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
Ruqayyah Binti Shaharuddin
34266453
a. Introduction
United Kingdom became the first country that decided to leave the European Union, EU. The underlying reasons for British EU exit or Brexit are because there is a concern among the Leave voters about immigration and multiculturalism while there is a concern on UK economic shocks among the Remain voters. Brexit affects the UK in various dimensions; politics, economics and social. In this essay, I will be focusing on the economics side specifically the opportunities and risks to the UK small and medium businesses (SME) resulting from the British’s decision to leave the European Union. The effects would be significant as “99.9% of the total enterprises in the UK are SMEs” (PR Newswire Association LLC, 2011)
b. Main body
Opportunities
Brexit causes “the British pound plummeted to a 31-year low against the dollar”(Hobolt 2016). This indicates exports become relatively cheaper for the United States resulting in much greater UK products demanded by them. As the demand for UK products rises, UK SME able to take advantage in terms of greater sales for the products. This increase in sales for UK SME open up wide opportunities for them to do research and development on the innovation of their products, expand their businesses locally or internationally. However, while some SMEs in the UK might observe this depreciation in sterling as an opportunity, some might not. This is due to the effects will be depending on the quality of the products of the firms. “So high-quality UK companies will continue to be attractive, but for others, US buyers may choose to wait” (Price 2016). Besides that, weakening sterling could also hurt UK SME in terms of purchasing imported raw materials. UK SME would have to bear higher costs of production prior Brexit when pound sterling is strong.
As Brexit occurs, UK SME could be free of adopting the European Union law that sometimes creates a greater cost for them. “Take the burden of regulation, which has been estimated by the independent think tank Open Europe to cost the UK economy more than Pounds 33bn ($48bn) every year.”(The Banker 2015). This high cost of the EU regulations affects the UK SME as they could not spend the money elsewhere like for the expansion of their economy, research, and development or the introduction of a new capital to the company. On the other hand, the removal of the EU standards could also cause greater production cost for the SME. Being the member of the European Union enforces firms to make productions according to the EU common standard. “Common standards make it possible for firms to produce products to one standard rather than having to make more costly adjustments to meet individual country standards.”(Floyd 2016). Brexit would have cause greater production costs for SME in the UK.
Next, the opportunity of Brexit would cause the locals, UK citizens get the greater opportunities to set up new businesses (SME) or to be employed. This is because the EU laws of free movement of capital lead to a large scale of EU companies been set up in the UK. This scenario may harm the local’s SME especially if they are incapable of competing with them in terms of the quality, reliability, and availability of their products. UK SME may, therefore, be forced out of the market. However, Brexit may result in the UK SME operates in much less efficient. This is because fewer EU firms exist in the UK market resulting in less competition among the firms. This less competition or concentration ratio making the UK SME acted in a way they have no incentive to innovate their products or make production more cost-effectively. Besides that, UK SME may abuse their market power by charging higher prices for their products. This act would cause the government to regulate these firms to ensure a standard price is being charged by them.
Risks
A research published by the Office for National Statistics (ONS) shows that SME provides 59.1% of the jobs in the private sector. According to PR Newswire Association LLC (2011), CEO at Simply Business commented that the research approved the importance of SMEs in the UK private sector in terms of providing jobs. Brexit causes a rise in the unemployment rate in the UK. One evidence will be in Wales. “A vote to leave would be a profound economic shock that could cause unemployment across all age groups in Wales to rise by around 24,000 while youth unemployment could rise by 3,000.”(Anon 2016). As stated by Anonymous (2016), an analysis by a Treasury shows that around 100,000 jobs created in Wales associated with UK’s exports to other EU countries. This clearly shows Wales benefited from the UK being a member of the EU. However, UK SME does not primarily depending on the EU countries to export their goods. Some countries like the United States might still do transactions with them which makes the rise in the unemployment rates among workers in the UK SME become less severe. Besides that, the research only shows the importance of SME in the private sector but not in the public sector to provide jobs. Thus, SME in the public sector would probably have limited effects on the increase in the unemployment rate in the UK.
Besides that, Brexit could bring a risk to UK SME as they are unable to benefit from the low labor cost. As stated by Floyd (2016), the EU policy that supports free movement of labor enables improvement of skills and labor supply which results in a much lower production costs for firms. Without the EU policy, the supply of labors in the UK become limited and may cause UK SME incur a higher cost to hire labors. Therefore, Brexit affects UK SME in terms of greater cost for hiring labors. On the other hand, the effects of a much greater production cost for UK SME depending on whether they are operating under capital incentive or labor incentive. Businesses that operate under capital incentive are clearly not affected by the changes in the UK labor supply market as they only require money and other financial resources to produce their goods or services. Hence, only the firms that are labor incentive are affected by the burden of a much greater cost to hire some labors. Besides that, the large inflow of EU immigrants in the UK does not necessarily contribute to a large workforce in the UK labor market if they are just entering the UK for other purposes like receiving a welfare benefit. (Gross, J. & Carney, S. 2013)
One of the consequences of Brexit to UK SME is the abolishment of a single market. A single market system allows an easy access to market within the EU countries. If the single market is removed, some UK SME may find it difficult to grow their businesses. One example is in Wales. “The EU is a major driver for businesses of all sizes across the country – such as Newport-based Jojo Maman Bébé. This Welsh success story now employs over 600 people and sells to 46 countries around the world. This would not have been possible without our membership of the European Union.”(Anon 2016). Therefore, not being the member of the European Union has resulted in failure for UK SME to grow and expand their businesses. However, the positive impacts of the removal of the single market may outweigh the negative impacts to the UK SME. This is because having access to a wider market causes UK SME become vulnerable towards the change in the price of their products. The vulnerability of price affects the profit level and thus making it hard for them to make economic decisions. Besides that, the challenge of not getting easy access to wider customers through a single market forces UK SME to become more competitive in terms of attracting more customers. More quality and innovative goods might be produced by them.
c. Conclusion
To conclude, the effects of Brexit to UK SME could bring about great opportunities like greater sales for them from the weakening currency of GBP, free from law bounded by the European Union and greater job opportunity for UK citizens to open up their businesses. Nevertheless, each opportunity could be limited due to greater import price, soaring labor cost and lack incentive for UK firms to be innovative and cost-effective in their production. The risks that Brexit carries to UK SME are an increase in the unemployment level, the production costs and the limitations on growth for UK SME. These risks, however, could be minimized if other factors like the ongoing UK transactions with non-EU countries, how the UK firms operate, the ease of decision making and the production of innovative goods been taken into consideration. Based on the arguments by both sides, I have come to a conclusion that Brexit had given more risks than opportunities for UK small and medium-sized businesses.
d. Reference list
Anonymous, Cover story: EU referendum – Viewpoint – John Longworth. 2015. The Banker
Anonymous, Skilled staff shortages check post Brexit small business bullishness 2016, Coventry.
Floyd, D., 2016. Brexit: How would withdrawal from the EU affect UK economic performance? , pp.12–14.
Gross, J. & Carney, S. 2013, World News: Labor Rule Spurs U.K. Immigrant Fears, Eastern edition edn, New York, N.Y.
PR Newswire Association LLC, (2011). ONS Research Highlights the Importance of UK SMEs. [online] Available at: http://www.simplybusiness.co.uk/knowledge/articles/2011/07/ons-research-highlights-importance-of-uk-smes/ [Accessed 7 Jan. 2017].
Price, E 2016, ‘Brexit’s opportunities for US dealmakers revealed’, International Financial Law Review, p. 5
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