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Brexit’s impact on small businesses: the experts may be spot on after all

Brexit has the potential to fundamentally rewrite the rulebook governing how companies do business in the UK – and there’s certainly been no shortage of serious concern. Given the magnitude of the imponderables linked to Brexit it clearly has the potential to heighten uncertainty which can have damaging consequences for economic activity.

The overwhelming weight of evidence predicts Brexit-induced uncertainty will have a significant negative effect on the UK economy. Economic forecasts are often inaccurate, however, so it’s important to look at corporate sentiment, too.

Uphill struggle: Theresa May. Shutterstock

Most academic and media focus surrounding Brexit examines its impact on big companies. The analysis has often examined what Brexit means for the future of large-scale foreign-owned manufacturing plants such as Nissan in north-east England.

But there is little evidence related to how small and medium-sized firms (SMEs) are likely to be affected, despite the fact that they are often considered the backbone of the British economy. For this reason, a team of researchers at the universities of St Andrews and Essex sought to look into it.

Backbone of the economy

In the UK, there are some 5.7m SMEs, which account for over 99% of private sector firms and 60% of total UK private sector employment. SMEs also account for 73% of all net private sector job creation in the UK, creating about 2m jobs since 2010. Therefore, how SMEs respond to the uncertainty arising from Brexit has significant implications for the economy.

To assess the impact of Brexit on SMEs, we analysed a major government survey of some 10,000 UK SMEs. The government had posed various questions to these businesses regarding Brexit and its likely affects on their future strategic intentions. Unlike the simulated data often used in economic forecasts, this has the advantage of being based on the real world views of entrepreneurs.

So what do the results tell us? The larger, more innovative, more export-oriented and hi-tech an SME is, the more likely it is to have concerns regarding Brexit. Those operating in hi-tech and service-related industries are also those most concerned.

In the chart below, we see that larger SMEs are more concerned that Brexit will act as an obstacle to their business activities. Around a quarter of larger SMEs (10+ employees) view Brexit as a major obstacle for their business. This could well be related to the fact that larger SMEs are much more likely to trade internationally (in both imports and exports):

UK exit from the EU as a major obstacle to the success of the business by employee size. Author provided

Innovative and export-oriented SMEs seem particularly concerned about the ramifications of Brexit. As shown in the next chart, twice as many innovative firms and nearly three times as many exporters compared to non-exporters view Brexit as a major obstacle. Particular ownership characteristics also seem linked to acute uncertainty, especially urban-located, family-owned and younger SMEs.

UK exit from the EU as a major obstacle to the success of the business by innovation capacity and international trading activity. Author provided

As shown in the chart below, Brexit-related concerns are not felt uniformly across the UK. SMEs based in Northern Ireland and Scotland view Brexit appear more worried than their counterparts in England and Wales. This may reflect the voting patterns of households given both these territories voted emphatically to remain within the EU. In the specific case of Northern Ireland, it may be correlated to the highly embedded nature of the nation’s integration within the wider Irish economy.

UK exit from the EU as a major obstacle to the success of the business by location. Author provided

Crucially, we also examined what the likely impact of Brexit was for SMEs. We found that Brexit is likely to result in lower levels of capital investment, reduced access to external finance, reduced innovative activity and lower levels of growth. Future plans for capital investment within innovative SMEs seem particularly likely to be affected.

Negative effects

Evidently, this study shows that Brexit is having a material effect on the behavioural expectations of entrepreneurs and managers within SMEs. Worryingly, these perceived negative effects appear to be foremost in the minds of entrepreneurs located in the types of innovative and export-oriented companies, often viewed as the high growth “superstars” of tomorrow. In other words, firms thought most significant for boosting productivity and economic growth have the gravest reservations about Brexit for their future success.

SMEs with high export activity remain worried about the effect of Brexit on their business. Shutterstock

In future, the rather incoherent and intransigent “no deal is better than a bad deal” negotiating stance of the current UK government coupled with the high political opacity surrounding Brexit will most certainly prolong, and even amplify, uncertainty levels in businesses of all sizes. This protracted process is very likely to be detrimental to the country’s economy, especially in the short to medium term.

Prior to the EU referendum, the pro-Brexit UK politician Michael Gove famously declared (in his denunciation of the overwhelming majority of economists who warned of the potential economic damage caused by Brexit) “that people in this country have had enough of experts”. Based on the findings of our study, it appears that the “experts” may have got it right.

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