Order Description
Foreign Direct Investment (FDI) has been central to the UK’s economic strategy for a number of years now. Some of this has been attracted by the opportunity to exploit the UK as a tariff-free bridgehead to EU markets, and some of it has been attracted by the UK government’s inducements and investment in infrastructure – a big part of which comes from EU-based companies.
Assuming that:
FDI accounts for 28% of the UK’s output (ONS, 2013)
This becomes less attractive due to the loss of tariff-free trade with the EU (i.e. a reduction in “insiderisation”) and a decision to repatriate among EU companies – roughly a 50:50 split between EU based owners and non EU-based owners (ONS, 2013)
The Government tries to stem this loss through lower corporation tax rates to encourage more FDI (which is already happening – Osborne lowered Corporation Tax just after the referendum)
Then:
If FDI were to be reduced (by, say, 10%), then GDP would fall (by, say, 2.8%)
According to Okun’s law this would increase unemployment (by, say, 1.4%), which would then become more severe through a negative Multiplier Effect. I.e. unemployment caused by loss of FDI (approx 300,000 given that FDI accounts for 3m workers in the UK (Driffield et al, 2013)) and from the impact on supporting industries (unquantifiable) would result in a lack of buying power of displaced workers from both of these, which would then affect others in the UK economy and thus multiply the impact (unquantifiable) – unless, of course, Okun’s law includes this
The Government would then have less money (in the order of 2%) because of reduced income tax and corporation tax receipts
The Government would then have to reduce its spending on social security payments and investing in the country’s infrastructure and economic development
Therefore:
Unemployment would rise
The unemployed would not be supported as well as previously by government hand outs as it has less tax income
The country would stagnate through lack of investment and would go backwards in the world in terms of competitiveness and the prosperity of its citizens
justify your answer.
