British exit from the EU a deterrence for R&D investment, warns a new report

Analysis says that nonchalance over UK’s standing in a “Brexit” scenario is dangerous, with innovation likely to suffer

The UK would lose its heft in key manufacturing industries, face heavy research funding shortfalls and risk brain drain were it to leave the European Union (EU), according to a new report.

The complex choices that would surround any British divorce from the EU are laid out in a 92-page paper by the Centre for European Reform (CER), a UK-based think tank.

A loss of unrestricted access to Europe’s market would cause foreign investment to dry up. It is, the report claims, “Hard to dispute that leaving the EU would make the UK a less attractive investment location for firms intending to sell to other EU markets from their UK facilities.”

The paper sees the automobile industry as one of the most vulnerable parties in this scenario. Factories would not close overnight, “But it would be harder for firms to justify new investment in their British plants, and component suppliers could opt against building up industrial capacity in the UK.”

The report’s confidence in this analysis stems from statements from two of the biggest investors, Nissan and Jaguar, which have clearly signalled that a British exit, or Brexit, would take away from the attractiveness of the UK as a base of operations.

Funding and brain drain

An exit would automatically damage the science base, the report says, leaving UK-based scientists who rely on EU funding out in the cold.

Of course, the UK would not be completely without research funds: the UK's seven research councils invest around £3 billion every year – but in the EU, the UK currently wins the lion’s share of research funding.

“Researchers based in the UK received 16 per cent of EU R&D funding, and 20 per cent of its grants for scientific research in the last budget period, the country contributed 11 per cent of the EU’s total budget,” the report notes.

Switzerland’s recent experience is presented as a cautionary tale by many. Following a row with the EU over a vote to restrict immigration, the country lost its full privileges with regard to science funding.

Starting from scratch

Were it to slip the EU’s leash, the UK would not inherit any of the EU’s bilateral trade agreements: negotiations would have to begin from scratch.  The report says finding a suitable trade arrangement that would allow the UK to retain a great amount of influence, would not be so straightforward.

Britain could try for a customs union with Europe, like Turkey, but it would have to abide by a lot of the EU’s legal rulebook, without having a say, for the privilege. A looser trade arrangement is an option, something like the Swiss relationship with the EU, but the report said this has left Switzerland partly shut of the EU services market.

Certain industries could emerge with gains in a Brexit scenario though, the report states. Outside of the EU the UK would, “Certainly be freer to introduce less onerous regulatory requirements for new technologies, such as nanotechnologies, the life sciences, genetically modified crop plants, space vehicles and interactive robots.”

Any immediate benefits here would be filtered down when it comes to the export market though, the report goes on to say, where British industry would come up against EU demands on labour market rules, health and safety and competition policy, as well as product standards.

For the computer software industry, the report concedes the factors which attracted foreign investors in this field to Britain, such as the availability of skilled labour and the English language, will remain if the UK leaves the EU.

Research is not the only funding shortfall to be swallowed. An exit would force the UK to choose whether to replace the EU’s structural funds with national regional development spending. Presently, Wales and Northern Ireland are large beneficiaries of the EU scheme.

Simplistic and misleading

While a lot of the newly-elected British MEPs would like to see a bonfire of the EU’s diktats and acquis communitaire, the aim of CER’s analysis is to dispel “simplistic and misleading” arguments for a British exit.

The report was drafted by a panel of economists and politicians for CER. It included Martin Wolf, chief economics commentator for the Financial Times, Peter Mandelson, former UK secretary of state for business and innovation and Michael Rake, chairman of the telecoms company BT.

The analysis does not look into the broader question of the effect on the EU, and how its chemistry would change, in the event of losing a powerful state like the UK.

The report also does not attempt to quantify the negative effect that sustained Brexit speculation is already exacting on investment into the UK, although this has been attempted elsewhere.

Mooted UK referendum

The UK’s Conservative party is offering a 2017 referendum on British participation in the EU, if it is elected in next year’s national election. The main rival, Labour, has not offered a vote.

A recent poll showed that British opinion is divided on the issue: 41 per cent of respondents said they would like to stay while 39 per cent would like to leave. The remaining 15 per cent are unsure.

The full report is here.