Brexit and its Impact on Small-Scale Enterprises in the UK

Brexit and its Impact on Small-Scale Enterprises in the UK

In June 2016, a national referendum was held in the United Kingdom in which over 30 million people voted regarding the motion to have the UK withdraw from the European Union. 52% of the people voted in favor of the motion, following which the UK would cease being a member of the EU in January 2020 (Sampson, 2017). The UK’s exit, popularly known as Brexit, has been a topic of discussion among scholars. Much of this has focused on the economic impacts of the UK’s decision, more so when it is considered that the EU has been the UK’s biggest as well as nearest trading partner (BBC News, 2020). According to Kierzenkowski et al. (2016), being an EU member has been one of the key drivers of economic prosperity. This means that the exit would greatly affect the country’s economic status and growth, particularly in terms of restricted access to markets, economic uncertainties, and a high risk of doing business. This paper explores the UK’s exit from the EU in terms of its consequences on small enterprises.

Brexit’s Economic Consequences

Before focusing on the effect of Brexit on small businesses, it would be helpful to provide an overview of how the exit affects the UK economy as a whole. Sampson (2017, p.167) describes the UK as “a small open economy …that relies heavily on trade with the European Union”. This description alone suggests that Brexit has vital implications for UK’s economic growth. To begin with, the exit reduces economic integration between the EU and the UK, thus resulting to more barriers and reduced investment inflows. As Kierzenkowski et al. (2016) observe, access to a single market as provided by the EU is instrumental to foreign direct investment. It follows, therefore, that Brexit would negatively affect investment in the UK. This is because the single market provided by the EU enables foreign investment entities to serve EU markets using the UK as their export platform (Sampson, 2017). Exiting the single market will certainly reduce FDI flow into the UK by substantial margins.

Secondly, being a member of the UK conferred notable comparative advantage to the UK. Exiting the Union would thus impose new trade costs since the UK’s ability to specialize and maximize its comparative advantages is reduced. The uncertainty created by Brexit has the potential of negatively affecting business transactions, especially if the UK does not draft a free trade agreement with the EU. In such a scenario, goods produced in the UK would be subjected to common tariffs imposed by the EU. On the other hand, a decision by the YK to build tariff walls would negatively affect the flow of bilateral trade, ultimately generating an adverse effect on the country’s economic growth (Chang, 2017).

Effect on Small-Scale Enterprises

It is important to explore how Brexit affects small businesses in the UK given that small as well as medium enterprises “represent a core constitutive part of the UK economy and are crucial for job creation, innovation and productivity growth” (Brown, Liñares-Zegarra & Wilson, 2019 p.2). It has been established that small and medium enterprises account for 60% of employment in the private sector (Brown et al., 2019). The UK is home to approximately 5.7 million small and medium enterprises; this makes small enterprises a key component of the economy’s backbone (Brown & Wilson, 2018). Having highlighted uncertainty as one of the consequences of Brexit, it goes without saying that the UK’s exit from the European Union will immensely affect small enterprises especially in terms of trading conditions.

Compared to larger organizations, small enterprises are more affected by unforeseen events-like Brexit, that come with unexpected shocks. In the words of Brown et al. (2020), small enterprises face unique human resource as well as financial constraints that hamper their ability to undertake proper contingency planning. In reference to Brexit, this implies that small enterprises may be unable to enter into appropriate alternative agreements to enable them continue trading profitably. For example, Hong Kong and China have been identified as potential avenues for UK-based SMEs following Brexit; however, replacement agreements are not very straightforward (Roper, Prouska & Ayudhya, 2019). In addition, most small enterprises in the UK are embedded into international value chains that operate within the single market offered by the EU (Roper et al., 2019). The implication of this is that Brexit could cause loss of customers especially for enterprises that are unable to relocate. When this happens, the small enterprises will have no option but to close down. This is a serious issue given that since Brexit rules came into effect early this year, almost 33% of companies in the UK have experienced substantial businesses losses or decline (Thomas & Foster, 2021).

The ease of doing business has also been greatly reduced for small enterprises. Lars Andersen, who founded a small enterprise known as My Nametags & Arty Lobster, says that it was comparatively easy for small and medium enterprises in the UK to sell their merchandise into various European markets when the UK was an EU member (London & Zurich Limited, 2021). This remark creates the impression that Brexit would create hurdles for SMEs doing their business in Europe. For Cheshire Cheese Company, Brexit has affected the commercial viability of small enterprises as distributors in countries such as France and Germany no longer wish to do business with them due to paperwork difficulties and extra costs (Thomas & Foster, 2021). Another small enterprise in the UK- Motorcycle Broker-reports that although small businesses still have the option of importing their goods from non-EU nations, this comes with a lot of friction. Specifically, it takes months to buy merchandise from such countries unlike in the past where it took only days (Thomas & Foster, 2021). Clearly, the exit of Britain from the European Union has negatively affected business in terms of viability, ease of operations, and profitability, more so for small enterprises.

Although the Brexit agreement confirmed that no tariffs and quotas would be imposed on UK-EU trade activities, there are significant costs to be borne by UK companies following the deal. For instance, UK firms are require to adhere to customs controls as well as costly checks (Thomas & Foster, 2021). Small enterprises are particularly affected as they struggle to comply with new procedures concerning exports and imports. A Hertfordshire-based beauty company by the name Evolve Beauty has incurred substantial costs following the Brexit deal. As reported by the company’s owner, Evolve Beauty has had to establish a warehouse in Ireland to facilitate reliable export of its merchandise to customers within the EU bloc. This decision has brought additional costs to the company (Thomas & Foster, 2021).

With the additional costs brought by Brexit, many small businesses in the UK have been forced to do workforce restructuring. More precisely, many small enterprises have been left with no alternative but cut jobs. An example is Something Different, a company that deals in the distribution of clothes and related merchandise to visitor centers together with small retailers. After Brexit, Something Different’s managing director had to cut his workforce by a half (Thomas & Foster, 2021). This move was necessitated by a declining business and low sales: in 2020, the company was distributing 2,500 parcels every day. Presently, it is only sending a maximum of 150 parcels daily. According to Thomas and Foster (2021), the biggest problem faced by Something Different is cost as well as border procedures that EU customers are not ready to shoulder.

Still on the human resource issue, Brexit poses significant workforce challenges to small enterprises. Although the move affects all organizations regardless of their size, small businesses are particularly affected especially in terms of skills shortage. Thomas and Foster (2021) report an increase in worker shortage among UK firms following Britain’s exit from the EU, which arguably restricted the freedom to move. A survey conducted among a number of companies revealed that Brexit has created hiring difficulties especially in terms of loss of highly skilled workers as well as ability to source low-skilled workers. In fact, retaining talented workers from EU countries has been identified as a major challenge faced by UK SMEs (Roper et al., 2019). This is an issue of concern considering that UE workers form a vital component of the UK economy as they help to fill in the skills gaps chronically experienced in several sectors (BBC News, 2017). Although the number of small enterprises employing workers from EU countries is relatively small, the freedom of UK firms to source workers from these countries is still important because of the high level of skill that these workers possess. As it is, uncertainties exist as to whether EU citizens will still continue enjoying the right to work in UK firms after Brexit (BBC News, 2017). In the event that these rights are curtailed, small businesses in the UK would suffer significantly in terms of being unable to obtain sufficiently skilled workers. The talent crisis caused by Brexit is a serious issue going by the report that close to 50% of highly skilled/talented EU citizens who currently work in UK firms are contemplating leaving the UK by the year 2023 (Lobel, 2018). This is a clear indication that UK companies, whether large or small, must urgently draft measures to mitigate any negative effects that could arise from this exodus.

Access to finance is another challenge that small businesses in the UK stand to face following Brexit. It goes without that business growth is determined by access to affordable as well as sustainable financing. Unless Brexit is implemented in an orderly manner, there is a likelihood of the UK entering into a market turmoil that could result into controlled lending, especially for small enterprises (Percy, 2019). This is based on the fact that during harsh economic times, banks often shelve lending to small businesses.

The discussion so far has dwelt on the negative impacts of Brexit, thereby creating the impression that Brexit has nothing but negative consequences for small firms in the UK. While it is true that the uncertainties and shocks created by the deal would cause significant challenges, Brexit offers some opportunities that small businesses could take advantage of. For example, small enterprises could experience substantial growth by setting up offices and branches in EU countries. This way, they would tap into new markets, besides accessing new pools of talent (Percy, 2019). There is also the argument that Brexit confers greater flexibility to UK firms since they are no longer governed by EU regulations. The argument is that after Brexit, UK companies can trade with greater freedom with non-EU countries such as Australia together with America.

Brexit could also widen the scope for small businesses to expand via inward investment. Lobel (2018) postulates that with the value of the UK currency depreciating as a result of Brexit, private equity companies could invest more in UK businesses. When this happens, local businesses will be safeguarded. On a different note, Brexit has caused fluctuations in exchange rates, making UK merchandise more affordable to international customers (Lobel, 2018). This means that on the positive side, Brexit provides new opportunities for small businesses to expand their operations into overseas markets and enjoy higher returns.

Lastly, small businesses in the UK could approach the projected talent crisis resulting from Brexit as an opportunity to hire more local workers. By anticipating a shortage in foreign workers, business owners in the UK could invest in up skilling their local workers. This would have a double effect in the sense that it would not only allow companies to fill talent gaps; it would also improve employee motivation and satisfaction because local workers will feel that their employers are determined to see them grow. In other words, it would have a net effect of boosting the rate of employee retention.

Conclusion

Having explored the consequences that Brexit has on small businesses in the UK, it may be concluded that Brexit is a ‘double-edged sword’ especially where businesses are concerned. Without doubt, Brexit makes it harder than before for UK firms to trade with EU countries, but on the other hand, it has created opportunities and new freedoms for UK companies to engage in trade with other markets. The negative of the exit on small businesses, as identified in the research, include new procedures and supply chain disruptions that translate to extra costs for UK firms. There are also workforce-related challenges, specifically accessing skilled workers from EU nations. More importantly, Brexit has caused confidence issues among investors, with some countries being not-so-keen on doing business with UK firms.

References

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