Deglobalization and Entrepreneurial Investment: The Natural Experiment of Brexit

We seek to gain insight into the consequences of deglobalization on entrepreneurial investment by analyzing an instance of economic disintegration: the United Kingdom’s exit from the European Union. Brexit is not only a unique empirical opportunity, a natural experiment, but it is economically important, since the UK was the heart of entrepreneurial investment in Europe. The theory of international trade, at a macroeconomic level, and the theories of economic agglomeration and entrepreneurial location, at a firm level, all predict that economic disintegration would lead to a lose-lose scenario for both the UK and the EU, with the UK losing more. However, since these theories were developed in a period of slow increasing globalization, we lack knowledge on the specific mechanisms by which these losses occur. We argue that one such mechanism is the different institutions that move or stay as a result of the economic disintegration—institutions that support industries in different ways and therefore exacerbate or mitigate the effect of economic disintegration on entrepreneurial investment. Difference-in-difference analyses of the entrepreneurial investment received by ~35,000 startups, and of the portfolio choices by ~26,000 investors and ~89,000 investor-quarters, in the UK, EU, and US (a counterfactual not affected by Brexit) show that the effects are highly heterogeneous by industry, with larger-magnitude effects on industries that are heavily regulated. Qualitative analysis from 45 interviews (conducted as Brexit’s process was unfolding) suggests that the institutions that support these industries, differently affected by Brexit, explain such variation.