UK Foreign Direct Investment in uncertain economic times

Abstract

This paper uses time-varying Bayesian models to assess the impact of the shifting, and progressively more volatile (especially since the EU Referendum vote in 2016) macroeconomic landscape on Foreign Direct Investment (FDI) inflows to the UK. FDI inflows are depressed in response to higher UK-specific economic and geopolitical uncertainty. A stronger real exchange rate and a higher interest rate also have a negative effect. It benefits from lower UK corporate tax rates and higher US uncertainty, the latter creating investment opportunities in the UK. Rising economic policy uncertainty since the EU Referendum, has led to FDI losses of up to 0.5% of GDP.