By Adam Roy Kilvert
This blog post is part of a series of essays written by BAIB students on the contextual factors of Brexit on multinational enterprises for the module Multinationals in the Domestic and Global Context.
Adam Roy Kilvert is a forth year BA (Hons) International Business student having completed a year in industry. He has devoted his time toward furthering his understanding of the international environment into which businesses operate. He is interested in international trade and development and the effects western modernity has and is having having on emerging economies, paying particular attention to the epoch changes that are occurring and their subsequent effects on influencing public policy and foreign direct investment. His email address is firstname.lastname@example.org.
Brexit is about an epoch change in the business landscape and has profound implications on that landscape for the industries and companies operating in the UK currently and into the future (Van Reenen et al., 2016). Despite the monetary policy being enacted by the institutions / central banks of the globe, political fallout has become an ever-increasing agenda for countries and populations the world over.
The outcome of the United Kingdom exiting the European Union (EU) was an example of this new found political fallout, creating ‘uncertainty’ over the future attractiveness of doing business in the UK (Rugman & Verbeke, 2001). It brought home the concerns of an ever-growing spikey world as perceived by Florida (2005), where the majority of UK citizens that reside in rural areas voted to leave, outnumbered those technological and political ecosystems like London and Scotland (Rosenbaum, 2017). Besides exposing concerns over multicultural and immigration tendencies of the older, less qualified UK population in these rural locations (BBC, 2017), Brexit has raised questions for the manufacturing industries. By assessing the UK’s public policy pre-vs-post Brexit and what this means more specifically for the Japanese automotive manufacturer, Nissan, taking into consideration the normative, behavioural and resource-based views of public policy (Rugman & Verbeke, 2001)
Before the British public made the overwhelming vote to leave the European Union, analysing the UK’s public policy on
foreign direct investment (FDI) would have been far simpler. Following neoclassical welfare economics, Caves (2007) and Dunning & Lundan (2013) would analyse Nissan and the UK’s public policy, via the ‘normative’ approach, which, as the access to the EU allowed (pre-Brexit) assumes away distributional issues. The UK’s access to the European market, granted in 1973 (BBC News, 2017) gave MNE’s like Nissan the opportunity to import their non-location bound firm specific advantages (FSA’s) through the UK into the rest of Europe. The automotive industry offered the UK and EU the opportunity to create a competitive market in which they could maximise real national income and grow their economies through the inward flow of FDI (Dunning & Lundan, 2013). From this perspective, the EU represented both the access and demand Nissan needed from its automotive products, growing their market share whilst reducing transaction costs, benefitting from economies of scope and geographical location (by accessing the benefits of the free market the UK could offer as a host country) (Caves, 2007). This hybridity between the firm and the country demonstrations the macro forces that dictate the efficiency aspects of Nissan’s strategy, utilising their dynamic capabilities in production, manufacture and distribution to exploit the UK’s strategic position (Bloom, Reenen & Sadun, 2012; Irwin, 2015), whilst creating, among other things, a competitive environment for the UK automotive industry to attract further inward FDI and technology rents (Caves, 2007). Thus, post-Brexit, the determinants of Nissan and the UK government public policy are far more complex and require Rugman & Verbeke (2001) conceptual framework to help diagnose the uncertainty Brexit has created for the UK and its foreign investors, compared to (Caves, 2007) basic economic model makes assumptions of a hybrid condition.
Foreign direct investment (FDI) occurs when Nissan approaches the UK and asks to invest its resources in business activities outside its home country (Hill & Jain, 2000). By having a tangible stake of its operations in, the UK, the Japanese automotive manufacturer has been able to freely access the EU market via its liberalised trade agreements (KPMG, 2014).
Britain is a major player in the competition of FDI in the world, being the second largest economy benefiting from FDI (SMMT, 2016). It is therefore vital for UK economy to secure its large foreign partners like Nissan, as they represent more than just a chance to increase national GDP (Onwuamaegbu & Sauvant, 2013). Following the behavioural approach of (Rugman & Verbeke, 2001) shows pre-Brexit that Nissan follows the complimentary zone of his model, whereby Nissan’s home (Japan) and host (UK) have similar goals (Lall, Narula & Bellak, 2003). Each country wishes to grow its economy, and in the 1970’s FDI was the answer. Nissan seized the opportunity to exploit the UK’s strategic positioning (Caves, 2007; Marketline, 2016). Complimentary conditions emerged which gave Nissan the opportunity to open the wholly owned Nissan factory (Sunderland, UK) acting as an ‘engine’ of economic development for both nations, capitalising on a technology intensive industry. Nissan could gain the full value of its FSA’s through the UK (Smaragdi & Varsakelis, 2013). Yet, with 80% of the Sunderland plant’s production being exported directly to the EU market, Nissan’s argument to remain in the UK becomes of paramount concern (Nissan, 2017). The question is at what cost? Britain has been pushed, since Brexit to promote its attractive position for continued inward investment (Gordon, 2016). The resource based approach plays stature here, whereby Nissan hold considerable negotiating power vs the national government, and lays way to the ‘behaviour’ of the UK government.
In Rugman & Verbeke (2001) pre-Brexit conditions for Nissan’s operation, viewed public policy of the UK as exogenous, with limited flexibility on Government policy due to the influences of the rest of the EU (KPMG, 2014; 2017). Being a member of the EU creates strong institutions for public policy so that the UK cannot create specific firm/ industry advantages to gain MNE’s business, as it would cause an unbalanced political landscape for the other member states to bid on Nissan’s inward FDI gains (Lall, Narula & Bellak, 2003). Post-Brexit this has led to what Rugman & Verbeke (2001) recognise as non-location bound FSA’s can be shared through higher productivity and knowledge sharing, something that is being threatened by the uncertainty Brexit has caused across the global, country, industry and firm levels of the macro economic environment (Hill & Jain, 2000). The next two years’ envelope a period of dilemma for the automotive industry in the UK, as predictions have been vast that Brexit will be an economic disaster for both the EU and UK alike (Van Reenen et al., 2016). Automotive competitors BMW and Ford are already reassessing their futures in the UK, with the likelihood that jobs will be lost and factories shut (Reid, 2016).
Following the Resource-based view, FDI raises national productivity and in turn output and wages and therefore it is in the Government’s interests to keep key players like Nissan on board (Bartlett & Ghoshal, 2002). Nissan are therefore one of the single most important MNE’s in the UK, setting a bench mark for UK production and manufacturing (Economist, 2016; KPMG, 2017). Britain is the home to both the bestselling and technologically advanced models Nissan offers for both global and EU export (Nissan, 2016). As Bloom et al., (2012) found, multinationals boost productivity through enhanced technologies and management practices that would not be available if the UK was not endogenous in its policy making. This therefore leads to benefits such as Nissan offering 40,000 jobs across design studio, technical centre, supply chain, dealer network, sales and marketing in the UK (Nissan, 2017; Careers, 2017). Those jobs directly and indirectly serve their manufacturing plant in Sunderland which has turned the East of England into one of the world’s major international automotive centres as well being one of Nissan’s top production sites (SMMT, 2014; 2016).
If it wasn’t for this impressive fact book produced by the Sunderland Plant, arguably the UK would be worse off and the odds overwhelming that Nissan would pull it operations in the UK indefinitely and look inward to its joint venture with Renault, its European partner (Thomas, 2016). The UK government are therefore in pursuit of quadrant 4 of Rugman & Verbeke (2001) framework, whereby benefits can be met for both sides. As an economy’s growth is paramount to any country, but more so now than ever in the UK, with a period of austerity under threat from another recession, Theresa May and her cabinet are bidding to convince the automotive MNE’s that the UK’s automotive industry is still a driving force to invest. As the Economist (2016) reports, companies are retreating globally from FDI. In 2000, every $1bn of stock of worldwide investment represented 7,000 jobs and $600 of annual exports compared to the 3,000 jobs and $300m of exports we see today, suggesting the long-term gains of FDI are quickly diminishing, begging the question is it worth all the hassle and risk?
Brexit is a rude awakening to the failing of a neoliberal economic system that is being tested across the EU. The scare is that the UK will enact a tax haven effect, which would just exacerbate reasons we are here in the first place (Morgan, 2016). Having said this, Nissan have been the nation’s biggest car manufacturer, producing 1 in 3 of all cars produced, investing vast amounts into the future of their automotive success into the UK Sunderland factory and contributing £3bn to the UK economy (Nissan, 2016). Investments of upward of £650mn were being discussed and determined pre-Brexit, but put on hold whilst uncertainty was high. As Rugman & Verbeke (2001) disclose, this led to the UK government adopting an endogenous public policy, offering ‘reassurances’ that business will go on as usual. For the mean time, it has been enough to secure 7,000 more jobs to continue the successful production in the crossover arena in the North-East (Nissan, 2017; Marketline, 2017).
As Lall, Narula & Bellak (2013) recognise, Nissan have used this dramatic change in the landscape to exploit a newly found endogenous Government that is desperate to reinstall the confidence of investment of inward FDI from firms like Nissan. Bartlett & Ghoshal (1986) support this observation, as a firm’s strategy can influence public policy and force governments to make changes to their institutions via the cost of future investment. With Nissan being the largest employer in North East of the UK, they offer more than maximising real national income (Dunning & Lundan, 2013; MarketLine, 2016). In this perspective, this period of ‘uncertainty’ creates a new window of opportunity for Nissan. The UK’s labour market institutions of the North have a history of suffering the effects of industries collapsing and so represent not only a large proportion of the electoral but also run the risk of history repeating itself, both outcomes that will negatively affect the current serving conservative party. Florida’s (2005) spikey world theory denotes how, rural areas represent less educated and geographically dispersed areas that act as the troughs to financial peaks like London. With the Brexit campaign promising a better UK, the Government must keep its investors like Nissan engaged in their strategic plans if they are to keep the electoral of the North-East on- side for the 2020 elections (Lall, Narula & Bellak, 2013).
Consequently, these UK Government ‘assurances’ have claimed that Brexit will not affect Nissan’s strategic advantage from exporting its products outside of the UK, being a direct example of the what is recognised as the ‘behavioural’ approach when consolidating the effects Nissan’s capabilities and resources can give in negotiating powers (Bartlett & Ghoshal, 1986). Nissan can therefore continue to do what the UK Government are have and are continuing to struggle to achieve in the North; creating jobs and helping build socio-economic benefits that will invest in the North-East’s future, by simply investing in its Sunderland plant and continuing to follow its ‘ zen’ strategy of continuous improvement whilst creating shared value (Hall & Jain, 2000; Irwin, 2015). Creating new jobs and incentivising innovation through the younger generation are long term building blocks of the economy, without which would create an economic void (Boddewyn, 1988; Dunning & Lundan, 2013).
Theresa May has continually stressed ‘Britain is open for business’ and personified this through the Nissan negotiations, commenting:
“It is a recognition that the government is committed to creating and supporting the right conditions for the automotive industry so it continues to grow – now and in the future”
The Nissan ‘deal’ costs could be high, as the guarantees and buy-ins that have been discussed privately will sway Nissan’s decision to remain in the UK. The expected returns will be high, whilst being as uncertain as ‘Brexit’ (Morgan, 2016). However, as Britain still represents a highly attractive, transparent economy (World Bank, 2017), the question arises, how will Brexit effect the import and export of inward FDI? Is Britain still a key player in exporting an MNC like Nissan’s products to the rest of Europe or will embargos and trade barriers conjured up by the EU state put an abrupt stop to the attractiveness of FDI in the UK (Van Reenan et al., 2016).
The effects of which create the incentive for Nissan to seek new export seeking advantages, with a backup plan surely being devised with their partner Renault (Nachum, Dunning & Jones, 2000). Through the ‘behavioural’ approach, we can see how each party is trying to Taylor the uncertain environment to their own benefits. Although Euro sceptics have forecasted the automotive industry will take a 12% dip in production and a 2.5% increase in cost (Van Reenan et al., 2016) meaning uncontrollable factors of Nissan’s business could decide its long-term strategy in the UK. Example can already be seen in the foreign exchange rate of the pound (£) that has decreased against the US dollar ($), negatively effecting export costs and increasing import costs from their supply chain, ultimately increasing cost of production by 10% for Nissan (Economist, 2016).
The question therefore remains, can the UK do enough to keep Nissan in the UK? From the welfare economics approach, Caves (2007) and Dunning & Lundan (2013) would argue that Nissan should remove their operations from the UK as it no longer offers incentives of maximising profits and geographical location. From Boddewyn (1988) perspective, options still remain to exploit the resources Nissan can offer whilst still effecting public policy for the benefit of their operations, at least for the short term (Van reenan et al., 2016).
BBC News, (2017) BBC News – A timeline of the EU. Available from: http://news.bbc.co.uk/1/hi/world/europe/3583801.stm [Accessed 15 March 2017].
Bartlett, C. & Ghoshal, S. (2002) Managing across borders. 1st edition. Boston: Harvard Business School.
Bloom, N., Reenen, J., & Sadun, R. (2012) Americans do IT better: US multinationals and the productivity miracle. American Economic Review. 102 (1), pp. 167-201.
Boddewyn, J. (1988) Political Aspects of MNE Theory. Journal of International Business Studies. 19 (3), pp. 341-363.
Careers, (2017) Nissan announces 2016 UK production statistics. Available from: http://careersatnissan.co.uk/2017/01/26/nissan-announces-2016-uk-production-statistics/ [Accessed 6 March 2017].
Dunning, J. & Lundan, S. (2013) Multinational enterprises and the global economy. Transnational Corporations. 19 (3), pp. 103-106.
Economist, (2016) Parked [online]. The Economist. Available from: http://www.economist.com/news/britain/21709323-nissan-announces-it-staying-put-sighs-relief-parked [Accessed 6 March 2017].
Florida, R. (2005) THE WORLD IS SPIKY Globalization has changed the economic playing field, but hasn’t leveled it. Atlantic Monthly. 296 (3) pp. 48.
Gordon, S. (2016) Sweeteners for car groups mask costs for the sake of expediency. Financial Times.
Hill, C. & Jain, A. (2000) International Business: Competing in the Global Marketplace. 10th edition. New York: McGraw-Hill Education.
Irwin, G. (2015) BREXIT: the impact on the UK and the EU. [online]. Available from: http://www.global-counsel.co.uk [Accessed 6 March 2017].
KPMG, (2014) The UK automotive industry and the EU. [online]. Available from: https://assets.kpmg.com/content/dam/kpmg/pdf/2014/04/uk-automotive-industry-and-the-eu.pdf [Accessed 6 March 2017].
KPMG, (2017) KPMG’s Global Automotive Executive Survey 2017. [online]. Available from: https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/01/global-automotive-executive-survey-2017.pdf [Accessed 6 March 2017].
Lall, S., Narula, R. & Bellak, C. (2013) EU enlargement and consequences for FDI assisted industrial development. Transnational Corporations. 18 (2), pp. 69-89.
MarketLine, (2016) Nissan: Positive economy growth leads to future production of new models in the UK. pp. 5-8.
Morgan, J. (2016) Brexit: Be careful what you wish for?. Globalizations. pp. 1-9.
Nachum, L., Dunning, J. & Jones, G. (2000) UK FDI and the comparative advantage of the UK. The World Economy. 23 (5), pp. 701-720.
Nissan. (2017) Life at Nissan Sunderland. [online]. Available from: http://careersatnissan.co.uk/life-nissan-sunderland-nmuk-plant/ [Accessed 6 March 2017].
Onwuamaegbu, U. & Sauvant, K. (2013) FDI, the global crisis and sustainable recovery. Transnational Corporations. 20 (1), pp. 1-17.
Rugman, A. & Verbeke, A. (2001) Multinational Enterprises and Public Policy. In: Alan Rugman (ed.). Oxford Handbook of International Business. 1st edition. [online]. Oxford: Oxford University Press.
Reid, D. (2016) Brexit driving car manufacturers to consider route out of Britain [online]. CNBC. Available from: http://www.cnbc.com/2017/03/01/brexit-driving-car-manufacturers-to-consider-route-out-of-britain.html [Accessed 6 March 2017].
Rosenbaum, M. (2017) Local voting figures shed new light on EU referendum [online]. BBC Politics. Available from: http://www.bbc.co.uk/news/uk-politics-38762034 [Accessed 6 March 2017].
Smaragdi, I. & Varsakelis, N. (2013) The single European market, the European Monetary Union and United States and Japanese FDI flows to the EU. Transnational Corporations. 19 (1), pp. 55-68.
SMMT, T. (2014) seeing inside manufacturing: Nissan. Available from: https://www.smmt.co.uk/2014/10/seeing-inside-manufacturing-nissan/ [Accessed 6 March 2017].
SMMT, T. (2016) SMMT Motor Industry Facts 2016. [online]. Available from: https://www.smmt.co.uk/reports/2016-key-facts/ [Accessed 6 March 2017].
Thomas, H. (2016) Looming Brexit headache for Nissan’s Sunderland plant [online]. BBC Business. Available from: http://www.bbc.co.uk/news/business-37024707 [Accessed 6 March 2017].
Van Reenen, J., Sampson, T., Ottaviano, G. & Dhingra, S. (2016) The impact of Brexit on foreign investment in the UK. [online]. Available from: http://cep.lse.ac.uk/pubs/download/brexit03.pdf [Accessed 6 March 2017].
World Bank Group, (2017) Economy rankings. Available from: http://www.doingbusiness.org/rankings [Accessed 6 March 2017].