UK Capital Formation

There have been many debates in the UK about EU membership and how the country will benefit from becoming a full fledged member.  There are also several claims that the EU Single Market Model has helped investment, especially Foreign Direct Investment (FDI) in the UK – which has brought in anywhere between 20-50% of total UK capital formation.  Membership in this model of a Single Market is assumed to be key factor to encourage investors to put their money in the UK.

The recent refusal of the British PM – David Cameron – to participate in a new EU Treaty shocked many in industry and the prevailing belief is that it will lead to the country’s isolation and marginalization by the EU and risk the inflow of FDI and new jobs.  

What are the criteria for Investment Choice?

No one is quite sure how investors choose one country over another to invest.  It is believed that social, political and institutional factors play a major role.  By choosing to stay outside the EU, UK has managed to attract a high amount of FDI into the country.  This has demonstrated that a country need not join the EU to:

  • to be successful in the global investment and trade market
  • give up control of their sovereignty
  • give up control of their borders
  • incur costs and face constraints from big political and legal institutions

Their size has been a decided advantage for the UK. It is capable of surviving and thriving in a globalized trade and investment world and be competitive. Some suggest that now would be a good time to do a risk assessment on withdrawing from the EU.  This will provide valuable insights into whether the UK should emulate other independent European Countries in attracting foreign investors.

Figures that work in favor of the UK to attract FDI and other capital are as follows:

                                                             EU                                       UK

FDI stocks                                       14,683                                 17,442
Unemployment (all ages)                    9.9%                                      6.5%
Unemployment (15-24)                    17.3%                                   13.5%                     
GDP (per capita, 2009 nos)              34,212                                 35,151        

All figures are calculated using the US Dollar and weightage.  It is no small wonder that the UK chooses not to join the EU – they are doing well to attract FDI and other forms of Capital investment.