BrExit and foreign investment in the UK

Nigel L Driffield, Michail Karoglou

Research output: Contribution to journalArticle

Abstract

We explore the likely effect of Brexit on inward foreign direct investment (FDI) through its possible effect on the benchmark variables that characterize the macroeconomy. For this we propose the use of a Markov regime switching structural vector auto-regression to distinguish between the volatile and stable states of the economy and account, among other effects, for the contemporaneous effects that the frequency of FDI innately generates. Our findings suggest that, if Brexit triggers a sterling depreciation in the current economic climate, this will fuel a prolonged negative effect on FDI. FDI flows may be positively affected (at most) by a sterling depreciation after Brexit only if this event drives the UK economy to a period of highly volatile growth, inflation, interest and exchange rates: a scenario that is rather unlikely. And, even then, the sterling depreciation benefits would last for only a short period of time.

Original languageEnglish
Pages (from-to)559-582
Number of pages24
JournalJournal of the Royal Statistical Society, Series A (Statistics in Society)
Volume182
Issue number2
Early online date25 Oct 2018
DOIs
Publication statusPublished - 1 Feb 2019

Bibliographical note

© 2018 The Authors Journal of the Royal Statistical Society: Series A (Statistics in Society) Published by John Wiley & Sons Ltd on behalf of the Royal Statistical Society.

This is an open access article under the terms of the Creative Commons Attribution‐NonCommercial‐NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non‐commercial and no modifications or adaptations are made.

Funding: Leverhulme Trust. Grant Number: RF‐2013‐503

Keywords

  • Brexit
  • Currency volatility
  • Economic growth
  • Inward investment
  • Markov switching
  • Stuctural vector auto-regression

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