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The Impact of Brexit on Foreign Investment and Production

Ellen McGrattan and Andrea Waddle ()

No 542, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: In this paper, we estimate the impact of increasing costs on foreign producers following a withdrawal of the United Kingdom from the European Union (popularly known as Brexit). Our predictions are based on simulations of a multicountry neoclassical growth model that includes multinational firms investing in research and development (R&D), brands, and organizational capital that are used nonrivalrously by their subsidiaries at home and abroad. For the main simulation, we assume that U.K. investments in the European Union face the same restrictions as Norway’s and that E.U. investments in the United Kingdom are treated reciprocally. We find a significant fall in foreign investment and production by U.K. firms, and a small but positive welfare gain for U.K. citizens. Following the Brexit, the United Kingdom increases international lending, which finances the production of others, both domestically and abroad. In the European Union, declines in investment and production are modest, but the welfare of non-U.K. citizens is lower. If, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, domestic production and investment in the United Kingdom fall by less, and the welfare of U.K. citizens rises by more.

Keywords: Brexit; Foreign investment; FDI; United Kingdom; European Union (search for similar items in EconPapers)
JEL-codes: F23 F41 O33 O34 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-opm
Date: 2017-02-02
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Working Paper: The Impact of Brexit on Foreign Investment and Production (2017) Downloads
Working Paper: The Imact of Brexit on Foreign Investment and Production (2017) Downloads
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