The General Election campaign has featured numerous statements from politicians, business leaders and think tanks on the benefits and risks of holding an In/Out referendum so that the people of Britain can decide whether they want to remain in the EU. If we take the potential impact on foreign investment as a guide, EY’s research suggests that this issue is significantly harder to call than the very definitive tone adopted in current commentary would suggest. Not least because 45 per cent of the 400 foreign investors we spoke to were unaware of any possibility of an In/Out referendum.
In developing EY’s UK Country Attractiveness survey, to be released in late May, we posed questions to foreign investors about what they thought about the possibility of a referendum in 2017. Foreign direct investment (FDI) is regularly identified as being very likely to be affected by any potential change in the UK’s relationship with the EU for two main reasons. First, the UK’s reputation for political stability and predictability is consistently top of the reasons foreign investors in our survey find the UK attractive. Second, they also say that access to the European market is very important when deciding whether to invest in the UK (72 per cent of respondents polled by EY hold this view).
However, when asked if the possibility of the UK leaving the EU after 2017 would impact investment up to 2017, just 31 per cent of foreign investors surveyed said it would. Of this 31 per cent, 12 per cent would reduce investment and 19 per cent would put current plans on hold.
The results also suggest that there is some positive sentiment for the UK considering changes to its relationship with the EU. The US, for example, is a key market for us to watch – more than a third of all investment projects into the UK in 2013 came from US investors. Although 21 per cent of US investors would put FDI on hold, 15 per cent said the possibility of a referendum would cause them to increase investment compared to the 10 per cent who would reduce investment.
To sum up, the overall results suggest that the uncertainty created by a referendum would have a negative short-term impact on foreign inward investment in the UK up to 2017, but that this impact would not be uniformly negative. Unsurprisingly, not all foreign investors are convinced of the benefits of Britain’s EU membership.
But is the short-term loss a price worth paying? When asked how the UK’s attractiveness as an investment destination would be affected if Britain’s political relationship with Europe was reformed but access to the Single Market was retained, the results were reasonably balanced: 22 per cent of respondents said this new model would make the UK more attractive while 31 per cent said it would make the UK less attractive.
The geographic differences in the answers to this question are interesting, and they do suggest that certain groups of investors can see benefits from a reshaping of the UK’s relationship with Europe. Market access is clearly important but the political arrangements less so. Investors from the US were evenly split, with 23 per cent viewing a new regime as potentially making the UK more attractive and 23 per cent seeing it as less attractive. Asian investors were net positives, with 35 per cent seeing the changes as making the UK more attractive compared to 23 per cent who had the opposite view.
However, the view from Europe should not be forgotten as it remains a fertile source of FDI for the UK. West European investors were overwhelmingly negative, with 43 per cent seeing change as making the UK less attractive compared to the 15 per cent who saw the moves as positive.
The impact of a possible EU referendum is not at all clear-cut. It seems very likely that there would be a short-term cost in lost investment. The longer-term impact is harder to call, with a significant number of investors, especially outside of Western Europe, open to the benefits of a looser political relationship between the UK and the EU, provided access to the Single Market can be retained.
What is abundantly clear from both the responses to these questions and other research on attitudes to the EU and devolution in the UK, however, is that there is a strong desire from business for changes in the way government operates. This, combined with the striking fact that 45 per cent of investors were unaware of a possible UK referendum, suggests that whoever is in power in the UK after 7 May needs to initiate an inclusive conversation with the wider business community both within and outside the UK.