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Foreign Investors

As European countries grapple with the process of transition toward the formation of a Common political and economic entity in Europe, Britain is poised to decide whether to join or how much to give up of its independent existence if it is joining. The European Union is today 25 states strong and two more states, Romania and Bulgaria are set to join in 2007. Within the E. U itself is a smaller Economic grouping called the Eurozone which consists of 12 countries who have adopted a common currency called the Euro. Britain has kept itself away from joining the Euro Zone, i. e. in adopting the Euro as its currency.

It has Sweden and Denmark for company and ten other states that joined the E. U on 1st May 2004 namely, Cyprus, Czech republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Of these, Britain and Denmark have special provisions within the Mastricht treaty that originally brought into being the E. U. This special provision reserves their rights to join the Eurozone at a later date, after they have secured national consensus by means of referendum. It is indeed a momentous decision for Britain to make this vital decision whether

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to join the Eurozone or not at the present juncture.

Tony Blair is expected to call for a referendum on the matter in the near future. The debate in Britain centers around two points of view. The first group says that entry into Eurozone must be decided only on the question whether it will benefit Britain economically. The second group argues that entry relates to a more fundamental question of Britain losing its sovereignty and giving up its identity to European institutions. Gordon Brown, Chancellor of the Exchequer of the Tony Blair government has propounded the view that Britain stands to gain from adoption of Euro.

He has devised a five-point test to be applied in the decision to allow Britain’s entry into Eurozone. The tests are 1) Is there sustainable convergence between U. K. and the Eurozone economies? 2) Is there sufficient flexibility to deal with economic change? 3) Will it encourage or discourage companies from investing in Britain? 4) What will be the impact on financial services industry? 5) What will happen to employment? The impact on investment is of special concern. Most studies reveal that Britain’s exclusion form the European Single Currency (Euro) is not affecting inward investment despite fears entertained by the government.

The Euro has failed to dent Britain’s position as Europe’s top location for internationally mobile investment projects (Kevin Brown, 2002) In fact they say joining the Euro would undermine London’s flexibility, a key ingredient in its attractiveness. European union had the reputation of being cumbersome and bureaucratic. However, the pound would face a large degree of volatility if it did not join, point out some other experts. Thus the choice is really between a ‘potentially strong and independent London, but with a high risk factor and (being) a leader in a larger and more stable bloc, which may experience slower growth.

”(London First, 2002) The U. K. is the world’s fourth largest economy with a Gross Domestic product (G. D. P. ) of worth U. S. 2. 1 trillion dollars in 2004. Only the U. S. A. ($11. 7 trillion), Japan (4. 6 trillion$) and Germany ($2. 7 trillion) are bigger. In recent year more money has been invested in Britain than it invests abroad. The U. K. ’s Net International Investment position in 2003 was –111,363 million pounds. This estimate covers direct investment in business, portfolio investment in equity and debt securities, reserve assets, financial derivatives etc. Inward investment was a record high. The stock of foreign investment in UK.

Was U. S. $672,015 million in 2003 which represents 37. 4 percent of its G. D. P. Between 2000 and 2002, U. K received foreign investment of around 49% higher than the size of its economy merits. In the future the U. N. has declared that U. K. will be the third highest receiver of Foreign Direct Investment in the world. Three quarters of Foreign Direct Investment (FDI) comes from either EU. USA or Japan. The remaining investment is shared by ten developing countries- Argentina, Brazil, China, Hong Kong, Indonesia, Malaysia, Mexico, Saudi Arabia, Singapore and Thailand. These figures show that the flow of F. D.

I to U. K has been mostly from the Developed countries. The E. U has been its main partner since 1999, since it first replaced the United States. But the U. S. is still the single biggest source of FDI stock of the U. K. The share of developing countries has declined and that of the E. U has increased dramatically, representing more than half of U. K. ’s FDI stock annually. In 2001,The E. U mad e the largest single investment in U. K. According to another report, the United Kingdom is the most favored Inward investment location in Europe attracting about 40% of Japanese, American and Asian investment to the E.

U. The Unique Selling Proposition of U. K. is that-1) It offers fast easy access to the European single market, 2) It has 28 million skilled and adaptable workers 3) It has the lowest utility costs in the E. U. 4) It has a sound regulatory environment designed to promote growth and profits 5) has low corporate and personal taxation 6) has world class Research and Development services. Thus there is a debate whether entering into a Euro Zone may rob England of certain of its advantages. A study by Wyn Morgan and Katherine Wakelin on ‘Impact of European Integration on F. D. I; the U. K.

food Industry in the 1990’s’ examined the impact of European integration on FDI. It came out with the finding that the process of EU integration has played a positive role in increasing inward FDI both from sources within the E. U. and outside the E. U . in the food industry in the U. K. The results also indicated that the determinants of FDI varied according to whether it was intra or extra EU. Overall, comparative advantage benefits such as capital intensity and low costs as well as effective rate of tariffs appear to be causal in F. D. I. originating outside E. U. FDI originating from within E. U.

seems to be less cost sensitive and more concerned with issues like branding, skills and low propensity to export in that sector. Jumping trade barriers seem to be an attractive motive for trans nationals to be attracted to a home country. .Tariffs encourage local sales but not sales to other countries through exports. In these cases, FDI aimed to serve the local markets than selling back in home market or a third country. In the presence of tariffs FDI may substitute for exports. This confirms that trade barriers may be one determinant of FDI. Tariff jumping becomes attractive for multinationals while directing investment into the E.

U. Tariff jumping within the E. U for E,U, member countries may have become less feasible because of the dismantling of trade barriers within the E. U. As such Inter E. U trade would have been expected to fall within the E. U. Yet F DI within the E. U. has increased due to other factors. First while horizontal investment may have declined with the Single Market program (SMP), the vertical integration of firms across European borders may have increased. Second, European markets may still remain fragmented due to other factors than trade and investment measures like taste and cultural difference.

Thirdly brand names and advertising can lead to firms preferring to be located close in the market. The debate of whether Britain should join the Euro zone finds echo in the following dispute. The Bank for International Settlements(2001) released a report, which said that during the period form 1998 to 2001, the city of London recorded a very moderate decline in its share of foreign exchange trading from 32. 5 % to 31. 1%. Euro skeptics sought this opportunity to point out that Britain had prospered outside the Euro zone. Also it would give the warning that she should not join the Eurozone, as it would harm her competitiveness.

Pro- Euro campaigners on the other hand attributed the decline to the Pound’s exclusion from the Euro zone. Another major issue is that of E. U enlargement. The E. U. today has 25 member states including the erstwhile communist East European states. In terms of employment, GDP and standard of living the newly inducted states are a heavy burden on the E. U. They are also potential sources o f economic prosperity too if natural and human resources are utilized properly. A positive outlook towards EU enlargement says that an enlarged EU means greater political and economic stability in Europe.

It will mean more U. K. jobs, trade and prosperity. Research estimates it will add 1. 7 billion pounds to U. K. ’s G. D. P and create 300,000 jobs across the E. U. But U. K is already confronted with the problem of excessive immigration. Immigration from 10 new E. U countries since 2004 has seen the influx of skilled, low cost work force, which is generating severe opposition at home. The govt. has issued restrictions on the migration of Romanian and Bulgarian workers to U. K. after these two nations join the E. U. in 2007. Yet others see this migration as a boon.

“ In a global economy, where competitiveness is key, immigration from Eastern Europe has helped British companies compete with those in the emerging economies of Asia. ”(Lord Grenfell, 2002). The issue of Britain of opting out of Euro and E. U. enlargement has now left the realm Of economics it has more to do with political posturing. It has been proved that Britain can still attract investors without joining the Euro zone, inward FDI increased with European integration, and that it can benefit from E. U. enlargement. What British P. M.

Tony Blair is contriving to suggest is that Britain needs Europe and the Euro not an end in itself but to ensure that it can play its full role in the world stage (Murray, alasdair, 2001).

BIBLIOGRAPHY:

1) Barber L. , 2002, ‘Euro’s triumphant start leaves many challenges’. , Financial Times. com 2) Brown K. ,2001, ‘U. K. Investment fall related to Euro exclusion’, FT. com 3) Hillyard M. and Barclay C. ,1998. , ‘E. U. enlargement: The financial consequences”, research papers 98/56, House of Commons library.. 4) Mahoney H. , 2006. , ‘Select group of politicians to tackle EU constitution.’, E. U. OBSERVER. 5)Morgan W. & Wakelyn K. ,2002, ‘Impact of European Integration on FDI: the U. K. food industry in the 1990’s’, Research paper 99/10, Center for Research on Globalization and labor markets. 6)Murray A. , 2001. , ‘ Too scared to pop the question? Blair’s Britain and the Euro?. ’ PDF. , Center for European Reform, London. 7) Swann C. , 2001. , “London remains dominant financial center’. , FT. com 8) Leader, 2005, ’Ending the opt-out’ , The Guardian. , 9)U. K. Trade and Investment Autumn performance Report, PDF. ,2005. 10)’European Union’- Wikipedia. 11) ‘Euro Zone’- Wikipedia.

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