The Greek referendum, which rejected all debt restructuring proposals, has brought into sharp focus the next challenge to the EU: the UK’s membership in the group.
To appease the far right-leaning members of the Conservative party and sections of the electorate, PM David Cameron has promised a referendum on the UK’s continuing membership of the EU. The potential exit of the UK from the EU, colloquially referred to by the portmanteau word, “Brexit”, has polarized business leaders around the world on the wisdom behind an exit or its potential gains.
Will Brexit allow the UK to maintain its position as the highest recipient of FDI in Europe?[1]
The UK’s membership of the EU has often been cited as an important reason for companies investing in the UK, the UK being their ‘Gateway to Europe,’ giving investing companies – especially Indian, Japanese and Chinese companies[2] -access to the common market. While other EU members have equal access to the common market, investors see the UK as their preferred investment destination vis-à-vis other jurisdictions in the EU because of its resurging economy, a robust legal system, the English language, ease of doing business[4], and liquid capital and equity markets.
The UK has recently pushed for inward FDI from emerging economies.[5] India is an important source, especially as Indian companies are looking to tap foreign markets. Generally, the total outward direct investment (ODI) from India has increased.
| Year | Outward Direct Investment (in billion USD) |
| 2008-2009 | 17.1 |
| 2009-10 | 18 |
| 2010-11 | 43.9 |
| 2011-12 | 30.9 |
| 2012-13 | 26.9 |
| 2013-14 | 36.9 |
Source: EXIM Bank India[6]
The impact on Indian FDI to the UK could potentially be over two time periods: the short-medium term and the long term.[7] The short-medium term covers the interim period before the referendum, [8] and is likely to see FDI decrease temporarily, the deterrents being the potential financial instability and a legal regime overhaul. Investors may put off investing till at least after the transition.[9] An EY survey of 406 investors (31% of those surveyed) suggested that they would “reduce or freeze” potential investment until 2017.[10] 2017 is a conservative estimate, since investors will be wary of investing in the transitory period after the referendum as well, waiting till the market shows confidence in the new investment regime.
If the UK votes to leave the EU, FDI may fall in the long-term as well. As a member of the EU, the UK benefits from tariff-free trade in goods and services to the 28 member states, which it will lose if it leaves the EU, making other EU countries – like Germany – possible alternatives. A full 72% of the investors surveyed by EY stated that access to the European market was important for them.[11] This has elicited warnings from JP Morgan and the British Bankers Association, with companies like HSBC threatening to consider shifting headquarters.
The common market, however, isn’t the only factor. The European political landscape with Greece’s recent default and referendum on being part of the Eurozone, has landed the EU in murky waters. (The Eurozone only refers to the monetary union i.e. those countries adopting the Euro, which the UK is not a part of. The EU refers to the economic and political union, which the UK is a part of). Without precedent on the matter, it will take at least a year to decide on Greece’s continued membership to the Eurozone. This is likely to make European markets unpredictable, a trend evident since the onset of the Greek crisis. The effect of this has been felt even in Germany, the most financially resilient EU member, with business confidence falling for the second consecutive month, and business expectations dropping for the third consecutive month.[12]
The Euro also suffered major swings as a consequence of the threat of “Grexit” and the lifting of the Swiss Franc peg to the Euro. The Indian Rupee has pared back losses against the Euro in the last year moving from 81.56 to 69.99.[13] Indian investors looking to repatriate profits to India will worry that the Euro depreciation can cut into profits.
From a trade perspective, the UK may benefit from its freedom to negotiate FTAs or other trade agreements with non-EU nations on its own terms. The EU regulates trade with non-EU members on a pan-EU basis. This prevents the UK from negotiating trade agreements with other nations. India and the EU have been negotiating a Trade and Investment Agreement since 2007, which has reached an impasse because of the EU’s insistence on India (and India’s reluctance thereof) to include a Trade and Sustainable Development Chapter in the FTA.[14] This exemplifies the difficulties a developing country like India faces in agreeing to an FTA with the EU.
With the UK looking to attract FDI from emerging markets, Brexit would allow the UK to negotiate bilateral trade agreements in lieu of that objective, without stringent EU regulation. Indian investors will benefit from lower regulation (hence cost) and more access than they currently have.
The FDI flow from India to the UK has generally increased, with 2011-12 seeing £1832.54 million being invested (5.9% of total Indian ODI).[15]
| Year | FDI inflow in million USD |
| 2001-02 | 83.46 |
| 2002-03 | 33.7 |
| 2003-04 | 82.14 |
| 2004-05 | 127.57 |
| 2005-06 | 3019.09 |
| 2006-07 | 384.66 |
| 2007-08 | 740.8 |
| 2008-09 | 343.98 |
| 2009-10 | 344.84 |
| 2010-11 | 393.04 |
| 2011-12 | 1832.54 |
Source: EXIM Bank India[16]
This is slightly complicated by the net FDI inflow figures (total FDI inflows less disinvestments) from India to the UK, which show that in 2012 and 2013 there was net disinvestment from the UK, despite the uptick in total FDI inflow.
| Year | FDI Inflow (Net) in £ million |
| 2001 | 33 |
| 2002 | 1 |
| 2003 | 7 |
| 2004 | -15 |
| 2005 | 138 |
| 2006 | 265 |
| 2007 | 151 |
| 2008 | 2638 |
| 2009 | 20 |
| 2010 | 48 |
| 2011 | 563 |
| 2012 | -15 |
| 2013 | -264 |
Source: ONS[17], GH
There is still no empirical data to suggest that Indian investors have begun shifting FDI to other European countries. The UK is still the EU country that receives the highest FDI from India, apart from the Netherlands, which has seen an increase in Indian FDI since 2008-09, largely due to the Netherlands’ favorable tax regime. Despite the hiccup in net Indian FDI to the UK in 2012-13, which coincided with slower Indian GDP growth and the taper tantrum, Indian investment into the UK has been consistently increasing, with 2014-15 seeing a 65% increase, making India the third largest source of FDI to the UK.[18]
It is difficult to predict the outcome of Brexit on Indian FDI because of other competing factors like the unstable European markets, a tumbling Euro and possible disintegration of the Eurozone, all tugging in different directions.
Only one thing is clear; Indian FDI in the UK is increasing. London is looking to attract this FDI. Makes for good negotiation.
Kunal Nathwani was an intern at Gateway House. Kunal graduated from University College, London (UCL) with an LL.B. He then completed his Legal Practice Course (LPC) from BPP and is currently working at the London office of international law firm, Simmons & Simmons.
This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.
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[1] UK Trade and Investment, “UKTI Inward Investment Report 2014 to 2015”, UKTI/15/43, June 17, 2015<https://www.gov.uk/government/publications/ukti-inward-investment-report-2014-to-2015/ukti-inward-investment-report-2014-to-2015-online-viewing>
[2] Grant Thornton, <‘What if the UK Leaves the EU – The Business Impact,’ FDIntelligence, March 21, 2013<http://www.grant-thornton.co.uk/en/Thinking/FD-Intelligence/Issues/What-if-the-UK-leaves-the-EU–the-business-impact/>
[3] Financial Times ‘JP Morgan Raises Alarm Over Rising Euroscepticism in Britain,’ January 22, 2014, <http://www.ft.com/cms/s/0/98af3bb8-8392-11e3-aa65-00144feab7de.html#axzz3ey6NjyxQ>
[4] World Bank, The UK is ranked eighth on the Ease of Doing Business Rank, World Bank: Doing Business: Ranking of Economies < http://www.doingbusiness.org/rankings>
[5] UK Trade and Investment, “UKTI Inward Investment Report 2014 to 2015”, UKTI/15/43, June 17, 2015 <https://www.gov.uk/government/publications/ukti-inward-investment-report-2014-to-2015/ukti-inward-investment-report-2014-to-2015-online-viewing> and UK Trade and Investment, “UKTI Inward Investment Report 2013 to 2014”, URN14/125, June 18, 2015 <https://www.gov.uk/government/publications/ukti-inward-investment-report-2013-2014/ukti-inward-investment-report-2013-2014–2>
[6] Export-Import Bank of India, “Emerging Trends in India’s Foreign Trade”,2015, <http://www.eximbankindia.in/sites/default/files/indias-international-trade-and-investment.pdf>
[7] Grant Thornton, ‘What if the UK Leaves the EU – The Business Impact,’ FDIntelligence, March 21, 2013 <http://www.grant-thornton.co.uk/en/Thinking/FD-Intelligence/Issues/What-if-the-UK-leaves-the-EU–the-business-impact/>
[8] ibid
[9] ibid
[10] EY, “EY’s Attractiveness Survey: UK 2015: Another great year – but time to reflect on how the UK can stay ahead of the pack,”< http://www.ey.com/Publication/vwLUAssets/The_UK_Attractivness_Survey_2015_-_full_report/$FILE/1595088_UKAS_report_2015_FINALWEB.pdf>
[11] ibid
[12] CES ifo Group Munic, The Business Climate Index dropped to 107.4 in June from 108.5 in May, https://www.cesifo-group.de/ifoHome/facts/Survey-Results/Business-Climate/Geschaeftsklima-Archiv/2015/Geschaeftsklima-20150624.html
[13] ‘XE’, 6 July 2015< www.xe.com>
[14] European Commission, “Commission services position paper on the Trade Sustainability Impact Assessment for the FTA between the EU and the Republic of India”, May 31, 2010 <http://trade.ec.europa.eu/doclib/docs/2010/june/tradoc_146221.pdf>
[15] Export-Import Bank of India, “Outward Direct Investment from India: Trends, Objectives and Policy Perspectives”, Occasional Paper No. 165, May 2014, < http://www.eximbankindia.in/sites/default/files/Full%20OP/ODI%20OP.pdf>
[16] ibid
[17] “Office for National Statistics”, 8 July 2015< http://www.ons.gov.uk/ons/index.html>
[18] UK Trade and Investment, “UKTI Inward Investment Report 2014 to 2015”, June 17, 2015<https://www.gov.uk/government/publications/ukti-inward-investment-report-2014-to-2015/ukti-inward-investment-report-2014-to-2015-online-viewing>