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Will Brexit affect British businesses?

By Harry Sminia - Posted on 12 July 2016

Professor Harry Sminia looks at how the impact of the Brexit vote might affect individual British firms.

The UK has voted to leave the EU. There are now many questions about what will happen next and whether anything that was predicted by the Leave or Remain camps will come true. Most of what is reported focuses on the ‘economy’, or ‘business’ in general. But what would the effect of Brexit be on an individual British firm?

The answer is, of course, it depends. It depends on the specific circumstances of each firm. Even the immediate consequence of the pound dropping in value has different effects for different firms. It will be more of a problem for firms sourcing abroad and paying in dollars who then sell in the UK earning pounds. If you sell abroad in dollars but source in the UK paying in pounds, a weak pound will be beneficial.

It also depends on how Brexit is going to happen. Some have argued or are hoping that the UK will continue to have unlimited access to the EU and everything, from a business point of view, effectively will remain the same. Others expect that something of a barrier eventually will be put up, but that it remains to be seen how high it will be. With the UK now destined to leave the EU, for the sake of argument, let’s assume that there will be a barrier. To get to grips with what this means for individual British businesses, we have to look at the various areas where firms compete.

The first area that comes to mind when we look at where firms compete is the markets where the products and services are sold. Looking at this, there is not really such a thing as the European single market, as it is often referred to. Firms sell their wares in numerous different markets, market segments and niches. Some of these markets, segments and niches are specific to single European countries; others stretch across different countries. Borderless would mean that every firm in Europe would be able to access every niche, segment, and market, no matter where in the EU these would exist. It is mostly a matter of how well a firm is able to cater for the demands in those markets, segments, and niches, as to whether a firm is successful. But even more importantly, it depends on how a firm competes in the markets and segments of their choice, which would determine whether a British firm could remain successful after Brexit.

If Brexit impedes British firms, then it also works the other way round: EU firms would have some difficulty accessing UK market segments and niches. British business in the EU and EU business in the UK would become international business. It would mean added hassle and costs as a consequence of having your logistics impeded by the extra paperwork and other issues that come with importing and exporting. Also the rules and regulations would start to diverge, with firms operating in the UK and the EU having to comply with two sets of rules instead of one. If you compete on price, the extra hassle and costs would harm you. If you compete on value, it would mean that you may be inconvenienced but it is not necessarily threatening the viability of your business. You would be hurt in your margin but it would not necessarily deliver a knock-out blow. This, of course, works both ways. Price fighters in the UK would be less affected by competition from the EU. Firms competing on value would find their European competitors still present in their markets. A special case is a market or segment that stretches across the UK and the EU. Brexit would put a border across this market, effectively separating it out into two different markets where firms in the UK and the EU are similarly impeded when trying to cross the border.

There is another story as well. More and more, products and services come together as a consequence of an international supply chain, with many different firms adding their specific bits to a final end product or service. This not only concerns the components and sub-systems a product and service is composed of, it also applies to the capabilities, machinery and technology, which is used to produce all the bits and bobs that make up a product or service. These increasingly are sourced internationally as well. Firms compete to be part of such a supply chain. Creating a border would put an impediment in place, especially if this border originally was not present. If a British firm is part of a supply chain that stretches out across the EU, Brexit will mean that this firm is at a disadvantage, although this disadvantage is mediated by how essential this firm’s contribution is to the whole chain. The more essential a firm’s contribution is - with alternative sources not readily available - the less this firm will be affected by trade barriers. However, if you are one of many suppliers and easily exchanged, a trade barrier will make you less desirable as a supply partner.

A third area where firms compete but also co-operate concerns innovation and new technology. More and more, innovation is such an effort that it requires more than one firm to pull it off. Firms jockey for position in the various innovation initiatives that are taking place. They are also dependent on being part of joint innovation activities to reap the benefits when it all takes off. You have to work with inventors, research institutes, experts, financiers, competitors, clients, and various other parties to turn a good idea into a working business proposition. Innovation takes place in a network of participants that increasingly has to have international reach. Again, if your innovation network stretches out across the EU, then when the UK pulls out and effectively a border is put up, it becomes more difficult for British firms to develop and maintain a position in these innovation initiatives. It is also more difficult to resort to your existing capabilities, current value propositions, the essential part you now play in a supply chain, and even your innovativeness, because this will all erode when you are not playing a part in the process by which an industry or a technology progresses.

To sum up, whether and how a British firm will be affected by Brexit depends on where your markets are, how you compete in them, what supply chains you are part of, and whether you are involved in any innovation initiatives.

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