Chart 4: Stock of Foreign Direct Investment to and from the UK (2007 – 2016)
Source: ONS “Foreign Direct Investment involving UK companies”, inward and outward table
The UK is both a major destination and source of overseas direct investment. The value of the total stock of (inward) Foreign Direct Investment (FDI) in the UK has been rising noticeably over recent years, from under £600 billion in 2007 to around £1.2 trillion in 2016. The value of the UK’s stock of outward direct investment (ODI) has been more stable over the last decade, and was also around £1.2 trillion in 2016.
Investment between countries generates many economic benefits. It leads to a more competitive business environment, which in turn creates jobs, increases innovation and generates economic spill-overs to the rest of the economy.(15) There is also evidence of links between trade and investment.
Despite the benefits, global investment can be unnecessarily restricted by host government measures. Modern free trade agreements (FTAs) therefore increasingly include provisions relating to investment, including investment by establishing a commercial presence abroad. FTAs can seek to create a level playing field between domestic and foreign investors by prohibiting discrimination, market access barriers, and measures that could unduly distort investment flows. FTAs can also seek to increase certainty for investors by providing them with protections against arbitrary or manifestly unfair treatment. Addressing risk and uncertainty is particularly important for companies that may incur significant “sunk” costs(16) when they invest. The right of governments to regulate in the public interest is recognised in investment chapters in FTAs.
There is evidence that FTAs can increase certain forms of investment.(17) This depends on the specific provisions within the agreement and the economies involved.(18)
15. See for example: technology transfers from investment in R&D-intensive countries (Van Pottelsberghe and Luchtenberg, 2001), positive impact on economic growth (Szkorupova, 2014), increase on employment, productivity and competitiveness (HMG, 2014), R&D (Lin and Yeh, 2005)
16. A sunk cost is a cost that once a business pays can no longer be recovered by any means.
17. See for example: Lejarraga and Bruhn, 2017, Velde and Bezemer, 2006, Büthe and Milner, 2014, Kim, Lee and Tay, 2017, Kohl, Brakman and Garretsen, 2016, and Berger et al., 2013.
18. For example vertical foreign direct investment: Osnago et al., 2015
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