The UK vote to leave the EU in June 2016 generated an immediate political shock that was accompanied by a sharp rise in economic policy uncertainty. As then-Bank of England Governor Mark Carney warned shortly after the referendum, “the UK relies on the kindness of strangers at a time when risks to trade, investment, and financial fragmentation have increased” (Carney 2017). This warning captured a central vulnerability of an open economy facing political rupture: foreign capital is mobile, forward-looking, and sensitive to uncertainty.

A substantial literature examines Brexit’s effects on UK trade, productivity, and domestic investment (Portes 2023). At the micro level, prior work studies firm responses in terms of investment, employment, and export performance (Thwaites et al. 2019, Bloom et al. 2018, Exton et al. 2019). However, surprisingly little is known about how Brexit-related uncertainty affected international capital flows at the firm level. This gap matters for policy. Aggregate capital flow data can mask substantial heterogeneity in how firms adjust their balance sheets in response to political shocks. Understanding these micro-level responses is crucial for assessing financial stability risks and the transmission of uncertainty across borders.

A firm-level view from Switzerland

In a recent paper (Fischer and Yeşin 2026), we present new empirical evidence based on firm-level capital flow data to shed light on this question by examining how the Brexit vote affected foreign investment flows between Switzerland and the UK. Switzerland offers a particularly informative laboratory. It is a major financial centre hosting a diverse population of multinational firms – Swiss-owned and foreign-controlled, spanning a wide range of industries and sizes – with extensive cross-border assets and liabilities. Both Switzerland and the UK play outsized roles in global finance, and both are deeply integrated into international capital markets.

The analysis exploits quarterly firm-level data from the Swiss National Bank’s cross-border capital linkages surveys, which underpin Switzerland’s balance of payments and international investment position statistics. These surveys capture all firms resident in Switzerland with cross-border assets or liabilities above defined thresholds, using harmonised international accounting standards. Crucially, the data distinguish between equity and debt components of direct investment and provide information on maturity, allowing short-term and longer-term financing to be analysed separately.

Using a difference-in-differences framework, the Brexit vote is treated as a sudden and largely unanticipated increase in policy uncertainty (Geiger and Güntner 2024). The behaviour of non-financial firms’ capital flows to the UK before and after the referendum is compared, controlling for broader trends and firm characteristics. This approach allows a clean identification of how Brexit-related uncertainty altered firms’ cross-border investment decisions.

Debt, not equity, bears the adjustment

The central finding is that heightened Brexit uncertainty dampened Swiss foreign investment flows to the UK – but in a narrow and highly specific way. The decline is concentrated in debt flows, particularly short-term debt. Equity flows, by contrast, show no systematic or persistent response to the Brexit vote in either direction.

This distinction is economically meaningful. Equity investments typically reflect long-term strategic commitments and control considerations. They are costly to unwind and less sensitive to short-term fluctuations in political risk. Debt, especially short-term lending, is far more mobile. It can be adjusted quickly in response to changes in perceived risk, funding conditions, or repayment uncertainty. Importantly, debt comprises not only positions vis-à-vis third parties but also intra-group positions, including those vis-à-vis direct subsidiaries or parent companies.

From this perspective, the results align closely with a ‘market sentiment’ view of uncertainty. Rising policy uncertainty makes short-term debt less attractive because future cash flows and repayment schedules become harder to predict. Firms respond not by abandoning their UK operations altogether, but by restructuring the financing of those operations – reducing exposure through the most flexible instruments first.

Not all firms react the same

The second key result concerns heterogeneity across firms. The contraction in debt flows to the UK is driven almost entirely by US firms
resident in Switzerland. Swiss and EU firms show little or no comparable adjustment.

This pattern likely reflects differences in firms’ global production and export strategies. US multinationals have historically used the UK as a platform for serving the EU market, while Swiss and EU firms resident in Switzerland are less inclined to use the UK as a platform for European exports. For US firms, Brexit raised the prospect of higher trade costs, regulatory divergence, and supply chain frictions, making UK-based operations riskier relative to alternatives within the EU. Reducing short-term debt exposure can be seen as an early, precautionary response to these anticipated changes.

Implications for capital flow theory

These dual findings contribute to the broader literature on international capital flows in several ways. First, they provide rare firm-level evidence linking policy uncertainty to cross-border financial adjustments. Much of the existing evidence relies on country-level panels (e.g. Azzimonti 2019) and delivers mixed results, with effects varying across countries, periods, and types of capital flows. The firm-level perspective shows that uncertainty can matter even when aggregate effects appear muted – but only for specific instruments and firms.

Second, the results qualify influential findings on the co-movement of capital inflows and outflows. While equity flows behave symmetrically in the face of the Brexit shock, short-term debt does not. This asymmetry suggests that aggregate ‘capital waves’ (Forbes and Warnock 2012) may conceal important compositional changes beneath the surface.

Policy lessons: Watch the short end

For policymakers, the implications are clear. Political shocks like the Brexit vote do not necessarily trigger wholesale capital flight. Instead, they can induce selective retrenchment, concentrated in short-term debt instruments that are central to corporate liquidity management. Such adjustments can generate funding pressures in domestic markets even when long-term investment appears stable.

This argues for closer monitoring of short-term cross-border capital flows, not just foreign direct investment and trade. Central banks and financial authorities may need to ensure that liquidity backstops and communication frameworks are robust enough to manage sudden, uncertainty-driven funding shifts. Coordination across jurisdictions becomes especially important when shocks affect multiple financial centres simultaneously.

Beyond Brexit

Brexit was a uniquely British event, but the mechanisms it reveals are general. In an era of rising geopolitical fragmentation, policy uncertainty is likely to remain a recurring feature of the global economy. The evidence from firm-level capital flows suggests that its financial consequences may be subtle but significant – working through balance sheets rather than headlines.

Carney’s warning about the ‘kindness of strangers’ was not a prediction of collapse, but a reminder of vulnerability. The Brexit experience shows that when uncertainty rises, kindness does not vanish – but it does become shorter term, more cautious, and more conditional.

References

Azzimonti, M (2019), “Does partisan conflict deter FDI inflows to the US?”, Journal of International Economics 120: 162-178.

Bloom, N, S Chen and P Mizen (2018), “Rising Brexit uncertainty has reduced investment and employment”, VoxEU.org, 16 November.

Carney, M (2017), “A fine balance”, speech at the Mansion House, London, 20 June.

Exton, O, L Han and M Crowley (2019), “The impact of Brexit uncertainty on UK exports”, VoxEU.org, 21 January.

Fischer, A and P Yeşin (2026), “The kindness of strangers: Brexit and bilateral financial linkages”, Journal of International Money and Finance 163 (also CEPR Discussion Paper 18453).

Forbes, K and F Warnock (2012), “Capital Flow Waves: Surges, Stops, Flight, and Retrenchment”, Journal of International Economics 88.

Geiger, M and J Güntner (2024), “The chronology of Brexit and UK monetary policy”, Journal of Monetary Economics 142.

Portes, J (2023), “The impact of Brexit on the UK economy: Reviewing the evidence”, VoxEU.org, 7 July.

Thwaites, G, P Smietanka, P Mizen, S Chen, P Bunn and N Bloom (2019), “The impact of Brexit on UK firms”, VoxEU.org, 4 September.