Impact of Brexit on SMEs in the UK

 

EXECUTIVE SUMMARY

This study seeks to assess the effects of Brexit on the performance of small and medium enterprises (SMEs) in the UK. The essence of this is that there is a lack of such studies within the academic sphere. Although studies that assess the effects of Brexit on corporate performance exist, the majority are focused on larger foreign organizations and sectors, neglecting the SME, a sector that yields significant positive effects on the UK’s economy and employment. This study seeks to fill that void by examining the effects of Brexit on the performance of SMEs in the United Kingdom. In order to do that, it will start by presenting a background overview of Brexit. This will be followed by a review of pertinent literature, discussions of research methods, and the significance and implications of the study's findings. Since this is a research proposal, significance and implication will focus on the need for the study and what the study will fulfill when completed.

INTRODUCTION

It is established that external factors influence the performance of ventures, and this influence become significant in cases where these factors are outside the company’s control. One of such factors is politics, as it deals with the ability of the government (beyond the control of an organization) to enact policies that can either favour or negatively affect the performance of a venture.

In the UK, Brexit is a good example of political factor as following months of negotiation, the UK and EU reached an agreement that would bring an end to their relationship and see the UK leave the EU block. This decision was based on a vote in the UK, in 2016, agreeing that the UK will leave the trading block by 2020; although, as part of the agreement from the negotiation, both part would keep certain things as it was until a deal is reached (BBC News, 2020).

As a result of this agreement, there is now a new outlook on the relationship between the UK and the EU. Prior to the agreement, it was possible for people from the UK to work in any part of the EU, trade across bother without added taxes, and they could trade unlimited amount of goods in the EU. However, the implication of leaving the block is that such benefits will now end as UK employees in the EU will be required to possess EU working visa if they intend staying and working in an EU country for over 90 days in a travel permit that should not be in excess of 180 days (BBC News, 2020). Clearly, Brexit has unprecedented effect on the British economy and this study is designed to assess this impact as it concerns SME. .

LITERATURE REVIEW

For the UK economy, SMEs play pivotal role in its development, accounting for 60% of employment and 99% of total ventures National Endowment for Science, Technology, and the Arts (NESTA), 2017). It is also established in extant studies that SMEs (especially those whose investments are highly irreversible) are more affected by uncertainties in the market as they have limited resources as well as lower resistance to unforeseeable shocks (Ghosal & Ye, 2015). For these firms, such uncertainties affect how they make decisions (Baker et al., 2016), as well as overall potency of their decisions. Thus, there is a high possibility that the Brexit situation will be a salient factor that can potentially increase the level of uncertainties in the British economy and yield adverse effects on SMEs in the country.

Since SMEs are constrained in the area of finance and human resource management, they are known to face higher difficulty when it comes to understanding the nature of contingency plan that is right for their operations and how to adopt that in response to unpredictable phenomenon like the Brexit. To demonstrate this, Confederation of British Industry (CBI) noted that there are few smaller corporations capable of adopting for issues like Brexit when compared to their larger counterparts. Similarity, the impact that Brexit will yield on SMEs will depend not just on the final deal that the UK reaches with the EU, but also on their business orientation, geographical location, and the sector such company operates in (especially when one puts their extent of internationalization into perspective) (Brown et al., 2019; Brown & Lee, 2018). UK’s decision to leave the EU was made via a vote in 2016 (now known as “Brexit”), and such a significant political event that comes with huge seismic outcomes in the areas of politics, society and economy (Jessop, 2017; Lee et al., 2018). It was considered possibly being the benchmark upon which rules that govern business in the UK will be rewritten at both the national and international sphere. To be precise, a significant number of empirical studies have suggested that Brexit will yield negative effect on the economy of the UK (Bisciari, 2019; Crowley et al., 2019), especially when its bordering geographical sphere are put into perspective (Cambridge Econometrics, 2018; Chen et al., 2018; Los et al., 2017; Pollard, 2018).

Although a number of studies have looked at the likely impact of Brexit on businesses, most of them have been speculative in context (Cumming & Zahra, 2016) with focus on specific industries (Bailey & De Propris, 2017), while emphasis has been placed on the larger foreign ventures (Dhingra et al., 2017). In essence, the influence of Brexit on SMEs is an area that has been largely ignored (Brown et al., 2019). This is quite surprising as SMEs represent a core aspect of the British economy in innovation, job creation, and growth (NESTA, 2017). The significant importance of SMEs in the UK economy is evidenced in the numerous policies (both regional and industrial) aimed at providing support for them in both the UK and the EU (McCann & Ortega-Argilés, 2016; Bailey & Tomlinson, 2017), and this is why one might be right to question the lack of interest in relation to effects of Brexit on SMEs in the UK.

Brown et al. (2019) noted that the clear effect Brexit is having on UK SMEs is that it has forced many ventures into scaling back on their capital investments, exports, and inventions. Although these challenges seem to be on the rise, it is shown in the appraisal of existing policy framework that majority of the entrusted administration seem capable of implementing the right measures to intervene in such circumstances, with the intent of alleviating the negative impact that Brexit is having on sustainability of SMEs. Sindakis and Aggarwal (2022) conducted another study that looked at what Brexit means for SMEs in the UK. It was revealed in their work that SMEs have started adopting newer and innovative technologies that are capable of facilitating how they generate revenue. Change in employment structure is considered the main reason for this shift, as it affects venture’s ability to recruit, train and retain the right workforce easily. The effect that Brexit will have on different regions will be uneven (Cambridge Econometrics, 2018; Chen et al., 2018). In support of this view, Brown et al. (2019) made known that SMEs located within the peripheral regions in the regulated administrations of Wales, Northern Ireland, and Scotland seem more concerned about the impact of Brexit on their operations. The reason being that the decision to leave the EU is something that will directly affect their performance, especially as it would lead to decline in the funding they get from EU, with potential to intensify disparities across these regions. Similarly, another study suggested that the SMEs that will be most affected by the Brexit decisions are those that import and export goods. The reason is because trade-related issues will increase post-Brexit (Balls et al., 2018; FSB, 2017), especially as those advocating for Brexit see the departure of UK from the EU block as an opportunity to purse their personal trade policies. Thus, it is expected that there will be higher import taxes on UK goods entering the EU, resulting in negative effects on the performance of companies that manufacture and export such goods from the UK. While the government might move for a more dominant policy to curb this effect (Kalafsky & Brown, 2018), one needs to state that the support needs and capabilities of SMEs are highly varied, implying the need for a carefully targeted and implemented interventions (Wright et al., 2007). Essentially, there is a need for a study that seeks to assess the effect of Brexit on performance of SMEs in the UK, which is the foundation of this study.

RESEARCH METHODOLOGY

The study will be quantitative research. Longitudinal data will be gathered from LSBS produced by the BEIS. The reason for this is that the data covers over 15,000 responses from SME owners and managers in the UK who participated BMG Research Ltd’s study back in 2016 and 2017, through a computer-assisted telephone survey, when the Brexit event took place. One of the innovative aspects of the LSBS 2016 data was the introduction of questions that asked if the UK exiting the EU is viewed by SME managers and entrepreneurs as a significant problem to the overall success of their business. It was also part of the questions in the 2017 account of the survey, together with other questions that are related to Brexit

The data will be analyzed using IBM’s SPSS Statistical Tool. The analysis will start by assessing the types of SMEs that consider Brexit to be a major hurdle to their overall success. Precisely, such analysis will be based on regions, industry sectors, and firm-specific elements. Following the work of Brown et al. (2019), the primary geographical units of analysis will be England, Wales, Scotland, and Northern Ireland. The analysis will also utilize the rough nature of the data and utilize data at the postcode level to assess the perception of SMEs that are located within the peripheral and non-peripheral areas. An assessment will also be done to understand the opinions of SMEs in urban and rural areas. Basically, the analysis will be centered on identifying the effect of Brexit on the performance (both financial and non-financial) of SMEs in the UK.

THE STUDY'S SIGNIFICANCE AND IMPLICATIONS

A review of the literature showed that there are limited studies assessing the influence of Brexit on the performance of companies, and where they exit, such analysis has predominantly focused on larger foreign corporations. However, SMEs maintain a significant and strategic position in both economic development and employment in the UK. Therefore, this study, which seeks to assess the influence of Brexit on the performance of SMEs, is significant for a number of reasons. First, it will highlight and discuss the influence that Brexit has had on the performance of SMEs. Secondly, it will highlight and discuss the measures put in place by SMEs to address these issues. Finally, it will recommend new approaches that SMEs can adopt in order to address the challenges brought by Brexit.

The implication of such significance is that findings from the study can be used to bridge gaps created by Brexit in the performance of SMEs in UK. By so doing, the UK economy and employment positions will be sustained, helping the country mitigate negative effects of the Brexit decision. On the same note, findings will help support exiting theories and models related to the effect of government policies on performance of SMEs, educating both managers and CEOs on the best approach to cushion unforeseen circumstances that they might face in their respective industries.

CONCLUSION

Brexit, just like any other government policy, is expected to yield certain effects on SMEs. However, the difference is that the effect of Brexit will be regional (if not global) as the decision will affect countries across the entire European continent. Thus, it is imperative to assess this effect in order to better prepare companies in the region to cushion against negative influence of the policy on their financial performance. Although necessary, review of literature shows that majority of the studies have focused on larger foreign organizations, and those that looked at SMEs in the UK have been sectorial in nature. Therefore, it is a necessary (and urgent) that a study assess the effects of Brexit on performance of SMEs in the UK. This is the main objective that this study aims to fulfill. It will be a quantitative research, with data from existing LSBS survey, by the BMG Research Ltd, to be analyzed. The data is free and easily accessible and the reason for choosing the data is because it is has (with over 20,000 responses) and it was conducted from 2016 to 2017 when the event occurred.

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