty Images

Foreign investment into the U.K. has fallen by 19 percent since the Brexit vote in 2016, a new study has found.

Published Thursday, the report by the University of Sussex's U.K. Trade Policy Observatory showed that overseas investment has continuously declined since its peak in 2015. It has been the longest continuous decline for the U.K. since foreign direct investment (FDI) records began in 2003, it said. FDI is defined as overseas investments into new or existing projects, where the foreign investor secures a majority-ownership.

While the world economy remained resilient last year, the U.K. lost an estimated $1.5 billion in foreign capital investment, the report said. In 2017, the U.K. saw a 10 percent reduction in FDI projects.

UK finance minister: Sense of urgency on UK and EU to solve Brexit
UK finance minister: Sense of urgency on UK and EU to solve Brexit

Researchers said that although the U.K. remained one of the world's largest FDI recipients, uncertainty over its future had cost the country its status as the largest greenfield FDI recipient in Europe. A greenfield investment is a type of FDI where a parent company builds its operations in a foreign country from the ground up.

In 2017, the U.K. received almost 1,000 greenfield investment projects worth more than $33 billion — but it was overtaken as the top recipient by Germany, with France also gaining ground.

In early 2015, a quarter of all FDI projects into the EU were bound for the U.K. — by the end of 2017, the U.K.'s share of European FDI had fallen to 18 percent, the research said.

Researchers estimated that the services sector — which comprises around three quarters of the U.K. economy — had lost as much as 25 percent in FDI since the EU referendum in June 2016.

Lower investor appetite

Ilona Serwicka, a research fellow in the Economics of Brexit at the University of Sussex and co-author of the paper, said if the trend was not reversed, there could be "serious damage to the U.K. economy in the medium-long run."

"This fall in FDI could be due to a temporary adjustment because of the current climate of uncertainty," she said in a press release. "But it could also indicate a permanent shift away from the U.K. by foreign investors."

Nicolo Tamberi, research officer in the Economics of Brexit at the university, added: "The drop in FDI that we observe suggests the prospect of losing unfettered access to the EU single market once the U.K. leaves the EU could lower investors' appetite to invest in the U.K." The EU single market allows free trade between member nations by removing regulatory obstacles such as tariffs from internal borders.

Deals still being done

Dharmash Mistry, general partner at venture capital firm Lakestar, said if the U.K. did not reinforce a positive environment it would lose overseas investors to other European markets, adding that Brexit was "undoubtedly" spooking investors.

"If there is uncertainty many investors wait to see how the future will unfold before deploying too much capital," he told CNBC via email. "Talent will wait to see if they can continue living in the U.K. before moving. This is true today and (will become) more of a concern if we don't stem the tide."

He said businesses needed mobility of talent across borders, more government capital, and a regulatory friendly framework to remain attractive to investors overseas.

However, Zoe Chambers, the head of the future of industry team at Octopus Ventures, said deals were still being done despite political uncertainty, noting that innovative industries such as artificial intelligence were holding firm.

"There's a lot of capital in the market," she told CNBC over the phone. "An increasing number of U.S. investors are looking across to the U.K. and Europe — historically they have only invested in domestic companies, but they're more and more willing to invest across the pond."

UK a very attractive place to invest, portfolio manager says
UK a very attractive place to invest, portfolio manager says

Chambers added that investors tended to think on a long-term basis, and therefore hoped they would "ride out any ups and downs."

"The U.K. has such a strong reputation for talent and that doesn't die overnight," she said.

"With London in particular, we've seen Google acquire DeepMind and allow it to stay headquartered in King's Cross, and some of the best universities in the world for research and development are in London."