The Implications for D2N2 Businesses of a UK exit from the European Union

Transcription

1 The Implications for D2N2 Businesses of a UK exit from the European Union March 2016

2 Key Points Introduction A referendum on the UK s membership of the EU will be held on Thursday June 23 rd Voters will be given the choice between remaining in the EU, on the basis of the revised membership terms negotiated by the Prime Minister, or leaving. There is considerable uncertainty about the terms on which the UK would leave, and the ongoing conditions under which the UK would be able to access the EU market post-exit, which makes it difficult to quantify the economic impact of a vote to leave. The implications for D2N2 businesses of a potential exit arise in the following areas: trade and access to markets; regulation; investment; sector impacts; labour market; uncertainty; and access to funding. Trade and Access to Markets EU membership provides D2N2 businesses with free access to a market of over 500 million consumers. East Midlands businesses export goods valued at over 9bn to the EU, with around 4.3bn of this estimated to be from D2N2 businesses. The additional trade resulting from the Single Market is estimated to be worth between 2% and 6% of national income. This equates to between 860m and 2.6bn in D2N2. The EU is also an important source of imports, with 52% of imports to the East Midlands ( 11bn) originating in the EU. Imports provide an important part of the supply chain for key sectors including transport equipment manufacturing. Through the EU, D2N2 businesses have access to free trade agreements with Canada, South Korea, Mexico, South Africa and Chile. The Trans-Atlantic Trade and Investment Partnership (TTIP) agreement will provide a similar agreement with the USA. Leaving the EU is likely to require the re-negotiation of separate trade agreements with these nations, disrupting existing export flows and making them subject to tariffs. Business Regulation Businesses operating in the Single Market are required to comply with EU-imposed legislation and regulation, which is estimated to cost UK businesses 33.3bn a year. This would indicate a cost of c. 0.9bn per annum for D2N2 businesses. It is unclear the extent to which EU legislation would be repealed following a British exit from the EU. Some regulations might be retained by the UK Government. Businesses wishing to trade in the EU post-exit would still be required to meet the regulations. However, there might be cost savings for non-exporting businesses. Business Investment Over 135,000 people in D2N2 are employed by foreign-owned businesses, equivalent to 15.6% of total employment. Foreign Direct Investment (FDI) by both new and re-investors is an important source of job and growth and is expected to contribute to the D2N2 target of 55,000 additional private sector jobs. 1

3 Access to the Single Market is an important factor in attracting investors to the UK, but it is just one of a range of factors that influence investment decisions. Sectoral Impacts The transport equipment manufacturing sector could face significant disruption from a British exit from the EU. The sector employs over 20,000 people in D2N2. Car exports could face a tariff of 10% and pan-european supply chains could be disrupted. Aerospace supply chains would also be affected, and the UK would need access to the EU- US agreement which provides a single transatlantic market for aerospace parts and associated services. Over 18,000 D2N2 workers are employed in the food and drink manufacturing sector, which could face tariffs of 20% or more. D2N2 is home to major businesses including Thornton s, Warburton s, Nestle, Greencore, British Sugar and Pork Farms. Over 60% of exports from this sector currently go to the EU, but high tariffs for those importing inputs from outside the EU impose significant costs on some businesses. The chemicals and pharmaceuticals sector, which includes D2N2 s priority Life Sciences sector, could be adversely affected by an exit from the EU, with tariffs of up to 4.6% likely to be imposed. The sector may however benefit from relaxation of the regulatory environment. Labour Supply Nearly 57,000 residents of D2N2 were born in EU countries (other than the UK and Ireland) 2.7% of the total population. Over the past year, 12,750 EU nationals have registered in D2N2 for a national insurance number, allowing them to work, claim benefits or tax credits, increasing the size of the labour force available to D2N2 businesses. Nearly 3,000 EU-resident students studied at D2N2 s three Universities in 2014/15, generating c. 60m of spend within the local economy. As EU nationals they are able to remain in the UK following the completion of their studies, potentially providing an additional source of skilled labour for local businesses. Economic Uncertainty Whatever the longer-term benefits or costs or leaving the EU, in the short-term, the uncertainty surrounding the referendum is imposing some economic costs. The value of sterling has fallen, creating higher costs for importers and businesses with pan-eu supply chains. Access to Funding The EU currently provides funding for regional development within D2N2, with over 100m of Structural Funds allocated to the ESIF strategy, of which a large proportion will support business growth. It is unclear whether this funding would be replaced by UK government expenditure in the event of a British exit from the EU. EU funding also supports high level R&D in D2N2, through the Framework Programme with which all the HEIs are involved. The ultimate beneficiaries of much of the research undertaken will be businesses in D2N2 and further afield. 2

4 Introduction and Context The EU Referendum and Potential Exit from the EU A referendum on whether Britain should remain part of the EU will be held on Thursday, 23rd June, following the Prime Minister s negotiation of a package of changes to the UK s membership conditions. Both the Leave and Remain campaigns have begun to make the case for their positions, in an attempt to mobilise opinion in the run-up to the referendum. The decision to leave or remain in the EU will be made by individual voters on the basis of a number of factors, including their views on sovereignty, democratic accountability and immigration. Economic considerations will also be a factor for many. As a result, efforts are now being made by a number of organisations to estimate the economic impact of a British exit on jobs, productivity and national wealth. This task is made more challenging by the lack of certainty about what a post-eu future would look like for Britain. At the current time, it is impossible to say on what terms Britain would leave the EU and the implications this would have for trade, access to the Single Market and the regulatory environment for D2N2 businesses. Quantifying the impact of a British exit is therefore largely dependent on the assumptions that are made about the future. A vote by the British people to leave the EU would be followed by parliamentary legislation to invoke Article 50 of the Treaty on European Union. Under the Lisbon Treaty, the EU treaties cease to apply to a Member State two years after notifying its intention to leave the EU (i.e. 2018). This timeline can be altered if agreement can be secured in the European Council and European Parliament. The UK would not be part of discussions about its exit and the terms of withdrawal from the EU would be agreed by the remaining Member States. Article 50 of the Lisbon Treaty states: The member of the European Council representing the withdrawing member state shall not participate in the discussions of the European Council or in decisions concerning it. The UK would therefore not have a seat at the table at the discussions by EU partners about the terms of its withdrawal 1. British businesses, as with the British public in general, hold a range of views on the benefits or otherwise of leaving the EU. Business representative organisations have taken up different positions: The CBI, which represents the views of businesses employing almost seven million people, says that a majority (80%) of its members are in favour of Britain remaining within the EU; The British Chambers of Commerce, which speaks on behalf of 52 regional Chambers of Commerce and represents thousands of businesses employing over five million people, has said it will not campaign for either side in the referendum as its membership is divided; The Federation of Small Businesses, which represents small businesses across the UK, has not taken a position on the referendum and will not be advising members on how to vote. Purpose of this Paper The purpose of this paper is to examine the potential implications for businesses in the D2N2 LEP area of a British exit from the EU. Given the uncertainty about the future, no attempt is made to estimate the impact in financial or output terms. The report draws on research and data from a range of organisations. We have tried to ensure that the sources drawn upon are objective, although as the House of Commons Library 2 notes: There is no definitive study of the economic impact of the UK s EU membership or the costs and benefits of withdrawal. Many of the costs and benefits are subjective or intangible and a host of assumptions must be used to reach an estimate. 1 The process for withdrawing from the European Union, HM Government, Feb Exiting the EU: UK reform proposals, legal impact and alternatives to membership, House of Commons Library Briefing paper no , Feb

5 The Potential Implications of Leaving the EU for D2N2 Businesses The business implications of a British exit from the EU are potentially significant. The report considers the potential implications across areas including: Trade and access to markets Regulation Investment Sector impacts Labour market Uncertainty Other impacts Potential Implications for Trade and Access to Markets The Single Market is a market of 500 million customers. As a member of the EU it is effectively the home market for D2N2 businesses, with products and services being subject to the same base regulatory standards, businesses working to the same employment legislation, and the movement of goods and services without tariff barriers. Free trade within an open market sits at the core of EU s remit and principles. Departure from the EU would result in the loss of common trade terms with other Member States and access to negotiated trade agreements for the UK. This carries a series of potential implications, as outlined below. Exports The UK exported 230 billion of goods and services to the European Union in 2014 equivalent to 45% of all UK exports 3. Seven of the UK s top 10 export markets are in the European Union and it is often the place smaller businesses look to export to in the first instance 4. Annual Business Survey provisional figures for 2014 suggest that across the East Midlands 14,900 businesses export goods and/or services and 14,500 import goods and/or services. Exports of goods from the East Midlands were worth 21.5bn in 2014, and 43% of East Midlands exports are to the EU, a lower proportion than is the case for the UK as a whole. Nearly 70% of East Midlands exports ( 14.9bn) are accounted for by the machinery and transport sector, in which D2N2 businesses play a particularly important role. 8% 11% Value of East Midlands Goods Exports by SITC Section 2013 Machinery and Transport Miscellaneous Manufactures Manufactured Goods Chemicals Food and Live Animals 60% 50% 40% 30% 20% 10% 0% Value of Goods Exports by Country Group 2013 East Midlands UK 69% Crude Materials Source: HMRC Beverages and Tobacco Other commodities nes Source: HMRC 3 House of Commons Library, op. cit.; ONS Statistical Bulletin, Balance of Payments, ONS Statistical Bulletin, UK Trade, April

6 No data is available on exports to the EU from D2N2 businesses, but the regional data would suggest a minimum value of 9.2bn (based on D2N2 s share of total East Midlands employment) with around 4.3bn exported to the EU. Research undertaken by BIS in emphasises the scale of connections between the UK and EU economies, stating that around 3.5 million jobs are linked to the export of goods and services to the EU. Based on D2N2 s overall share of UK employment, this would equate to some 115,000 jobs in D2N2. The same report estimated that EU countries trade twice as much with each other as they would do in the absence of the Single Market, generating income gains for the UK of between 2% and 6%. These findings would be expected to broadly apply to locations across the UK, and would equate to between 860m and 2.6bn of GVA in D2N2. Whilst a departure from the EU would not prevent D2N2 businesses from exporting to the EU, a series of tariffs and barriers to trade could return which would serve to reduce levels of trade relative to the current position. As considered in the sectoral impacts section, there would be particular implications for heavily regulated sectors and those with high export tariffs, many of which are of particular importance to the D2N2 economy. Imports The EU is also an important source of imports to the UK, with many companies having supply chains which extend across the continent. Fifty-three per cent of the UK s goods and services imports ( 289bn) come from within the EU, meaning the UK has an overall deficit in trade in goods and services. The largest sources of imports include: Germany 70.6bn France 37.0bn Netherlands 36.1bn The total value of imports of goods to the East Midlands was 21.6bn in 2014, very slightly higher than the value of exports. Fifty-two per cent of these imports came from the EU, and the importance of industry supply chains is evident from the fact that 43% of imports were accounted for by the machinery and transport sector. Trans-Atlantic Trade and Investment Partnership and other Trade Deals Through membership of the EU, Britain is party to a range of free trade agreements with a large number of non-eu countries, including Canada, South Korea, Mexico, South Africa and Chile. An increasing proportion of the UK s exports go to non-eu countries. The EU and the USA are currently in the middle of lengthy negotiations on a free trade agreement (the Trans-Atlantic Trade and Investment Partnership). This aims to open up access for nearly all services and goods markets between the two continents reducing customs duties on goods, reducing restrictions on services, and further opening up public procurement markets. It will also improve regulatory coherence between EU and US standards and ensure greater EU-US cooperation in setting international standards. Similar arrangements are also proposed with Japan and will build on approximately 30 trade deals already negotiated by the EU which give UK firms access to a $24 trillion market 6. The UK, with historic close ties to the United States, is expected to be a major beneficiary of increased trade generated through the Trade and Investment Partnership. 5 The UK and the Single Market: Trade and Investment Analytical Papers Topic 4 of 18, Department for Business, Innovation and Skills 6 Quoted in 5

7 Leaving the EU would mean the UK would sit outside all these agreements. Most commentators argue that the UK would no longer be party to these agreements, and would need to re-negotiate its own terms of trade with each nation. There would be challenges to the UK negotiating comparable terms in its own right. There are forecasts suggesting that consumers in the UK will be disadvantaged. Consumer prices fell by 0.5 per cent as a result of EU negotiated free trade agreements which suggests new agreements with the US and Japan could save households 6.3 billion every year 7. Such benefits would also be lost in the event of an EU exit. Single Digital Market The European Commission is in the process of taking policy and legislative action to open up the digital single market. The UK has Europe s biggest e-commerce market and the world s second biggest market for audio-visual content. In addition, the UK Government estimates that there are in excess of 120,000 UK businesses in the digital economy 8. Over 30,000 people are working in the creative and digital sector in D2N2 with growth experienced in the two cities in recent years (Derby 4% and Nottingham 1% growth per annum since 2010). Furthermore there are approximately 5,600 Digital and Creative businesses in D2N2, the vast majority (over 90%) of which employ fewer than 10 people. The digital single market could therefore generate significant opportunities for D2N2 business which would be lost in the event of the UK leaving the EU. Potential Implications for Business Regulation The EU imposes legislation and specific regulations which business operating in EU member states and trading in the EU market must follow, including regulations affecting product specifications, competition, employment terms, health and safety and consumer protection. There are significant costs for businesses associated with these regulations, principally through regulatory administration and the practical aspects of putting regulations in place, with costs particularly burdensome for small businesses 9. Open Europe estimates that EU regulations cost the UK economy 33.3bn a year, based on the 100 costliest regulations 10. The five which impose the greatest costs on UK businesses are shown in the table below: Regulation Estimated cost (per year) Estimated annual cost to D2N2 businesses* 1. The UK Renewable Energy Strategy 4.7bn 132m 2. The Capital Requirements Directive IV 4.6bn 129m 3. The Working Time Directive 4.2bn 118m 4. The EU Climate Change and Energy Package 3.4bn 95m 5. The Temporary Agency Workers Directive 2.1bn 59m Source: Open Europe, ekosgen estimates * Based on D2N2 share of UK business base 7 (LSE) Federation of Small Businesses. FSB Manifesto European Elections Feb

8 An EU exit would allow the UK to create its own legislation, tailored to national priorities and adaptable to changing circumstance. However, it is unclear whether this would result in significant changes to the business regulatory environment in the UK. The CBI s assessment is that of the regulations included in the table above, those related to energy and climate change and capital requirements would be unlikely to be repealed, because of the UK Government s own commitments in these areas. Whilst the savings to businesses that could be achieved by repealing those relating to working time and agency workers could be significant, the costs would be borne by workers (e.g. through longer working hours, reduced entitlement to paid holidays etc), and again there is no guarantee that the government would wish to impose this. Businesses that wished to continue to trade within the EU would be required to continue to meet EU regulations, potentially meaning that two different sets of product standards would be in force, adding costs in terms of administration and complication. Potential Implications for Business Investment Located at the heart of England, D2N2 LEP is an important UK and European location for business investment. D2N2 has a considerable number of foreign owned companies in a wide range of sectors, with foreign owned enterprises accounting for 15.6% of jobs in D2N2 in 2011, equivalent to over 135,000 jobs, ranking it 11 th of the 39 LEP areas 11. The achievement of the LEP s growth plans, including reaching the 55,000 jobs target, will in part be reliant on the attraction of inward investment to the LEP area, through both the expansion of existing operations and the development of new businesses. International trade and Foreign Direct Investment (FDI) are recognised as two of the most important sources of business growth for D2N2 in the Strategic Economic Plan. Some of the core considerations of an exit from the EU in this context are outlined below. The UK s Role as a Gateway to Europe The EY Attractiveness Survey provides insight into the attractiveness of a country or region as a location for FDI, based on both the realities and perceptions of international and local opinion-formers and decision-makers. The survey for shows that 72% of investors cited access to the European single market as important to the UK s attractiveness. Nationally, more than half of all European headquarters of non-eu firms are in the UK, with the UK hosting more headquarters than Germany, France and the Netherlands put together. D2N2 has strong transport links within the UK and beyond and the presence of East Midlands Airport (EMA) just outside the LEP boundary plays a key role in supporting D2N2 as an export orientated LEP area. The airport itself has high dependency on EU trade and has the 2 nd largest air freight hub after Heathrow. Civil Aviation Authority statistics for show that of 57,000 services using East Midlands Airport, 43% were run by EU (non-uk) operators, accounting for almost 2 million passengers (44% of the total). Examination of the origin/destination of international passengers shows that the airport served over 90 EU destinations (90% of all international destinations) which accounted for 97% of all international passenger flows for which an origin/destination was reported. The highest flows were recorded between East Midlands and Spain (2.2 million, 53% of all international passengers). 11 The LEP network. Building Local Advantage: Review of Local Enterprise Partnership Area Economies in _full_report/$file/ _ukas_report_2015_finalweb.pdf

9 There are plans to increase traffic at EMA from 4.3m passengers and 300,000t freight in 2013 to 10m passengers and 700,000t freight in Capturing Inward Investment Foreign Direct Investment is an important source of business and employment growth within the UK economy. Incoming businesses typically bring with them higher rates of productivity and demand for high level skills, and provide an important source of innovation and technology transfer. UK wide data collected through the Annual Business Survey 2012 (released in November 2014) shows that there were almost 12,000 European-owned businesses in the UK non-financial business economy (i.e. excluding finance, public administration and publicly provided education and health), accounting for 0.6% of the total business base (54% of the foreign owned total) but 21% of total turnover and 29% of UK value added 15. UKTI figures for 2014/15 highlight the importance of EU Member States as a source of FDI in the UK. The UK is Europe s leading destination for FDI stock, flows and projects, benefiting from significant investment from Europe, the United States and increasingly from Asia. In 2014/15 there were 1,988 FDI projects (including re-investment), supporting 84,603 new jobs. This included 1,058 new investments and 740 related to expansions. In total, FDI projects in the UK were recorded from over 70 countries and territories. FDI investment from EU Members States included 124 projects from France, 97 from Germany, 91 from Italy, 59 from Spain and 51 from Ireland. Links to other EU Member States are therefore strong. In 2013 over 50% of inward investment to the UK came from EU countries 16 and UKTI figures show that the UK remains a popular destination for headquarters functions (370 projects in 2014/15). A wide range of projects are being supported with the primary sectors for FDI in the UK being: UK Foreign Direct Investment in Key Industries and Sectors, 2014/15 Number of Projects Software & Computer Services 253 Food and Drink 104 Financial Services 222 Biotechnology and pharmaceuticals 85 Business and Customer Services 143 Mechanical, Electrical & Process Engineering 80 Creative and Media 124 Clothing, Footwear and Fashion 77 Automotive 117 Electronics and IT Hardware 75 Source: Inward Investment Report 2014/15, UKTI A number of these sectors reflect strengths in D2N2 s business base and priority sectors, including in transport equipment manufacturing, food and drink manufacturing, life sciences and creative and digital industries. D2N2 has a strong presence of firms with global reach. Examples of multi-national companies with a significant presence in the LEP area include: Toyota Japanese owned firm with a large automotive manufacturing plant at Burnaston, Derbyshire Rolls-Royce The headquarters of Rolls-Royce PLC's aerospace division is in Derby Bombardier Canadian owned international manufacturer in aerospace and rail sector with large site in Derby 14 As set out in EMA Sustainable Development Plan 15 Data accessed through:

10 Walgreens Boots Alliamce Owned by a US company, with corporate headquarters in Switzerland and operational headquarters in Nottingham Siemens German owned global engineering company with a large centre in Nottingham Experian Global information services company with a large presence in Nottingham and corporate headquarters in Dublin The continued attractiveness of Derby to investors was highlighted by the Financial Times fdi magazine Global Cities and Regions of the Future 2014/15 17 report, which ranked Derby 23 rd of all European cities and 9 th of all UK cities. The report also ranks Derby 3 rd of all small European cities in terms of its FDI Strategy. Attracting investment in part reflects the strength of the D2N2 and UK economies in their own right but also the access that they provide to the Single Market, although quantifying the relative importance of each factor is extremely difficult 18. A decision to leave the EU would be expected to impact on FDI in D2N2 and the wider UK by both EU Member States and non-eu investors. Potential Sectoral Impacts Research by Open Europe 19 shows that a UK exit is likely to have particularly significant impacts on eight of the UK s key export sectors: automotive; chemicals and pharmaceuticals; aerospace; capital goods and machinery; food, beverages and tobacco; financial services and insurance; and professional services. This raises implications for D2N2 linked to sector specialisms in the LEP area and supply chain links to wider UK sector specialisms. Disruption in the event of an exit is expected to be most significant for financial services (due to high levels of regulation which could serve as a barrier to trade and would be outside the UK s control) and those sectors with high export tariffs (above 4%) such as cars, chemicals and food which account for approximately 35% of the UK s exports to the EU. There may be opportunities to negotiate preferential trade deals for selected sectors but the likelihood of achieving this, the terms that would be agreed and the timetable over which agreement could be reached cannot be determined at this time. Based on this, there may be implications for a number of D2N2 s priority sectors in the event of an exit, including: Transport Equipment Manufacturing: D2N2 has an established and widely recognised specialism in Transport Equipment manufacturing with a number of large and globally significant transport manufacturing companies, including Toyota, Rolls-Royce and Bombardier, which are part of large local and national supply chains. The sector employs over 20,000 people in D2N2 and is highly represented within the total employment base, with a location quotient of Employment is particularly concentrated in Derby, which has a LQ of 11, reflecting the location of major employers in the City. The sector is highly productive and an importance source of employment and GVA for the D2N2 economy. Exiting the EU could potentially lead to a high level of disruption for the automotive sector, with the potential for high tariffs on car exports, uncertainty in EU wide supply chains and increased administration at the border. Complex aerospace supply chains would likely also need to adjust if the UK exited the EU and the UK would need to gain access to the EU-US civil aviation agreement (a single transatlantic market for House of Commons Library, op. cit A location quotient (LQ) indicates the relative concentration of employment in one location compared to the national average a location quotient of more than one indicates a higher concentration of employment. 9

11 aerospace parts and associated services). For example, Rolls-Royce is part of the EuroJet collaboration and provide engines to Airbus and Boeing 21. Food and Drink Manufacturing: A large employment sector with over 18,000 employees in D2N2 and a location quotient of 1.6. Employment is largely concentrated outside the two cities, with particular concentrations in the Peak District, Newark and Sherwood, Bassetlaw and Amber Valley. Employee numbers have increased by 11% (+1,700 jobs) since 2009 and the LEP area has a particular specialism in the manufacture of food products. D2N2 has a significant presence of well known food manufacturers, including Thorntons, Warburtons, Nestlé, Greencore, British Sugar and Pork Farms, as well as a high number of SMEs in the sector. The strong connectivity of the LEP area supports high levels of exporting across the UK and internationally. Open Europe state that in the case of the UK exiting the EU, the food and drink sector could face high tariffs and changes in supply chains. However, there may be the potential to purchase cheaper inputs for processed food products. Life Sciences: The life sciences sector in D2N2 employs 4,000 people, and includes the manufacture of chemicals and pharmaceuticals, the manufacture of medical instruments and R&D on natural sciences and engineering. Whilst not particularly highly represented in D2N2 (LQ of 0.7) demand for life sciences is increasing, driven by an ageing and better informed population, growing global wealth and new and developing technologies, and D2N2 is in a position to take advantage of this. Nottingham is designated as one of the UK s six science cities, with the presence of one of the largest teaching hospitals in the UK and the LEP area is home to the operational headquarters of large pharmaceutical company Alliance Boots and innovative centres, including BioCity and MediCity. Pharmaceutical companies tend to rely on trade links to source basic chemicals which they can then turn into more sophisticated products and an exit from the EU could disrupt these complex supply chains. Exiting the EU could also potentially lead to exclusion from the Transatlantic Trade and Investment Partnership. There would also likely be implications for the financial, professional and business services sector which, whilst not a LEP priority sector, is a key employment sector in D2N2 with over 176,000 employees (accounting for 20% of D2N2 s employment). The sector is particularly prominent in Nottingham, with over 70,000 employees and accounting for over a third of the City s total employment. Loss of the single market would have significant implications for the sector, particularly for banks and other financial firms, with the risk of losing cross-border access to EU markets. Exiting the EU could also pose a significant risk to jobs created by FDI, which account for a large proportion in the sector. Potential Implications for Labour Supply The free movement of people is a fundamental principle of the Single Market. All residents of Member States have the flexibility to live and work where they choose in the EU. Whilst there is considerable debate about the impact of immigration on communities and public services, businesses in D2N2 benefit from having access to a larger labour pool than would otherwise be the case. Depending on the agreements reached regarding existing immigrants and future arrivals, withdrawal from the EU could have significant implications relating to the labour force for businesses in D2N tcm pdf 10

12 Labour Force Movement Looking at the population as a whole, 2011 Census data showed that 2.7% of the D2N2 population (approximately 57,000 people) were born in EU countries, excluding the UK and Ireland. This is below the national average of 4.3% and ranks as the 14 th lowest LEP area, with areas such as London and Greater Cambridge and Peterborough having the highest proportions of their populations born in the EU. 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Source: DWP NI Registrations by Overseas Nationals 2002/ /15 D2N2 UK Trendline Between June 2014 and June 2015 there were over 17,000 National Insurance number registrations in D2N2 (allowing people to work or claim benefits/tax credits) by overseas nationals 22. This is equivalent to 0.8% of the total D2N2 population. In total, three quarters of registrations in D2N2 were for EU nationals, a very similar share to nationally, with this proportion remaining relatively stable over the last three years. Many EU migrants tend to be young and highly skilled such as university graduates and young professionals who are seeking overseas career enhancing experiences. Most EU migrants come to the UK for work purposes and University College London 23 recently reported that 62% of migrants from Western Europe have a university degree, compared to 24% of the British Workforce. EU migrants also offer job-specific or language skills which are highly sought after by employers and a recent report by the Migration Advisory Committee identified flexibility and work ethic as key reasons why employers recruited migrants into low-skilled jobs, amongst other useful skills and qualifications 24. At a time of recognised skills shortages nationally, having access to a substantial mobile labour force is a distinct advantage. Changes to migration rules would be expected to reduce the flow of overseas nationals into D2N2. In the context of an ambitious 55,000 jobs target and an ageing population, restrictions on labour movement could impact on the ability to deliver growth ambitions both in respect of the total workforce required and demand for skilled labour. Research by Di Giovanni et al 25 found that restricting mobility could restrict trade and reduce UK welfare equating to a loss of 1.5% of national income. Supply of Students The reputations of D2N2 s universities act as a strong draw for both domestic and overseas students. HESA statistics for 2014/15 show that the three D2N2 universities (The University of Nottingham, Nottingham Trent University and The University of Derby) had 2,880 EU-resident students (excluding those from the UK). Research conducted for the NUS 26 suggests annual per capita spending by students, including tuition fees, of 20,175, suggesting EU students in D2N2 spend in the region of 58 million per annum with elements of the expenditure re-circulated through the local economy. Student living costs are estimated Migration Advisory Committee. Migrants in low-skilled work. July Quoted in (LSE) 26 Student Contributions to the UK Economy, nef consulting,

13 at 9,204 per annum 27 a significant proportion of which consists of spend in the local economy, including spend on food shopping, travel, bars/pub/clubs, eating out, alcohol, clothes, mobile phones, course equipment, and excursions. Due to free movement of labour regulations, EU national graduates are able to stay in the UK after graduating, providing a valuable supply of skilled labour for D2N2 businesses. Any changes to the entitlement of EU nationals to study at UK institutions would impact on the number of students attracted and levels of associated expenditure. The tuition fees that EU nationals could be charged could, however, increase in the event of an exit, to equal those for other international students. Potential Impact of Economic Uncertainty Whilst the long-term effects of a potential exit from the EU are difficult to quantify, it is apparent that the uncertainty relating to the UK s future within the EU is having an economic effect in the short-term. Economic Uncertainty and Company Investment The uncertainty being caused by the referendum will cause businesses to delay investment and inward investment decisions in the intervening period. Of 406 investors surveyed by the 2015 EY Attractiveness Survey, almost a third of companies said they would either reduce or freeze their planned investments up to Many of these businesses are likely to be affected by delays to investment and expansion plans and in some situations, where office and plants are in competition with other company locations elsewhere in Europe, there is a risk that uncertainties (and an exit in the longer term) could result in D2N2 based operations losing out to other countries. Economic Uncertainty, Sterling and Interest Rates Since the date of the referendum was announced, there has been a significant fall in the value of sterling against other international currencies, reflecting the uncertainty surrounding the EU debate. Whilst this is beneficial for exporters, those businesses that depend on imported inputs as part of their supply chain are facing increased production costs. The uncertainty over the referendum also has longer-term implications for interest rates, with a number of ratings agencies indicating that they are likely to downgrade the UK s credit rating if there is a vote to leave, making it more expensive for the UK government to borrow money on financial markets. Potential Implications for Access to Funding European Structural and Investment Fund (ESIF) The European Structural and Investment Funds (ESIF) are the main funding instrument used to implement EU regional and cohesion policy. The programme provides funds to support the economic development of local areas and to help rebalance the European economy. The funds support investment in innovation, low carbon, businesses development, skills and employment. The D2N2 ESIF includes 104.4m of EU funds, plus an equivalent amount of match funding. The funds will play an important role in delivering economic development objectives, including skills development, business growth and the development of new innovation facilities. 27 NUS (2013), Success in the Student Market: Survey results. Main research findings available at: 12

14 D2N2 has a strong track record of securing funds with ERDF and ESF funding many important projects including large scale skills development and business support programmes. A pipeline of investment propositions has been identified with the funds anticipated to play an important role in supporting D2N2 s business growth aspirations. With the programme only recently opening for bids and the scope for awards to be made until the end of 2020, with funds to be spent before the end of 2022, a decision on the UK s membership will come at an important time in the programme s delivery. The implications of a departure during the midpoint of the programme are unclear but would likely result in significant confusion and disruption for projects and businesses being supported through the programme. Research and Technological Development The EU has a considerable impact on UK research and technological development in the form of the Framework Programme (FP), which is the European Union s primary funding instrument for supporting collaborative, transnational research and development, with a focus on science and technology. The programme distributed over 53.2 billion ( 45.5 billion) to as many as 10,000 research projects. The UK has consistently secured a disproportionate share of available funding and maintained a leading position in terms of the share of all FP projects in which it is involved. The UK received 5,205 million in funding through the first six years of FP7 ( ) which is greater than the spending power of five of the seven UK Research Councils. Whilst the funding is awarded to R&D organisations, businesses are often the ultimate beneficiaries of the research and development supported through the FP. Examples of European research funding successes in D2N2 include projects by all three universities within D2N2. The University of Nottingham has over 20 FP7 projects which members of its Advanced Manufacturing Institute have either led or participated in, including, for example, PRIME (developing a new type of adaptable plug) and Hyperspace (research into aircraft passenger comfort). Nottingham Trent University has been involved in the FP7 funded cycled project using their expertise in sustainable design, lifecycle assessment and eco-lighting and the University of Derby has worked on the AdvIOT project in collaboration seven other global universities. An exit from the EU would result in the loss of an important R&D funding stream with implications for D2N2 s HE sector and business base. This could lead to longer term competitiveness challenges for the universities and the loss of both academic and collaborative research activity to institutes outside the UK. 13