Changing the geographical composition of UK FDI inflows Assignment Sample

Changing the geographical composition of UK FDI inflows Assignment Sample

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Introduction

Globalization has led to an increase in Foreign Direct Investments, both inflow, and outflow of services and goods. FDI investment provides immense opportunities for the guest as well as the host country. New job opportunities, infrastructure, and GDP are benefitted of the host country whereas the guest country receives the opportunity to analyze and capture new market segments. There are certain factors such as political, economic, socio-cultural, etc. that affects the Foreign Direct investments such as the Brexit which is the decision of United Kingdom to be excluded from the European Union which was formed in Second World war to decrease the amount of bloodshed in all the countries.
The research analyses the geographical composition of the FDI in the UK postBrexit. Several types of research are conducted on this topic but the determinants of the location of foreign direct investments among different regions are less explored. The research is determined to fill the research gap by identifying the factors that lead to location determinant for FDI. The research is conducted in the United Kingdom as it is one of the major countries that experience a large amount of FDI due to the technical innovation, infrastructure, and presence of skilled labor. The United Kingdom has major trade relations from countries like the European Union, the United States, Japan, Germany, and China. The Brexit may impact the loss of inflow of FDI due to the changes in trade policies and tariffs.

According to Kumar and Sharma (2017), factors like infrastructure, inflation rate, R&D, digital technology, availability of the skilled and semi-skilled workforce, corporate tax, and incentives for investment are considered as the determinants of FDI. The reason for choosing these determinants for this research work is that their impacts on attracting FDI are still not explored much or in-depth using real-time data. Also, to understand the geographical composition of the FDI within UK post Brexit, London and Leeds have been taken as the study areas. Leeds is one of the called 'Core Cities' that are self-financed and self-selected advocacy group of large regional cities of the UK outside the Greater London region. The comparative study would be carried out to understand the regional biasness of FDI across the two regions of UK

The research will focus on different aspects of the Brexit impact on different industries, regions, and lifestyles of people to study the determined location of FDI. The secondary research methodology is used for the analysis and drawing conclusion. The work would be useful for the trade unions and countries to implement and strategically plan the trade policies and tariffs for enhanced productivity

Justification for the Research

The significance of this research work is that it attempts to explore an area associated with the FDI in the UK that not been studied much by previous researchers. One may find numerous articles on impact of Brexit on FDI or FDI's impact on the regional development within the UK. However, there is a very little amount of research done to understand the regional biasness of FDI across the two regions of UK. The role of determinants of the FDI in attracting the investment in the country or a region is still not explored much. Hence, this research is significant to understand and gaining in-depth understanding of the factors affecting the FDI in a region. For that purpose, two primary cities of the UK have been chosen. One of them is in the northern region of the UK i.e., Leeds while other one is located in the southern part i.e., London. The outcomes of this research is useful for business entities and government of the UK to ensure that regional disparities get reduced or eliminated by arranging the FDI's determinants in the region. The ultimate beneficiary of this research work could be the local investors and other business stakeholders. Motivated by the outcomes of this work, government can take measures to develop the larger towns and villages to make them suitable for the FDI inflows.

Research Aim & Objectives

Aim: To spot the factors responsible for regional biasness of FDI across the two regions of UK.To change the industrial configuration and enhance the economic development of a particular region.

Objectives

To identify that the selected set of determinants is vital for the inflow of inward FDI to a specific region.
To evaluate the changes in the geographical disparities within different regions of the UK by using parameters, such as jobs created, capital investment, FDI projects, and redistributed sites to FDI project.

Research Questions

Which determinants of FDI from the selected set of determinants are crucial to magnetize inward FDI to a particular region to utilize regional potential?
Are any of these determinants responsible for the regional biasness of FDI inflow to service sector?

Organisation of the Study

For the purpose of this study, the research work would be divided into 5 chapters. The very first chapter is the introduction of the topic, aims, objectives, and research question. Chapter 2 presents the in-depth analysis of the literature and article reviews on the topic. Chapter 3 comprises the analytical framework, research philosophy, approach, data collection technique, and analysis methods along with key interdependencies associated with this research work. The next chapter is focusing on empirical analysis and results along with the recommendations. At last, chapter 6 consists of the conclusion of the total report finding along with the summary of the research.

Literature Review

Overview of the FDI in the UK

The foreign direct investment (FDI) is described as the overseas investment made by local businesses with an aim to expand business operations, gain competitive edge, and establishing a long-term interest in the host country (Johnston et al., 2017).The UK's 23% of the GDP depends on the inflow FDI. The country has a very liberal economy and market entry and outward investment are quite convenient for businesses around the globe. The country has trade and sales relationship with the US, France, Japan, and Netherland. However, with Germany, Spain, and China, it only has trade relationship (Baierand Welfens, 2019). The primary exporting sectors of the UK include chemical, motor vehicles, equipment, and machinery. According to the OECD report of the year 2017, the net investment direction for the UK is more outward than inward. This means it receives lesser investments than the UK does in other countries.

FDI's GeographicalComposition in the UK

The share of the FDI of the UK has gained an increment from one-third to two fifth of the total FDI of the country. According to Kangand Jiang (2012) London is the primary beneficiary of the FDI inflow of the UK. There is a large disparity between the core cities of the UK and other areas. Since 1997, the FDI in the core cities has grown up to four times while in the lower level cities or region, the similar growth has not been noticed. According to Kangand Jiang (2012), the number of FDI projects between 2013 and 2017 has increased from 73 to 180 but in the next year, the number fell down to 97 only. This can be attributed the lack of research and development and manufacturing units.
According to Serwickaand Tamberi (2018), the sales and marketing sector of the UK received the largest FDI projects within the UK as the percentage grew from 25% to 56 % in the span of 20 years. This can be attributed to the liberal economy of the UK. Apart from this, the digitalisation and automation has also played a significant role. This is one of the reasons for the greater concentration of the FDI projects in London and other major cities while the larger towns account for only 15% of the FDI in the same period (EY Attractiveness Report, 2019). The trend of regional disparity of FDI in the UK continued for the manufacturing, logistics, and R&D sectors as well.

In contrast to the UK, Scotland has successfully managed to strike a right balance in the FDI across core cities, towns, and villages. In the EY's Attractiveness Report, it is highlighted that there has been a disparity between the core cities and larger towns in attracting FDI in the past 20 years. It is also determined that the economic policy of the UK are more focused on the core cities like London and are encouraging the geographical disparity in the distribution of the FDI.

Understanding the Determinants of the FDI

Quoting from the work of Kumari and Sharma (2017), there are many determinants or factors that have effects on the FDI inflows within a region. These are elaborated below:-
Role of Infrastructure

Dimitropoulou et al (2013) mentioned that countries are putting tremendous amount of investment in developing their infrastructural facilities. The author has supported the fact that the FDI is likely to take place in a region that has sound infrastructure facilities. Furthermore, this can be looked as the other way round also. This means that the investment done can be used in developing the infrastructure of an area or a city. Countries with good FDI has better infrastructure. Hence, the need for the investment in the infrastructure is quintessential for a country to uplift the economic growth of the country and further enhances the welfare and fostering the economic growth of region (Dimitropoulou et al, 2013).

Role of Skilled labour

According to Baierand Welfens(2019), the FDI is the medium for businesses in the foreign countries to acquire technical skills and managerial practices while accessing the market. The human resource is one of the crucial determinants of the FDI. Organisations are looking for a destination to invest their funds and get low-cost skilled labour for their labour -intensive processes. Johnston et al (2017) have mentioned that MNCs around the world are now more interested in getting skilled and educated workforce at the low prices. As the improvement in the human resources, the developing countries are now becoming the hub of FDI inflow and organisations from the developed nations like the UK, US, and Germany are putting their investments in them.

Role of Technology & Digitalisation

Kang and Jiang (2012).have mentioned that a dramatic shift has been noticed in the FDI pattern of the world due to technological advancements. These have forced organisations and nations to reassess their FDI patterns and how to address the digital economy effectively. The recent technological innovations and advancement, such as 3D printing, blockchain, IoT, cloud computing, automation, robotics, 5G, AI, and machine learning, and much more are driving the economic revolutions around the world (Johnston et al, 2017). According to UNCTAD 2019 Report, the global service exports of the world summed up to $2900 bn worldwide. Countries that are leveraging the digital infrastructure and investing in the digital economy are attracting the inbound FDI from other countries.

Role of Incentives and Tax Rebates

Tax incentives and rebates are the measures used by states to attract FDI. There are many benefits of offering the incentives to MNCs to invest in a country. The first and foremost is that it increases the mobility of global companies and reduces the market barriers (Baierand Welfens, 2019).

London: the First Choice of the Foreign Investors

According to Baier and Welfens (2019), it has been estimated that since 1980s London has been the global leader in the international FDI inflows. The FDI inflows are received majorly from the United States' Banks in the UK. London acts a common centre from where the international banks could manage the entire EU28 countries due to the single passport rule, which led to growth in productivity and GDP. Post-Brexit, several challenges are expected in the inflow of financial FDI in the UK. It is expected that as the passport rule has declined the inflow of FDI will decrease and the outflow will increase from UK banks. After the Brexit, the FDI of the city of London banks would shift primarily to the EU 27 countries or back to the US. The inflow of FDI in the UK Banking sector would experience a major decline from US and European countries due to the changes in tariffs and trade policies after the Brexit.

In the study conducted by Dimitropoulou et.al (2013), the authors have used a database of more than 2000 observations to understand the determinants of the location chosen for the Foreign Direct Investments in different regions of the country. The size of data is useful in identifying factors with precision. One of the most important factors identified in the research is the regional specialization of the location. This is the reason for London being the center for major FDI investments in the service sector as the region specializes in the service industry. The data analysis is conducted using the multinomial and conditional logit model for the accurate result and findings. After the Brexit banking sector would be affected the most due to the tariffs changes as well the trade policies.

As per the investigation of Serwicka and Tamberi (2018), there are major changes estimated after the Brexit regarding the GDP, employment, and investments. A simple exercise was conducted based on government records about the GDP, investments, and employment in a different region of the UK after the Brexit. It has been measured that except in the Midlands, all the other regions of the UK are experiencing a loss in FDI post Brexit. The different regions of the UK are affected differently such as Midlands experienced a change of 9.3% in the average FDI per year. Wales, North East, and East of England are the regions experiencing a major decline in the FDI. Hence, it can be concluded that the FDI factors are based on region specialization, and unlike before London would be experiencing a decline in the investments and other regions such as Midlands would experience an increase in trades and FDI.

Impacts of BREXIT on the UK

The study suggests that Brexit is likely to affect FDI both positively as well as negatively. The rise in costs of trade in the UK after the Brexit would reduce the importing which would lead to local manufacturing which is a positive impact on the local workers of the countries. The research and development centres will increase in both EU and UK which provides better technology to both EU and UK. However. The policy changes in trade affairs and tariffs lead to the withdrawal of major car manufacturing units from London which is a negative impact on the countries' productivity. UK would experience the welfare loss of citizens by 1.4% whereas the EU will experience the welfare loss of citizens by 2.3 percent. To overcome the welfare losses UK needs to decrease the trades and FDO on other countries. The model of analysis used in the study suggests that the FDI in the United Kingdom would increase rather than declining as the nation is planning to increase the investment and outward FDI to respond to the Brexit policies efficiently (Waddle and Mcrattan, 2017).

In the research conducted by Dhingra et.al (2018), the authors have reflected the post-Brexit consequences on UK relation with different countries, trade, employment, and investments. The study concludes that the initial period after the Brexit is estimated to be a negative phase of United Kingdom due to the decrease in trade, and investment flows, though the economic decline of the country depends on the economic relations of UK with the EU and other countries. The study provides some recommendations that can be adapted by the United Kingdom to slow down the economic decline of the country. Before the Brexit the major portion of UK trade belonged to the EEC (European Economic Community), this causes loss to the UK as only 13% of the trade was included in the national economy of the country. After the Brexit, this ratio will increase and provide positive growth to the UK GDP. UK offers three benefits to attract the FDI that are low shipment cost of goods, less legal frameworks, and skilled labour. The study suggests negotiation skills for the UK to manage the situation after exiting the European Union.

Post Brexit Scenarios of the UK

The research analyses the postBrexit scenarios in the UK after the Brexit, research is focused on analyzing two major concerns regarding the Brexit. The first concern is the employment issues that would be increased or increased for the countrymen and the percentage of GDP contributed by the foreign Direct Investments. The authors have used a gravity model approach which is useful in identifying the two-way flow of trade between countries. The difference is estimated using the counterfactual analysis. It is estimated that the FDI investment numbers will decrease by 65% up to 90% in extreme situations. The employment ratio will increase due to the and expected to create new job opportunities by 97%. The study suggests the adoption of Norway or the Iceland model after the Brexit which would help the United Kingdom to minimize losses due to a decrease in FDI inflows (Simionsecu, 2018).

In the views of Eichengreen et.al (2020) significant impact is expected on the international financial units after the Brexit. The work discusses the impact in capital inflows between different countries such as Japan, China, the US, Germany, Norway, etc, and the United Kingdom. The results and impacts are concluded to be substantial in the study. The study also describes London as the international financial centre primarily due to the single passport policy applicable before Brexit. However, after the Brexit financial FDI is likely to decline whereas service sector is estimated to grow. Lastly, the study includes decisions on the international and reserve currents between the European Union and the United Kingdom.

The study conducted by Bloom et.al (2019) identifies the impact of Brexit on larger and smaller firms in the United Kingdom. The authors the survey method to collect the reviews of the UK firms from the top to bottom level to investigate the effects of Brexit on firms and the employees of the firms. The study concluded that several uncertainties related to business practices, trade policies, and tariffs which have impacted to loss of FDI in the manufacturing industries from countries like Japan, China, and Germany. The investment is reduced by 11% in three years after the Brexit. The productivity of the country is reduced by 2% to 5%. It is concluded in the study that larger firms are impacted more than the smaller firms.

According to the views of Kang and Jiang (2012) foreign direct investment by multinational companies analyses the number of factors that determines the location of the Foreign Direct Investment. A framework was used to analyse the survey by various investing firms. The authors analyse the choice of a Chines company before investing in different economies around the globe. The study concludes that the purpose and motive of investment determine the choice of geographical location for the investment such that the location has ample supply of raw material, skilled labour, and easy trade policies. The period is also one of the factors that impact the choice of location as the period of business can be longer or shorter, for longer terms investment companies seek higher profits in the long term.

After the Brexit referendum in 2016, there is a shift noticed in the financial market around different countries. The study is focused to determine the relation between stock price and the rate of exchange of the United Kingdom and other countries to minimise the negative impacts of Brexit. The report studies the results of a survey of different industries such as the service sector, manufacturing, financial sector, etc. to determine the impact of Brexit. The research uses the detrended fluctuation analysis for the evidence verification for the results. It is estimated that a decline of 11% will be experienced in the financial sector and an increase of 5% is estimated in the manufacturing industry (Bashir et.al, 2019).

Brexit has led to major changes and challenges for the United Kingdom. The country needs to develop new trade policies, redefining international politics, etc. The changes have both positive and negative impact on the country's investments both the inflow as well as the outflow of foreign direct investment. The study provides different perspectives that highlight the factors to be covered while making new policies. The study suggests redefining the relation with other economic countries, and international politics reforms to provide an efficient solution for the upcoming challenges (Mendez-Parra et.al, 2016).

Brexit has impacted different industries in several manners. The study conducted by Johnston and Buongiorno, 2017)describes the impact of Brexit on the forest industry and investment in the industry. It has been identified that the estimation of the use of agricultural products will decrease with rapid rates by 2030. The use of sawn wood will decrease by 5 to 10%, paper and paperboard will decrease by 4 to 9%. The decline is caused primarily because of the decrease in consumption because of the withdrawal of multination companies of the FDI. The consumption has decreased not only in the export business but also inside the United Kingdom due to the decrease in GDP and income and an increase in the cost of goods. The government of the country is planning to make policies and businesses for increasing and consumption of goods and services by providing job opportunities to the population.

Analytical Framework &Research Methodology

The analytical framework for the research study is the pictorial presentation of the approach which is going to be followed to accomplish research objectives. The following research work comprises two stages, namely initiation phase and analysis phase. In the initiation phase, the topic selection approval, problem identification, and identification of the research objectives is done. This requires analysis of the literature and secondary data sources. Moreover, based on the literature analysis, certain determinants of FDI are identified which would be studied throughout the research. Based on these determinants, the comparison between Leeds and London would be carried out. For the analysis purpose, secondary data would be brought into use collected from the government records and archive reports.

It is important to note here that for the regression analysis, the FDI inflow is going to be the dependent variable while determinants of the FDI associated with these cities are going to be the independent factors.

Research Philosophy

According to Serwickaand Tamberi (2018), the research philosophy elaborates the nature of beliefs associated with the research for carrying out analysis. The philosophy may vary with the type of objectives and method of analysis for investigation (Serwickaand Tamberi, 2018). The current topic of the research is based on the epistemology philosophy used for addressing the facts related to the topic. The rigorous testing is carried out in this philosophy.

Research Strategy

The research strategy used to address the defined objectives of the research is to analyse the secondary data and systematic literature review. Different public data sources would be explored to collect the IFDI data. The nature of the data is going to be quantitative as all the selected variables taken into account for addressing the research aim are quantitative in nature rather than qualitative. To present the research hypothesis and enlist the research variables, journal articles and books have been referred.

Research Choice

The research would be using the quantitative research approach for the data analysis. There are four parameters in this research work, namely capital investment, number of FDI project in a region; number of jobs created, and redistributed sites for FDI project. All of these variables are quantitative in nature can be evaluated using qualitative approach. The data regarding these variables might be available in the government records available on the public domain.

Data Collection

It is already highlighted that the research would be studying four parameters or determinants of the FDI in the UK. The past 10 years of data will be collected and analysed from the DIT report, OECD, the UNCTAD, UKTI records, and other secondary data sources open for all. This research approach is very cost-effective as all the sources do not charge any fee to provide access to the data.

Data Analysis

The data analysis would make use of the comparative analysis of the determinants of the geographical distribution of the FDI inflow. The data related to the Northern region and Southern region of the UK will be collected into excel and a comparative analysis would be carried out. As mentioned by Baier and Welfens(2019), the comparative analysis is carried out primarily to elucidate and gain better knowledge of the causal processes involved in the geographical distribution of the IFDI factors in the UK. According to Serwickaand Tamberi (2018), there are many methods of carrying out comparative analysis in the research study. For this particular research, the so-called variation-finding comparative analysis would be carried out to study the variation in the FDI characteristics or its composition between two regions.

Time Horizon

There are multiple tasks associated with this research work. To complete the full research analysis work within the defined deadline, it is important to allocate certain segment of the time to every sub-task. The overall duration of research project is 16 weeks. This time duration has been divided among the subtasks as shown in the Gantt chart shown below. The topic selection for this research work is done within a single week while the research aim, objectives, and research questions are formulated in two weeks as certain preliminary literature review and research was required to set them up. The next activity for this research is carry out further literature study to understand and workout the parameters to be studied to compare two regions within the UK to compare the geographical distribution of the FDI. The data collection would take around three weeks as numerous sources related to the FDI inflow in the UK would be reviewed and the data would be collected. The analysis of the data would require graphical analysis and risk assessment might take up to 1 week. For more information, refer to the Gantt chart:-

Key dependencies

The following research topic has certain key dependencies that might have impact on the course of the research work. The first and foremost dependency associated with this project work is related to the availability of the secondary data for carrying out this research. As the FDI data for the different parameters chosen for this research work is to be taken from the government sources or publicly available data sources, the dependencies are quite high. In addition to this, the final approval of the research title is depended on the approval of the researcher. Hence, it can be counted as another dependency.

Empirical Analysis, Results, & Policy Recommendations

FDI Projects

New Jobs

Safe Jobs

Total Jobs


Total
EU
Total
EU
Total
EU
Total
EU
Leeds
708
250
27,866
10,665
7,738
3,142
35,604
13,807
London
3,943
1,164
99,073
25,493
6,919
1,040
105,992
26,533


FDI Projects


New Jobs


Safe Jobs


Total Jobs



2016-17
2017-18
2018-19
2016-17
2017-18
2018-19
2016-17
2017-18
2018-19
2016-17
2017-18
2018-19
Leeds
116
112
102
4,815
3,051
4,148
1,569
795
c
6,384
3,846
c
London
786
672
564
17,705
15,981
12,992
300
280
403
18,005
16,261
13,395

References:

• Baier, F. J. and Welfens, P. J. J. (2019) "The Uk's Banking Fdi Flows and Total British Fdi: A Dynamic Brexit Analysis," International Economics and Economic Policy, 16(1), pp. 193-213. doi: 10.1007/s10368-018-00426-x.
• Bloom, N., Bunn, P., Chen, S., Mizen, P., Smietanka, P. and Thwaites, G., 2019. The impact of Brexit on UK firms (No. w26218). National Bureau of Economic Research.
• Bashir, U., Zebende, G.F., Yu, Y., Hussain, M., Ali, A. and Abbas, G., 2019. Differential market reactions to pre and post Brexit referendum. Physica A: Statistical Mechanics and its Applications, 515, pp.151-158.
• Dimitropoulou, D., McCann, P. and Burke, S.P., 2013. The determinants of the location of foreign direct investment in UK regions. Applied Economics, 45(27), pp.3853-3862.
  Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J., 2016. The impact of Brexit on foreign investment in the UK. BREXIT 2016, 24(2).
• Eichengreen, B., Jungerman, W. and Liu, M., 2020. Brexit, the City of London, and the prospects for portfolio investment. Empirica, 47(1), pp.1-16.
• Johnston, C.M. and Buongiorno, J., 2017. Impact of Brexit on the forest products industry of the United Kingdom and the rest of the world. Forestry: An International Journal of Forest Research, 90(1), pp.47-57.
• Kang, Y. and Jiang, F., 2012. FDI location choice of Chinese multinationals in East and Southeast Asia: Traditional economic factors and institutional perspective. Journal of world business, 47(1), pp.45-53.
• Mendez-Parra, M., teVelde, D.W. and Winters, L.A., 2016. The impact of the UK's post-Brexit trade policy on development.
• Serwicka, I. and Tamberi, N., 2018. Not backing Britain: FDI inflows since the Brexit referendum. UK Trade Policy Observatory Briefing Paper, 23.
• Simionescu, M., 2018. The impact of Brexit on the UK inwards FDI. Economics, Management and Sustainability, 3(1), pp.6-20.
• Waddle, A. and McGrattan, E., 2017. The Imact of Brexit on Foreign Investment and Production. In 2017 Meeting Papers(No. 710). Society for Economic Dynamics.