The UK and Europe
The perils of a Brexit for Corporate America
Joseph Quinlan / Oct 2015
Photo: Wikimedia Commons
The spectre of the United Kingdom leaving the European Union has not garnered much attention in the United States but it should. While the prospects of the UK exiting the EU remain low, the very threat puts at risk Corporate America’s massive foreign direct investment position in the United Kingdom—a position premised, in part, on the UK’s membership into the largest, wealthiest and most important foreign market in the world to U.S. companies: the European Union.
For decades, the UK has served as a strategic gateway or bridge to the European Union for U.S. firms, with American companies very much at home in a country that boosts a large and affluent market, a shared language, and a similar business and legal architecture to the United States. In addition, as one of the standard-bearers of the Anglo-Saxon model of capitalism, the market interests of the UK and U.S. have long been aligned, making the United Kingdom a favoured destination for American firms.
Geography has also certainly helped matters. Perched at the rim of continental Europe, the UK offers easy access to Europe at large, and has long served as a jumping off point for U.S. firms desiring deeper access to the various markets of the European Union.
In short, leveraging the UK’s access to the EU has been a profit-generating strategy for U.S. multinationals for decades. But this strategy is now potentially at risk as the United Kingdom contemplates its future with (or without) its European neighbours.
America’s corporate presence in the United Kingdom is rather significant on both an absolute and relative basis. Indeed, after the Netherlands, America’s corporate stakes in the United Kingdom are among the deepest in the world. Totaling $587 billion in 2014, the last year of available data, America’s capital stock in the UK was more than double the combined U.S. investment in South America, the Middle East and Africa ($255 billion). Total U.S. investment stock in China was just 11-12% of the comparable figure in the United Kingdom in 2014.
Even when the U.S. investment position of China and India are combined, the figure is just 16% of total U.S. investment in the United Kingdom. Wealthy consumers, respect for the rule of law, the ease of doing business, credible institutions, membership of the European Union—all of these factors, and more, have long made the UK a more attractive place to do business for American firms than either China or India.
Whatever the metric—total assets, R&D expenditures, foreign affiliate sales and even affiliate employment—the United Kingdom is a key pillar of Corporate America’s global infrastructure and a key cog in the global competitiveness of U.S. firms. While the bulk of U.S. foreign affiliate sales in the UK are for the local market, the export-propensity of U.S. affiliates in the UK is hardly inconsequential. Indeed, while outranked by nearby Ireland, U.S. affiliate exports from the UK still totaled nearly $200 billion in 2012, the last year of available data. That figure is more than double U.S. affiliate exports from Mexico and nearly four times greater than U.S. affiliate exports from China—two lower-cost nations more closely associated with U.S. affiliate exports. The United Kingdom, in other words, serves as a strategic staging post for U.S. goods and service exports to the European Union. As a member of the EU, the UK—and American foreign affiliates—enjoy preferential access to the largest market in the world. This privilege would cease to exist if the United Kingdom decides to exit one the largest economic cohort in the world.
Finally, in that the United Kingdom is a key source of U.S. affiliate profits, any talk or action that leads to the severing of UK-EU ties carries significant risks to the bottom line of Corporate America. A Brexit would squeeze affiliate earnings in a very strategic market to U.S. firms.
In the end, U.S. companies from all stripes—finance, health care, autos, chemicals, food and beverages, technology, energy—have made a huge bet on the UK over the past few decades. U.S. firms have ploughed billions of U.S. dollars into the island state over the post-war era. This bet was wagered on the premise that the UK would remain part of the European Union. But with the country now debating whether or not to leave the Union, and expected to hold an in/out EU referendum by 2017, the question is this: is Corporate America’s big bet on the UK about to go bad? It’s a question more Americans should contemplate in the months ahead.