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Potential economic effects of Brexit

Executive summary

This study focuses on the aftermath of a referendum held in June 2016, which led to the initiation of the procedure of the UK exiting the European Union and the potential economic effects of Brexit on small businesses in Birmingham. Along with briefly discussing the consequences of Brexit on small and medium enterprises (SMEs) in different parts of the UK, the main focus of this report is on small businesses in Birmingham. The data used in this report is collected from various authentic and verified sources. The findings of this study show that the fear of Brexit is increasing among the small business owners as there is significant uncertainty over the future economic and trade policies. Small businesses, especially export-oriented companies, are at a very high risk of suffering financially due to unfavorable trading environment post-Brexit. A major problem faced during this study is the paucity of data related to small companies in Birmingham and the possible consequences of Brexit on these types of businesses.  Most of the findings of this study rely on the previous researches and inference of their cumulative conclusions. Research has shown that despite the initial setback anticipated by the SMEs, the long-term benefits of the Brexit can be reaped by the companies if they carefully plan and execute effective strategies in future and post-Brexit economic climate. Recommendations like the cultivation of a skilled domestic workforce, international expansion, and local investment are suggested at the end of the report to minimize the negative consequences of Brexit on the small-scale businesses and enjoy the ample growth opportunities created by Brexit in the long run.

Background

Background of Brexit

Brexit is the most popular political topic in the United Kingdom as it affects every citizen of the UK. Most importantly, Brexit has a massive impact on businesses, mainly small-scale businesses, as they will have to adapt their policies and workings according to the new rules and regulations after Brexit. Free trading of goods and services amongst the members of the European Union (EU) and free movement of the business people is going to be heavily impeded after Brexit, so small companies are likely to suffer the most due to new policies.

Moreover, new tax policies, tax, and duty reporting and safety regulations are going to be revised after Brexit. The purpose of this study is to discuss the extent to which Brexit is going to impact small businesses in the UK.

Before diving into the comprehensive details of Brexit and its impacts, the following is the basic background of this topic.

What is Brexit?

The citizens of United Kingdom decided to exit the European Union through a referendum held on 23rd June 2016. The withdrawal of the UK from the EU is called Brexit. Despite numerous elections and changes in the UK political leadership, no definite deal has been achieved between the UK and the other members of the EU to finalize the relationship between the UK and EU after Brexit. As a result, the future of small businesses is hanging in the balance as no policies are clear until now.

Introduction of the Project

Brexit and the triggering of Article 50 of the UK's constitution have paved the way for unforeseen circumstances to occur in the economic sector. For the last four years, there has been a looming business uncertainty in Birmingham. (Nicholas A. Bloom, 2017)

Due to the highly complex and multi-faceted nature of the Brexit, it has the potential to transform the whole small business landscape. (Jessop, 2017)

Researchers belonging to different fields like commerce, economics, managerial sciences, and entrepreneurship have studied the impacts of uncertainty caused by Brexit. The evidence present through the researches suggests that small businesses will be excessively affected by Brexit because such industries are not resilient to unpredicted economic and trade shocks. (Ghosal, 2017). However, the scale of the effects of Brexit is also dependent upon the type, size, locations, and structure of the small businesses in Birmingham.

The negotiations of the Brexit are profoundly affected by the politics of the ruling party, and multiple transfers of powers in recent years have added to the uncertainty caused by the developing situation. Brexit is going to have enormous ramifications for entrepreneurs and the international and domestic business processes of small companies. (Sands, 2018)

In addition to the changes in business policies, the researches show that unanticipated events like a global financial crisis and the decision to leave the EU disturb the economy and lead to massive reductions in tangible and intangible investments. (Ghosal, 2017)

Birmingham is the primary focus of our study because it is the second-largest city of the UK and hailed as a major manufacturing place in the world. It also called a "City of Thousand Trades," so this study deals with the possible scenarios which will be the result of severe trade limitations caused by Brexit.

The majority of this study is associated with Birmingham and small-scale businesses, effects of Brexit on medium enterprises in the whole country are also briefly discussed to fully comprehend the post-Brexit socioeconomic conditions.

Project Aims and Objectives

The aim of this study is to analyse the impacts of Brexit on the economic strategies and operation for the UK. This project will research the changing tax return matrices and changing graphs of national economic value and their impact small businesses in Birmingham. Moreover, it would help to identify the good and bad impacts of this Brexit which will affect the country at the most level.

  1. To find out How will the small businesses be affected with the immediate effects due to Brexit?
  2. To recommend the useful strategies for small businesses in Birmingham

Literature Review

This section of the report deals with the review of the data available regarding the impact of Brexit on small scale businesses in Birmingham and other parts of the UK.

Impact of Brexit on the Future Plans of Small Businesses

The following graph is a comprehensive illustration of the fear of the small businesses in the wake of Brexit. It shows that regulatory changes (around 74%) are the biggest fear of small companies. Moreover, the details of the uncertainty over the exports, expansion, and manufacturing of new products are also shown in the figure. (Ross Brown, 2019)

Figure 1: Impact of Brexit on Future Plans of SMEs (Ross Brown, 2019)

Impact on Export-Oriented Businesses

A study conducted by the University of St Andrews (Brown, 2018) compiled the data of about 10,000 companies to determine the impact of Brexit on both small and medium enterprises (SMEs). The report suggests that low levels of foreign investment, less access to external sources of finance, and a dramatic decline in growth are some of the issues that will be faced by SMEs in the UK after Brexit. 

Most importantly, the study concludes that negative effects are most likely to be in the minds of business managers who invest in export-oriented industries because Brexit is going to drastically limit the trade movement, and hence the confidence of the investors in small businesses will decline.

Other than Birmingham, the majority of the SMEs in Scotland and Northern Ireland will face the heavy brunt of Brexit. (Brown, 2018)

In terms of SMEs, there are a total of 5.5 million SMEs in the UK, which provides more than 60% of the private sector employment. Therefore, a negative impact on SMEs will create an adverse ripple effect on the overall economy of Britain.

Impact on Supply Chains of Small Businesses in Birmingham

The apprehension of the small business holders in the UK over the possible implications of Brexit cannot be understated. According to a survey, about 75% of the small business owners in the UK are concerned about the effect of Brexit on supply chains.

Moreover, the survey showed that only 11% of the companies had examined the possible impact of Brexit, while 16% have not even reviewed it.

The President of the UK trade body R3 has stated that it is imperative for small businesses to assess the possible damage of Brexit on the supply chain so they can adapt the policies to minimize the impact. Moreover, he said that businesses who are not aware of the upcoming circumstances are walking into trouble blindly.

Impact of Brexit on different Industrial Sectors

The following graph denotes the calculated percentage of the negative impact of Brexit on different industries. It clearly shows that business services are going to be profoundly affected by Brexit, followed by retail and food services. (Brown R. a.-Z., 2018)

Figure 2: Impact of Brexit on different Industries (Brown R. a.-Z., 2018)

Similarly, the following figure is the depiction of different scales of small and medium businesses in terms of the number of employees. Medium-size businesses are most concerned (29.2%) with post-Brexit economic conditions. Small businesses are also highly anxious (23.4%) about the upcoming policies. (Brown R. a.-Z., 2018)

This trend is particularly concerning because the negative impacts of Brexit seem to be more diverted towards the small businesses, which already face a lot of problems in their survival in the highly competitive UK markets. The export-oriented small businesses are going to have a challenging time in thriving post-Brexit because of the restricted trading with European countries. (Adamsmoore, 2019)

Figure 3: Uncertainty in Various Scales of SMEs (Ross Brown, 2019)

Demands of Small Businesses in Birmingham

According to a survey, the small businesses in Birmingham have made the following demands to minimize the negative impact of Brexit on their revenue. (Business Birmingham, n.d.)

  • 65% of the businesses want the government to finalize favorable trade deals as soon as possible.
  • 66% of the SMEs want good trading relations with Germany in the new trade agreements.
  • About 50% of the small businesses in the Midlands are going to follow their original plan of investment in the next year.
  • 19% of the small companies are going to delay the hiring of the staff to facilitate their business.
  • Around 44% of companies do not have enough knowledge about the possible effects of Brexit. Hence, they are not able to plan for the post-Brexit agreements.

Problems Faced During the Project

The main issue while researching the problems in the study was the collection of data. Even though a lot of reviews have been conducted to study the effects of Brexit, most of them are focused on large corporations. The primary objective of this study is to asses the impact of Brexit on small businesses in Birmingham, and there was a limited amount of data available in this area.

While research is also needed for the policy-making of large enterprises, small business owners face the issue of lack of research skills and teams dedicated to this task. This problem adds to the uncertainty caused by Brexit, as many small business owners are not aware of the possible consequences of exiting the EU.

SMEs are considered the backbone of the UK's economy, but even at the government level, there is a lack of enthusiasm to help these businesses in upcoming potential economic crisis. During the course of this research, it is found that most of the research is only dedicated to large cities and large corporations. However, the need of the hour is to study the possible effects of Brexit comprehensively in all parts of the country.

Due to the paucity of the data available about small businesses in Birmingham, the overall possible effect of Brexit is not definite to some extent and generalized from studies conducted in different parts as well.

Conclusions and Recommendations

After thoroughly analyzing the data related to the impacts of Brexit on small businesses in Birmingham, we can draw the following conclusions.

Conclusions

The findings and the detailed analysis of this report show that while Brexit is labeled as a huge crisis by many people, there can be some advantages reaped from this situation as it will create considerable growth prospects for the businesses in the future. All of the organizations will have to plan strategically to survive the initial shock of Brexit and then make policies that will benefit these businesses.

The impact of Brexit on small businesses in Birmingham can be minimized to a great extent if the small companies are given the resources to conduct their own surveys and analyze the possible effects of Brexit. Many small businesses are demanding the government to finalize the trade deals as soon as possible so that they can be prepared for new policies. Moreover, Germany is being seen as the topmost priority of trading by the majority of small and medium enterprises. About 66% of the SMEs in Birmingham are demanding immediate trade deals with Germany, so their business is not affected after Brexit.

A large-scale uncertainty is associated with Brexit and the future of trading in Britain. However, it has not derailed the plans of about half of the small businesses in the Midlands as they are going to implement their original plan of investment in the following years. (Business Birmingham, n.d.) Many small companies are facing issues in even planning the post-Brexit strategies because they have no idea about the possible impacts of Brexit on the industry sector. Still, some of them have decided to delay their expansion and hiring of more staff to maintain their revenue and avoid any bad investment. Experts have called for a clearer and more comprehensive plan for small businesses as, till now, most of them are unaware of the post-Brexit possible scenarios.

Despite a myriad of researches conducted about Brexit and its impacts, there is considerable ambiguity in what kind of deal will be reached between Britain and the EU. Conclusions can be inferred from the analysis of the data, but no implication of Brexit is definite. Right now, the entrepreneurs and small business owners need to plan their every move efficiently and take action to make most of the potential growth openings in the market. Some of these strategies are recommended in the following section of this report.

Recommendations

Despite the anticipated impacts of Brexit on small enterprises in Birmingham and other uncertainties associated with leaving the EU, Birmingham is on the path of development and expected to make great advancements in various industries by 2027.  According to a survey conducted in 2017 (Business Live, 2017), the construction in Birmingham is at an all-time high, which is generating lots of employment opportunities.

With the chances of a hard Brexit or no-deal looming over the country, even major corporations like Nissan, Airbus, and BMW have warned of a devastating effect on the small organizations that will disturb the whole supply chain. Jaguar Land Rover has promised to support up to 300,000 jobs through its investment in small companies and supply chains. (Adamsmoore, 2019)

Even though the current political and socioeconomic climate seems bleak for small businesses, there are some strategies that can be adopted by the companies to survive the potential crisis. According to (Adamsmoore, 2019), Brexit can benefit the small companies in Birmingham in the following ways:

Training of Domestic Workers

According to a survey, almost 50% of the UK’s skilled workforce is going to leave the country after five years of Brexit. (Lobel, 2018) This may seem alarming for the companies in the short-term, but the small businesses can use it to their advantage by cultivating a new competitor, and experienced workforce to improve the efficiency of their businesses. Training programs for existing employees can be launched to fill any knowledge and skill gap and enhance the staff retention of businesses. Moreover, small companies can hire more local workers and spend money on the local development of Birmingham.

Expand the Businesses Internationally

The thought of expanding business at this time of potential economic crisis may seem unfathomable to the business owners, but the UK SMEs have seen a huge upsurge in the sales by almost 35%. International buyers and investors are attracted by the high-quality goods manufacture in Birmingham, and small businesses are enjoying a lot of popularity right now. Therefore, by expanding the businesses internationally, either by establishing offices in foreign countries or offering online services and delivery, small companies can expand their operations and reach a vast number of customers worldwide.

Maintain the European sales

Markets in Western Europe are the top customers of products produced by small businesses in the UK. Although there is uncertainty over the trade agreements after Brexit, the small companies are embracing this challenge and producing goods of optimum quality of being exported to European countries. Even after the Brexit, UK small businesses are likely to target Western Europe more than the US or Commonwealth countries.

Local Investment

Along with the option of international expansion, this is the right time for small businesses to invest locally and expand their business. At the time of any economic crisis, SMEs are known to adapt quickly to the changing environment, which attracts a large number of investors. Hence, small businesses should try to expand at this time, so they can survive the Brexit easily and gain more investors.

If these recommendations are taken seriously by the small business owners, they can not only mitigate the impact of Brexit on their businesses but also prepare for the trading environment after Brexit. Even if a specific structure of the Brexit deal is not confirmed, all businesses should prepare for the upcoming business environment. Business expansion, staff hiring and training, international expansion, and major partnerships with international investors are going to be highly affected by Brexit, so they must be planned carefully by the owners, and every possible scenario should be thought out before making any important decision about the business.

References

Adamsmoore. (2019). Post-Brexit Birmingham: How West Midlands’ SMEs Could Look Set To Prosper. Retrieved from AdamsMoore: https://www.adamsmoore.com/in-the-news/post-brexit-birmingham-how-smes-could-prosper/ 

Brown, D. (2018). Reader in Entrepreneurship and Small Business Finance. St Andrews: University of St Andrews.

Brown, R. a.-Z. (2018). What Happens If the Rules Change? The Impact of Brexit on the Future Strategic Intentions of UK SMEs. Birmingham: Brown, Ross, and Linares-Zegarra, Jose Manuel and Wilson, John O. S.

Business Birmingham. (n.d.). SMEs in the Midlands look to post-Brexit opportunities, but concerns over productivity and systems remain. Retrieved from Business Birmingham: https://businessbirmingham.com/smes-in-the-midlands-look-to-post-brexit-opportunities-but-concerns-over-productivity-and-systems-remain/

Business Live. (2017). Birmingham enjoying record levels of construction. Retrieved from Business Live: https://www.business-live.co.uk/commercial-property/birmingham-enjoying-record-levels-construction-12528519 

Ghosal, V. (2017). Uncertainty and the employment dynamics of small and large businesses. Small Business Economies, 529-558.

Jessop, B. (2017). The Organic Crisis of the British State: Putting Brexit in its Place. Globalizations, 133-141.

Lobel, B. (2018, April 17). The Brexit opportunity: How small businesses can thrive in a post-Brexit landscape. Retrieved from Small Businesses: https://smallbusiness.co.uk/the-brexit-opportunity-how-small-businesses-can-thrive-in-a-post-brexit-landscape-2543506/ 

Nicholas A. Bloom, P. B. (2017). Tracking the views of British businesses: evidence from the Decision Maker Panel. Bank of England Quarterly Bulletin, 110-120.

R3 - Trade Body. (2019). UK small businesses 'concerned about impact of Brexit on supply chains'. Retrieved from Prentis: https://www.prentis.co.uk/news/business-news/archive/article/2019/October/uk-small-businesses-concerned-about-impact-of-brexit-on-supply-chains 

Ross Brown, J. O. (2019). The (potential) impact of Brexit on UK SMEs: regional evidence and public. Regional Studies.

Sands, E. B. (2018). Time for Clarity: The Views of British Business on The Path to. London: Harvard Kennedy School.

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