An illustration of a map of Europe. A line of businesspeople in suits carry moving boxes from the UK to countries in the EU.

Brexodus: UK firms redirected £22 billion worth of investment to the EU after Brexit

It is now 10 years since the UK voted to leave the EU. The Brexit referendum – which took place on 23 June, 2016 – marked the beginning of a long-term realignment for many UK businesses.

These firms had previously enjoyed numerous benefits through their access to the single market. This included frictionless trade, regulations that were closely aligned, and the ability to coordinate supply chains and production in an efficient way across borders.

For companies, this stability was invaluable. It allowed them to invest with confidence that they would not face unexpected barriers. Brexit changed all that.

Faced with so much uncertainty, UK firms responded in the most logical way they could. They relocated critical operations to the EU, where their access to the single market was secure.

These were not marginal adjustments. Our analysis found that Brexit prompted UK businesses to redirect approximately £22 billion of investment to the EU between 2016 and 2019 – an increase of 86 per cent.

This led to the creation of more than 100,000 additional jobs and 1,280 greenfield projects in the EU. Many of these were concentrated in ‘high value’ sectors such as professional services, finance, and advanced manufacturing – all at the expense of the UK economy.

These are not sectors that companies typically relocate to foreign countries when they are targeting larger growth markets or lower costs.

And this investment was not accompanied by a similar increase in non-EU countries. In other words, it was not part of a broader trend of ‘Global Britain’ pursuing distant opportunities for growth.

The exodus was driven by the fact that companies needed to maintain regulatory compliance and market access. That process continued well beyond the referendum period.

The Trade and Cooperation Agreement between the UK and the EU, signed in December 2020, was explicitly designed to restore the certainty that Brexit had removed.  It codified trade rules, investment frameworks, and regulatory cooperation between the two parties.

Policymakers presented it as the mechanism that would enable firms to invest in the UK with confidence once again. However, it offered only a partial solution.

The flow of foreign direct investment from the UK to the EU stabilised after the agreement was signed. But firms who had already relocated operations to the EU did not return.

At most, the agreement recovered a third of the investment that Brexit displaced – approximately £6.7 billion in value and 28,000 jobs.

This creates a significant problem. Dissuading firms from relocating more of their operations to the EU in future is not enough to reenergise the economy. The UK needs to win back as much as possible of the outward investment that flowed to the EU after Brexit.

Why has the Trade and Cooperation Agreement had such a limited impact?

One reason is that the EU subsidiaries that UK companies established in the wake of Brexit have become embedded in their strategies, local supply chains, and client relationships. These are operational networks that are not easy to unwind.

Another key reason is that agreements alone cannot restore certainty. Regulatory alignment and institutional credibility are essential for sustaining business confidence.

Take the pharmaceutical industry, for example. Brexit drove investment from the UK to the EU as firms established or expanded their European operations in order to maintain regulatory compliance.

However, that pressure eased after the Trade and Cooperation Agreement introduced closer alignment on pharmaceutical standards and marketing authorisations.

Consequently, the pharmaceutical industry is one of the few sectors where the trend of foreign direct investment from the UK to the EU has been reversed.

The Trade and Cooperation Agreement has not delivered similar results for industries such as advanced manufacturing. It reduced tariffs and quotas for these sectors, but this was rarely the key factor that companies considered when relocating their operations to European countries.

Manufacturers were responding to regulatory friction, such as the need to duplicate supply chains to meet different rules of origin.

This is why deeper regulatory cooperation – not further trade liberalisation – is essential to ensure that high value activities remain, and where possible return, to the UK.

The summit between the UK and the EU in May 2025 re-established political dialogue between the two trading partners. But it left regulatory cooperation on manufacturing, financial services, and professional qualifications to be negotiated at a later date.

The UK cannot afford to defer that process any longer. Firms that have already established European subsidiaries will only become more embedded as their sunk costs and operational networks deepen. In less than five years, many of them will be locked in.

The review of the Trade and Cooperation Agreement (which is due to take place this year) and the next UK-EU summit, offer a key opportunity to redress the balance. But to do that, policymakers must focus on regulatory friction, not tariff barriers.

The next summit must deliver substantive agreements on services, manufacturing supply chains, and data governance.

Failure to do so would leave the UK vulnerable to losing investment to the US, as well as to the EU. The aggressive industrial policy adopted by the Trump administration, combining protectionist tariffs with substantial subsidies for key sectors, is designed to attract more high value investment.

In a competitive landscape, it’s just as important to retain business operations which are already based in the UK as it is to attract Foreign Direct Investment from other countries.

The UK has a narrow window of opportunity to do that.

Further reading:

What is the key to levelling up the UK economy after Brexit?

Trump wants more trade tariffs - what would that achieve?

Can the UK become a high-wage, high-skill economy?

Growing pains: How to help small businesses scale

 

Nigel Driffield is Professor of International Business at Warwick Business School and Deputy Pro Vice Chancellor for Regional Engagement at the University of Warwick. He has conducted research and consultancy projects for the World Bank, European Commission, and several UK Government Departments including the Department for Business and Trade. He is also a member of The Productivity Institute.

Jun Du is Professor of Economics at Aston Business School. Oleksandr Shepotylo and Xaiocan Yuan are Lecturers in International Business at Aston Business School.

Learn to navigate disruption in today's complex landscape with our Executive Education programme The Strategic Mindset of Leadership at WBS London at The Shard.

Discover more about Strategy and Organisational Change. Receive our Core Insights newsletter via email or LinkedIn.