The Impact of Brexit on Foreign Investment and Production

Ellen McGrattan and Andrea Waddle

No 23217, NBER Working Papers from National Bureau of Economic Research, Inc

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 other intangible capital that is used nonrivalrously by their subsidiaries at home and abroad. We analyze several post-Brexit scenarios. First, we assume that the United Kingdom unilaterally imposes tighter restrictions on foreign direct investment (FDI) from other E.U. nations. With less E.U. technology deployed in the United Kingdom, U.K. firms increase investment in their own R&D and other intangibles, which is costly, and welfare for U.K. citizens is lower. If the European Union remains open, its citizens enjoy a modest gain from the increased U.K. investment since it can be costlessly deployed in subsidiaries throughout Europe. If instead we assume that the European Union imposes the same restrictions on U.K. FDI, then E.U. firms invest more in their own R&D, benefiting the United Kingdom. With costs higher on both U.K. and E.U. FDI, we predict a significant fall in foreign investment and production by U.K. firms. The United Kingdom increases international lending, which finances the production of others both domestically and abroad, and inward FDI rises. U.K. consumption falls and leisure rises, implying a negligible impact on welfare. In the European Union, declines in investment and production are modest, but the welfare of E.U. citizens is significantly lower. Finally, if, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, U.K. inward FDI and welfare both rise significantly.

JEL-codes: F23 F41 O33 O34 (search for similar items in EconPapers)
Date: 2017-03
New Economics Papers: this item is included in nep-cmp, nep-eec, nep-int and nep-opm
Note: EFG IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Published as Ellen R. McGrattan & Andrea Waddle, 2020. "The Impact of Brexit on Foreign Investment and Production," American Economic Journal: Macroeconomics, vol 12(1), pages 76-103.

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Related works:
Journal Article: The Impact of Brexit on Foreign Investment and Production (2020)
Working Paper: The Impact of Brexit on Foreign Investment and Production (2017)
Working Paper: The Imact of Brexit on Foreign Investment and Production (2017)
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