Export-platform foreign direct investment and trade policy uncertainty: Evidence from brexit

Abstract

This paper analyses the effect of trade policy uncertainty in a customs union on export-platform foreign direct investment (FDI). First, I develop a partial equilibrium framework with heterogeneous firms based on the proximity–concentration trade-off that involves trade policy uncertainty about trade costs inside a customs union. Second, I derive an empirical equation that I test by exploiting the 2016 Brexit referendum as a natural experiment and using data on manufacturing greenfield FDI projects. The results show that trade policy uncertainty impacted negatively the decisions of firms to invest in export-platform activities in the UK following the Brexit referendum. Moreover, I find that extra-EU manufacturing firms preferred EU countries as opposed to the UK for new investments after the 2016 referendum.