At the FDI Crossroads

10 September 2019 - Elizabeth Nichols

The UK is at a crossroads. In one sense things are clear: one lot of people want out of the EU by 31 October, the other lot want to stay in.
Where it gets complicated is when this is shoehorned into the political set up. UK politics is a two-party system but not one neatly divided along Brexit lines. Boris Johnson, the Prime Minister, and Jeremy Corbyn, the Leader of the Opposition, have far more complex incentives and constituencies and, in reality, just want power. The EU referendum has presented them both with an unprecedented and confused mess of political skullduggery and opportunity that is pushing our unwritten Parliamentary conventions and historic bonds of loyalty to their absolute limits.
Take the latest example, as I write:
Boris to Jeremy: I do not want a General Election, so I am proposing a motion that we have a General Election.
Jeremy to Boris: I want a General Election, however I will not be supporting your motion for a General Election.
Confused? We are too. It is impossible to predict what will happen next and, let’s be honest, would you stick your money into a country experiencing such fundamental political uncertainty.
But what does the market and the data say?
Foreign direct investment (FDI) refers to cross-border investment made by residents and businesses from one country into another, with the aim of establishing a lasting interest in the country receiving investment. Inward FDI covers net investments made by foreign companies, so UK inward FDI ought to be a pretty useful bellwether to cut through the political noise.
However, there are two problems: 

  1. UK Government statistics on FDI are based on historic transactions so the latest numbers are only good up to 2017. 
  2. When crunching the numbers on FDI, economists don’t seem to have a sensible way of distinguishing between foreign takeovers of existing UK companies (“takeovers”), and foreign investment in new plant / setting up new companies / branches, etc. (“investment”). Instead it’s all lumped together. 

Last month CK Asset Holdings, the Hong Kong property investment firm founded by billionaire Li Ka-shing, agreed to acquire UK pubs group Greene King in a £4.6bn deal. This is but the latest in a string of foreign takeovers of British companies since the EU referendum, the most significant of which being a business just down the road from our Cambridge office, ARM (it was sold to Japanese firm Softbank for £24bn). These have all been, essentially, foreign takeovers.
We track our M&A enquiries and transactions closely, and the last six months show a higher proportion of UK FDI. However, like Greene King and ARM, this is overwhelmingly “takeover” rather than “investment” FDI. For the most part it feels like (perfectly legitimate) efforts to purchase star UK assets whilst sterling is cheap – the UK “selling the family silver”.
We ought not to be surprised. A deficit on a country’s trading account must be balanced by a surplus of equal size on its capital account. Since 1984 the UK has achieved balance by running a surplus on FDI, and where the statistics are useful is in showing that the bulk of this comes from firms in EU member countries (really Germany, France, and The Netherlands – comprising about £260bn) and the USA (about £600bn).
The Brexit impasse could be paraphrased as “do we look to Uncle Sam or to the Northern European states for our FDI?”. Both present their risks and opportunities.
It seems the decision must be made, so entrenched are the political feelings. Until it’s decided, inbound UK FDI will disproportionately take the form of selling the family silver: a clear buying opportunity.
When it’s decided, the economic path of the UK will be set for decades to come.

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