Economic Disintegration and Multinational Production: Evidence from Brexit

Using microdata on Japanese multinational enterprises (MNEs) from 2010 to 2019, we examine the impact of Brexit on global production networks and supply chains. Specifically, we conduct a difference-in-differences analysis and compare the performance of Japanese foreign affiliates in the United Kingdom (UK) and other European Union (EU) countries before and after the 2016 Brexit referendum. We obtained the following three findings. First, Brexit significantly decreased the total sales of Japanese affiliates in the UK by approximately 11%. Their sales dropped because of lower local sales in the UK and exports, especially to other European countries. The impact of Brexit on Japanese affiliates’ total sourcing in the UK was even larger (approximately 14%), especially for their local purchases and imports from the European market. Second, Japanese foreign affiliates in the UK decreased their employment, number of Japanese expatriates, and capital investment after Brexit. At the same time, the productivity and profitability of Japanese affiliates decreased and their probability of exiting the UK increased significantly. Third, the negative impact of Brexit was larger in non-manufacturing industries than in manufacturing industries, suggesting much higher trade costs in service trade. Our findings suggest that a substantial increase in (uncertainty over) trade costs due to institutional changes may reshape global production networks and supply chains.