Flows of foreign direct investment into the UK would fall by over a fifth if the country left the European Union, costing British households over £2,000 a year each, according to new academic research.

Economists at the Centre for Economic Performance, based at the London School of Economics, calculate that reduced new foreign direct investment would have a much larger impact on UK national income than its earlier estimation of losses due to lower trade, writes Emily Cadman.

Thomas Sampson, one of the authors, said that it was “‘pie in the sky” to think that a free trade deal with the EU like the Swiss or Canadian arrangements – which have been cited by proponents of Brexit as possible options – would resolve the FDI problem.

“One reason that foreign banks, including the Swiss, flock to the City of London is that they have free access to the European Single Market. We put this in jeopardy by jumping ship.”

The vast majority of economists believe that membership of the European Union benefits Britain’s economy, and the paper is the latest attempt to put a number on the likely costs of exit.

Leave campaigners typically argue that these assumptions underestimate the impact of regulatory gains from leaving the EU and the potential to strike other third-party trade deals. In response to the International Monetary Fund’s warning on the risks of Brexit earlier in the week, Vote Leave Chief Executive Matthew Elliott said “the biggest risk to the UK’s economy and security is remaining in an unreformed EU which is institutionally incapable of dealing with the challenges it faces, such as the euro and migration crises.”

The LSE researchers looked at bilateral flows of investment between 34 advanced economies from 1985 to 2013 to try to estimate why foreign investors chose to invest in the UK.

The paper finds no statistical difference in being a member of the European Free Trade Association like Switzerland, compared to being completely outside the EU like Japan.
The authors suggests that a “very conservative” estimate where the Brexit-induced fall lasts only for 10 years and then reverts to its current level would see investment fall by 22 per cent over the next decade. That translates into a 3.4 per cent decline in real income, or £2,000 per household.

Gianmarco Ottaviano, another of the authors, said that cost of Brexit “might be a price that many people are willing to pay. But as we go down the list of items involved, the bill for British households keeps on mounting.”

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