Why the risk to investment means Brexit isn't worth the gamble
Andrew Webb, managing director of Webb Advisory
Neil Gibson wrote in Economy Watch last week that he is tiring of the Brexit debate because of the distracting impact it is having on some of the very serious problems that need to be resolved, whatever the result of the EU referendum.
I support Neil's sentiment and had intended to write about a different topic this week, before deciding that Brexit and the potential impact on foreign direct investment (FDI) needs to be given due consideration.
The UK and Ireland are star performers when it comes to attracting FDI. In fact, the UK is the largest recipient of FDI in the EU and half of all European headquarters of non-EU firms are based in the UK. The UK government calculates that UK hosts more headquarters than Germany, France, Switzerland and the Netherlands put together. FDI really matters to the UK.
It will be a few months before inward investment performance for this latest financial year is available but the most recent annual reports from Invest NI and UKTI record performance at a UK and Northern Ireland level. In fact, 1,988 projects landed in the UK in 2014/15 - a record year for the UK. In that same year, close to 100,000 jobs were created or safeguarded by FDI projects. Northern Ireland enjoyed similar record success in 2014 and is one of the leading UK regions for attracting inward investment. This success has been across a range of knowledge-intensive sectors. In particular Belfast is the world's top destination city for financial services technologies investments.
EY's Global Investment Monitor 2015 places Northern Ireland at the top of the regional rankings for attracting jobs from FDI projects, calculating that over 5,000 were created from FDI in 2014.
How a Brexit would impact on Northern Ireland's ability to attract inward investment is another great uncertainty in the Brexit debate so I sought the views of local FDI and trade specialists, OCO, in an effort to better understand the potential impact of Brexit on local FDI. OCO is operating in markets across the globe, advising companies and government on foreign investment strategies and listening to investor opinions on a daily basis.
CEO Mark O'Connell shared his insights with me: "In our 2015 survey of foreign investors already in the UK or looking seriously at the region, 68% indicated that uncertainty about Britain's relationship with EU was the single biggest inhibitor to further expansion or new investment.
"It is interesting that many of the firms such as JD Wetherspoon or major UK retailers who have come out supporting Brexit are totally domestic businesses and do not depend on Europe for clients or suppliers and can afford to take this position. However, major investors such as BMW and Siemens have already made veiled comments about the security of manufacturing jobs in the UK if Britain leaves.
"The other aspect which has attracted little attention is the thriving banking, fintech and ICT sectors (where Northern Ireland has been really successful) heavily rely on EU-wide data protection and regulation. An exit will undermine the conditions for these industries to thrive."
Considering the local perspective, OCO cited recent media reports that IDA Ireland, the agency responsible for attracting foreign investment to Ireland, appears to have increased its activity in London.
"Martin Shanahan, chief executive of IDA Ireland, must be a cheerleader in chief for Brexit - UK out of the European Union will make his job much easier in attracting a much larger share of foreign investment and European HQ projects to Ireland.
"In addition, the hard won case for Northern Ireland's lower corporate tax rate becomes almost an irrelevance. What investor would want to make, sell or distribute goods and services from a remote isolated corner of the UK without the guarantee of the same access to the wider EU market that Northern Ireland enjoys now.
"On the other hand, Enterprise Ireland, the government agency with responsibility for exports, is more circumspect as the UK is Ireland's largest customer with some €6.8bn (£5.4bn) worth of sales in 2014 while Republic of Ireland is one of the UK's largest export customers - so there are clear concerns among companies on both sides about the prospect new trade barriers and regulation attendant in dealing with a non EU trade partner."
O'Connell concludes: "On balance from OCO's point of view, a Brexit would be a disaster from the perspective of enhancing NI's FDI attractiveness, and would certainly curb our ambitions to upgrade and enhance the quality of projects we attract though the new improved corporate tax regime."
Many will come to a Brexit decision via social issues, political issues or economic issues. If the UK leaves, it would almost certainly seek ways to maintain the competitiveness of its FDI offer and may even get aggressive on corporate tax incentives but on economic issues, it is harder for me to see any coherent rationale for exiting. It now feels to me like it's a gamble where there is little to gain and potentially a lot to lose.
In next week's Economy Watch we hear from Ulster Bank chief economist Richard Ramsey