Brexit analysis paints bleak picture for UK, potential for Canada

Last year’s Brexit vote − the United Kingdom’s (UK) prospective withdrawal from the European Union (EU) − took the world by surprise and left even the most seasoned economists scratching their heads. The Schulich School of Business’ Douglas Cumming, Ontario Research Chair in Economics and Public Policy, has published a sound overview of this remarkably complex situation.

With funding from the Social Sciences and Humanities Research Council of Canada and data collected immediately after the Brexit vote, Cumming researched the international business and entrepreneurship implications of Brexit, and came to a chilling conclusion for the UK, with some potential for Canada. His work, co-authored with the University of Minnesota’s Shaker Zahra and executed with the help of Schulich’s Sofia Johan, was published in the British Journal of Management (2016).

“We highlight some of the potentially negative consequences for markets in the UK and around the world that result from barriers to trade and immigration associated with the uncertainty created by Brexit,” says Cumming.

June 23, 2016, the day the world changed

It’s hard to image a single electoral event that would have such a ripple effect. This happened on June 23, 2016, with the Brexit vote. “There’s agreement that Brexit will unleash fundamental changes in the British business environment that will profoundly alter the dynamics of the relationship with the EU, North America and, in fact, the rest of the world,” Cumming states.

Immediate questions arose:

• How would such a split be accomplished? What would this new world look like?
• What does this mean for the existence of the UK, with Scotland and Northern Ireland indicating that they may be seizing the day to seek independence?
• How would this affect the long-standing relationship between the UK and North America?

Study focuses on international business and entrepreneurship implications

In this paper, Cumming reviews the practitioner, policy and academic literature over the first month following the Brexit vote, and focuses on the issues associated with Brexit and international business and trade, multinationals and international entrepreneurship.

“There’s agreement that Brexit will unleash fundamental changes in the British business environment that will profoundly alter the rest of the world.” − Douglas Cumming

The existing literature indicates that North American companies will likely seek to retain their mutually beneficial relationship with the EU, one the world’s largest markets with advanced technologies and a highly skilled and educated labour force.

But predicting how the UK will fare with both the EU and North America is more difficult since, for many years, UK, Canadian and American companies have been collaborators as well as competitors. “Facing uncertainty, some of these multinationals have already expressed concern about declining profit margins causing them to reconsider the attractiveness of the UK as a place of business,” Cumming explains.

International finance could move from London to New York

After Brexit, Cumming explains, some anticipate a declining role for London as a global economic and financial centre – a position that this city has held since the 1980s. Additionally, the EU may enact regulations that limit London’s role, which would prompt financial services companies to relocate, possibly to Germany or the United States (US). New York City seems to be the obvious choice as it’s already a global financial hub.

Interest rates would be low as a result, which would affect exports. “This is coupled with predicted slower growth rates in the UK and EU, which may have ripple effects on North American companies as it increases currency (and political risk) volatility,” Cumming clarifies.

All of this poses a risk for financial stability in both the US and UK. The triple threat of excessively high debt levels, excessively low interest rates and excessively low productivity growth pose a particular risk.

This uncertainty, naturally, creates a conservative environment in which companies would start to think about reducing their investment in long-term activities, such as research and development, technology and other start-ups, which could improve the business climate by introducing innovative ideas that would spur growth.

UK firms will take a hit, experience brain drain

In this scenario, institutions are under considerable strain, if not total upheaval. Paradoxically, these developments will make entrepreneurialism very important in the new, post-Brexit environment. “Politicians, business people and entrepreneurs will have to actively work to reform existing institutions, abandon some of them and create new ones,” says Cumming.

However, he underscores the fact that immigration drives entrepreneurialism. So if legal barriers to immigration are set up in the post-Brexit era, this will hinder economic progress.

Cumming also notes that Brexit is predicted to have dire consequences for new start-ups. This is because funders and investors will be more attracted to EU-based businesses. “The uncertainty created by Brexit is a major consideration in making these decisions; this uncertainty is multifaceted and is expected to persist for years,” Cumming says, suggesting that UK start-ups may want to consider relocating to Canada or the US.

Indeed, Brexit may have triggered a situation where UK entrepreneurs are effectively encouraged to set up shop in the EU or elsewhere. Cumming notes that these changes will not play out well in the long-run in the UK, because they will effectively rob the UK of the technological capabilities of younger companies, the source of growth and job creation.

Cumming suggests that UK start-ups may want to consider relocating to Canada.

To Cumming, the first look at evidence specific to Brexit paints a picture in which UK and continental European firms will both be hurt by Brexit – the UK being the worse for wear compared to their continental counterparts.

UK entrepreneurs may be attracted to Canada’s strong STEM programs

This potential brain drain from the UK could benefit North America. According to Cumming, Canada and the US are eager to attract this talent to spur entrepreneurial activities and fill certain voids in existing companies. In fact, both countries have created programs that aggressively seek global entrepreneurs with strong STEM (science, technology, engineering and math) skills.

The paper, “International Business and Entrpreneurship Implications of Brexit,” was published in the British Journal of Management (2016). To learn more about Cumming, visit his website. To learn more about the Schulich School of Business, ranked among the leading business school in the world and #1 In Canada, visit the website.

By Megan Mueller, manager, research communications, Office of the Vice-President Research & Innovation, York University, muellerm@yorku.ca