Evaluation of the opportunities and risks of Brexit to UK SME's.
Coursework undertaken in my ACF100 module at Lancaster University, where I was required to write and individual essay on recent events and their effect on the business world.
8th February 2017
The new UK Chancellor of the Exchequer, Philip Hammond, acknowledged ‘sharp challenges ahead’ for the economy as he presented his Autumn statement, five months after the UK’s historic vote to leave the European Union.
Evaluate the opportunities and risks to UK small and medium sized businesses (SME’s) as a result of Britain’s decision to leave the European Union.
Research this topic area widely by using resources available in the library, from course reading materials and on-line sources. Extensive reading is bound to be reflected in discussions/arguments in the essay.
A word-processed essay, no more than 1,500 words in length.
On the 23rd of June 2016, the United Kingdom(UK), much to the surprise of the rest of the world voted to leave the European Union(EU). The subsequent reactions that followed resulted in the pound dropping to its lowest since 1985(Bloomberg, 2016). As negotiations on the process of how Brexit will be executed continues to ensue, it is no surprise that most firms are planning contingently in order to limit exposure to rapidly changing market conditions. Brexit is still unknown and with the vast amount of uncertainty laying ahead, it is imperative that businesses evaluate their risks and opportunities so as to adequately anticipate the eventual outcomes. Thus, the purpose of this essay will be to analyse the risks and opportunities available to UK Small and Medium sized Enterprises(SME’s) as a result of Britain’s decision to leave the European Union.
First, it will begin by analysing the main opportunity brought about by the devaluation of the pound following Brexit, then it shall discuss the two major significant risks that SMEs will eventually face; difficulty in accessing capital and the reduction in the availability of skilled labour. Throughout the evaluation of the risks, potential solutions that could be implemented have been explored. Finally, in its concluding section it shall summarise the findings and highlight some limitations of the sources used.
The main opportunity brought about by Brexit for SMEs is the devaluation of the British pound. A fall in the value of the British currency relative to others (Euro, dollars, etc.) has meant British products look cheaper and attractive to external investors. The tourism industry has seen a surge in business due to the increase in the number of visitors (Metro, 2016). SMEs involved in exporting activities have seen their profits increase because of this further proving the argument that it is a good opportunity. However, it is worth nothing that the positive effects brought about by the devaluation of the pound can only be enjoyed by those firms who are not only engaged in exporting activities but whose raw materials are produced in the UK as well. Conversely, the SMEs whose raw materials are imported are bound to face higher costs since they are now having to pay more than usual. According to the financial times (2016), only 6 per cent of SMEs export. A larger proportion are involved in the supply chain, and a fall in currency suggests that costs for those firms will be higher. This therefore contradicts the aforementioned argument for some SMEs as the costs involved are greater than the opportunity.
The First, and perhaps the most significant risk that SME’s will eventually face is the difficulty in accessing new capital and the increased cost of borrowing due to the downgrade of Britain’s sovereign credit score by top rating agencies (Reuters, 2016). As Sebastien Dullien (cited by the Guardian, 2016), a senior policy fellow at the European council on foreign relations and professor of international economics at HTW Berlin notes, Britain, depends on foreign investors as it runs a national current account deficit of almost 5 per cent of its GDP. A lower credit score rate is therefore likely to translate into lenders demanding a risk premium which would in turn be passed on as higher interest rates to SMEs. Furthermore, Brexit is bound to lead to a lesser integration of the UK and EU’s financial and banking system as evidenced by the actions banks have begun taking to shift operations out of the UK (financial times, 2016). As new sets of rules and regulations which British SMEs will have to follow in order to obtain finance from investment funds and continental banks increases, the eventual outcome will likely yield less competition and accessible fund for SMEs. Nevertheless, the British government could, as a counteracting measure, deregulate the banking sector. They could relax most of the strict rules that where put in place after the financial crisis of 2008, thereby leading to the reduction in the cost of lending. If nothing is done however and banks withdraw further lending, a domestic recession or financial freeze could be very detrimental to SMEs.
The second, most significant risk of Brexit, to SMEs is loss of access to the EU’s single market. According to the Federation of Small Businesses (2016), “Access to the single market means access to 500 million potential consumers, more than 26 million businesses and is worth more than £9 trillion”. The implications of an exit include loss of access and a potential tariff between UK and the EU. During her speech given last 17th of January, the British prime minister, Theresa May reaffirmed that the UK will be exiting the free market as staying will mean, the European court of justice having direct legal authority. She also confirmed that the UK will no longer be part of the EU customs union but will instead retain a custom agreement to remove tariffs and have frictionless trade.
The first implication of loss to the single market, is the problem for SMEs engaged in exporting activities with the EU. It could be argued that the effect on SME’s brought about by the lack of access to the single market would not be very significant as only 6 per cent (financial times, 2016) of Small and Medium Sized Enterprises take part in Britain’s export, however EU membership, as CBI (2017) states, is important in supply chains and lack of membership is bound to result in higher costs for firms due to tariffs which will in turn lead to loss of competitive edge. To tackle this potential issue, the British prime minister per her speech (2017), intends to replace the EU market membership with a free trade agreement and should this succeed, then the consequence of British SMEs losing their supply chains will be averted. Whether Theresa May will succeed in obtaining such an agreement is highly questionable as the British government seems to be seeking the full benefits of being a member of the single market without having to comply to European laws. Reaching a comprehensive trade deal has always been a very laborious task. For instance, the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU took 7 years (BBC, 2016) despite being approached with goodwill from both sides. On the other hand, the EU leaders seem to look forward to making an example out of Britain for leaving the EU (Independent, 2016). This situation, coupled with the prime minister’s statement that she would prefer no deal to a bad one raises the prospect of Britain leaving the EU and falling back on World Trade Organisation rules, including tariffs. On the bright side, the UK will now have the opportunity to strike trade deals with countries outside of Europe without having to rely on the EU’s Custom Union thereby giving exporting SMEs involved with countries outside of the EU the benefits of a better tariff. This also means that the UK despite having less negotiating power in comparison to the EU would not have to rely on the approval of all member states to obtain a deal (a reason the CETA deal still has not been made permanent).
The second implication of loss to the single market is the potential problem in recruiting skilled labour as complications about migration to the UK diminishes the supply of skilled labour available to SMEs. In her speech (independent, 2017), Theresa May stated that: “Brexit must mean control of the number of people who come to Britain from Europe” and that is what the government intends to deliver. This will have a drastic impact on SMEs who employ 15.6 million people, which make up 60% of all private sector employment in the UK (FSB, 2016).
To summarise this essay, it is safe to ascertain that the main opportunities associated with Brexit for SMEs is the devaluation of the pound and the possible benefits that might arise from the UK’s trade negotiations with non-EU countries. Nevertheless, the significance of the opportunity brought about by the devaluation of the pound is little as the portion of SMEs who benefit from it is only 6 per cent.
Conversely, the main risks faced by SMEs as a result of Brexit are the potential difficulties in accessing new capital due to Britain’s downgrade by rating agencies in credit worthiness and the loss of access to the single market. The latter implies increased cost for SMEs within the EU supply chain and a substantial decrease in the supply of skilled labour. Whilst, it is debatable that the benefits of eventual trade deals with non-EU will surpass the benefits of the single market, there is little doubt that SMEs will face the risk of lower supply in skilled labour.
Overall, the findings have led to the conclusion that the risks outweigh the benefits. The government should speed up the exit process as too much uncertainty brings about speculation which can hinder economic growth.
BBC. 2016. “Ceta: EU and Canada sign long-delayed free trade deal”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: http://www.bbc.co.uk/news/world-europe-37814884
Bloomberg. 2016. “Pound Drops to Lowest Since 1985 as Angst Builds Over Brexit”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: https://www.bloomberg.com/news/articles/2016-10-04/pound-tumbles-to-three-decade-low-as-angst-over-brexit-persists
CBI. 2017. “Benefits of EU membership outweigh costs”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: http://www.cbi.org.uk/insight-and-analysis/our-global-future/factsheets/factsheet-2-benefits-of-eu-membership-outweigh-costs
Federation of Small Businesses(FSB). 2016. “FSB sets out small business agenda for EU negotiations”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: http://www.fsb.org.uk/media-centre/press-releases/fsb-sets-out-small-business-agenda-for-eu-negotiations
Financial Times. 2016. “Banks begin moving some operations out of Britain”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: https://www.ft.com/content/a3a92744-3a52-11e6-9a05-82a9b15a8ee7
Financial Times. 2016. “UK SMEs count the cost of Brexit as banks reassure clients”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: https://www.ft.com/content/02ae610e-3d10-11e6-9f2c-36b487ebd80a
Independent. 2016. “Brexit: Theresa May admits EU leaders will seek to punish UK in negotiations”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: http://www.independent.co.uk/news/uk/politics/brexit-latest-theresa-may-eu-punish-uk-prevent-break-up-a7463081.html
Independent. 2017. “Theresa May’s Brexit speech in full: Prime Minister outlines her 12 objectives for negotiations”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: http://www.independent.co.uk/news/uk/home-news/full-text-theresa-may-brexit-speech-global-britain-eu-european-union-latest-a7531361.html
Metro. 2016. “What good has come out of Brexit?”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: http://metro.co.uk/2016/10/26/what-good-has-come-out-of-brexit-6216023
The Guardian. 2016. “How would Brexit affect finance for SMEs?”. [Online]. [Last accessed: 5th Feb. 2017]. Available at: https://www.theguardian.com/small-business-network/2016/apr/05/how-would-brexit-affect-finance-for-smes
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