What is the potential impact of Brexit on regional SMEs?

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What impact Brexit will have upon regional SMEs remains the “£350 million question”, but how can your business ensure it's prepared for the potential outcomes? Dr Jacob Salder, Research Fellow at Birmingham City University, addresses this important issue.

This blog post is authored by Dr Jacob Salder

Dr Jacob Salder has worked as a Research Fellow at Birmingham City University for over three years. His expertise lies in economic development, having built considerable experience through roles in local government, non-government organisations and regional development agencies. As well as being involved in the Centre for Brexit Studies (CBS), Jacob is part of the Centre for Enterprise, Innovation and Growth (CEIG), where his research focuses on regional development for SMEs.

Centre for Brexit Studies (CBS)

The CBS was established in January 2017 as the first research centre solely focused on Brexit. It was formed to foster an understanding of both the regional and national impact of the UK’s decision to leave the EU. CBS hosts regular events and works directly with regional businesses to help them achieve business growth both during and after the Brexit negotiations.

What can SMEs expect?

The impact of Brexit on SMEs is very much ‘the £350 million question.’ There is considerable ambiguity surrounding Brexit, and not just because of the ongoing negotiations. Principally, SMEs are incredibly diverse and the sector itself is huge – technically, 99.6 percent of businesses in the UK are SMEs. That covers a large number of units, from a sole trader operating out of their front room to a firm of 249 employees manufacturing vital components as part of an international supply chain. Such diversity makes it difficult to define overall what impact Brexit will have on SMEs, but there are a number of outcomes that we can certainly prepare for.

For example, being in the EU offers five consistencies, all of which will be affected:

Freedom of goods

SMEs that import or export will face obvious challenges in the event of new barriers trading with the EU (tariff and non-tariff). This extends further through direct suppliers to or customers of importers/exporters. The extent of this production chain can be significant, with implications for firms who are not import/export active.

Freedom of services

In terms of exporting, we sell more services than we buy. Free movement of services into the EU will however be at least reduced if not removed altogether, leaving those who trade services with Europe facing new barriers. Indigenous service industries may be affected where they provide key inputs to goods exporters to the EU; this market is a significant size in high exporting parts of the UK, such as the West Midlands.

Freedom of capital

Finance has been a major issue for UK SMEs, who often face limitations in the availability and range of financial products. A change in the investment model for the UK post-Brexit may help address this, for example by reducing debt-based products and creating a market for equity finance. There are issues around the implications of Brexit in terms of renewing high levels of internal consumer and government debt for a consumption-based economy.

Freedom of labour

We have been highly dependent on the EU for skilled labour, and certain places and industries are more exposed to any structural change in migration trends. This will likely make recruitment costs higher and timescales longer, with implications for output and productivity.

Regulatory consistency 

Outside the EU, the UK will have greater autonomy for the regulation of businesses. Regulation is commonly cited as a barrier for SMEs, the majority of these are currently domestic matters, such as taxation, rates and business support infrastructure. Relaxation of general standards imposed by the EU may disrupt trans-national relationships in certain industries, discourage innovation in firms and negatively affect employee welfare standards.

What are the opportunities?

The structural changes implemented by Brexit may see certain positives. Changes to business investment and financing may occur in response to the transition, seeing a reduction in debt-based financing and a wider portfolio of products which could include more crowdfunding and mutual-style models. If you look at the labour issue, controlling our immigration policy and linking this with industrial strategy could result in reducing vacancy shortages, as businesses will better be able to target their labour and skills needs. This control will not come without certain administrative and financial burdens.

With labour gaps a particularly prevalent concern post-Brexit, there is an opportunity for SMEs to try new forms of training and ways of working. Businesses can look to invest in automation to solve these labour gaps; while this removes some of the human element from their production lines, the advent of automation will create a host of new job and investment opportunities. Such opportunities not only contribute toward moving workers into more skilled employment with better career prospects, but also help to address regional and national productivity problems.

How can SMEs prepare?

 From the work the CEIG has conducted with SMEs, it seems that operationally they are very sharp. However, we find there is a tendency to not focus on strategic issues. I would suggest that you think strategically about where you want to take your business, and how your business relates to the people you sell to and the people you buy from. Think about what the inherent value it is that your business offers its customers, and how you can maintain and enhance this value.

Secondly, think back to those five consistencies highlighted earlier. What will the implications be for your business regarding changes to the business environment around goods, services, finance, labour, and regulation? Finally, now is the time to think about how you can acquire different forms of knowledge and skill sets in order to respond to the challenges of Brexit. BCU provides a broad portfolio of support programmes to help SMEs at all stages of life to achieve their objectives, from our SME diagnostic and bench marking service to support in developing and implementing business strategy.

To find out more, visit the Centre for Brexit Studies website. You can also access Birmingham City University’s SME diagnostic through the following link

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