The maker of Toblerone Swiss chocolate says it has widened the spaces in its iconic, triangle-array bars for some discount shops in Britain to keep prices down. EMPICS/Press Association. All rights reserved.
Since the UK referendum vote to leave the European Union on 23 June, numerous prognostications regarding the vote’s impact on the UK economy have been made. The more credible of these have come from two sources: economic data published since the referendum, which largely assesses past economic performance, and forecasts of future economic performance.
Underpinning past and future economic performance are, amongst other factors, business decisions to invest, divest, reinvest, locate, relocate, expand or contract business activity. These decisions are an important factor in how the UK economy is likely to perform in the future, and the wider economic impact that different Brexit scenarios are likely to have.
Over the past three years I have researched how referendums – such as the September 2014 vote on Scottish independence and the recent UK referendum on EU membership –influence business attitudes and decision-making.
What has emerged from this research is that there are a small number of factors that drive business decision-making under different constitutional and trading scenarios. Below I will explain what they are, how they might change under different ‘Brexit futures’, and what this might mean for the wider UK economy and public policy.
What the economic data are telling us
Economic data and forecasts since 23 June have painted a confusing picture of the impact of the referendum on the UK economy. On the one hand, there have been numerous economic statistics released that give succour to Brexiteers.
The latest economic data, for instance, show that the UK economy grew by 0.5% in the three months since the vote. Consumer confidence has largely bounced back to pre-referendum levels, and business investment was up by 0.9% in the third quarter of 2016. What this means is that the economy is still growing, consumers are spending, and businesses are expanding.
On the other hand, such data appears to belie the dire forecasts being made by the Office of Budgetary Responsibility (OBR), the Bank of England, the Institute of Fiscal Studies (IFS), and the Treasury amongst others.
The OBR, for instance, recently forecast that economic growth could be reduced by 1.1% by 2018, as both business investment decisions and immigration are reduced. Indeed, the Resolution Foundation, in their analysis of the OBR’s autumn statement, point out that the economy will only have grown by 6.8% between the beginning of the financial crisis and 2021 – some three times lower than in previous recoveries in the 1980s and 1990s. So why the discrepancy?
Predictions of future economic performance rest on numerous assumptions about what is likely to happen in the future. Yet, when we review what has occurred since the vote, the answer is that not much has actually happened.
The UK has had a vote on EU membership, and elected to leave. But Article 50 of the Lisbon Treaty, which triggers the two-year negotiating period between the UK signalling its intention to leave and its actually leaving, has yet to be invoked.
The only thing concrete that has occurred since 23 June is that the British pound has depreciated, as markets have adjusted their expectations in line with what they believe are the likely consequences of Brexit for future UK economic performance. The depreciation has helped some exporting businesses by making their products and services cheaper, and punished others who are importing goods and services from outside the UK by making them more expensive.
For those familiar with business decision-making, these discrepancies come as no real surprise. This is for three reasons.
First, investment decisions can take a long time to make and for corresponding adjustments to take place. Recent economic data thus reflect many business decisions taken before the vote.
Second, businesses don’t like uncertainty. They particularly don’t like uncertainty caused by political or trade agreement instability. If uncertainty continues, it is likely that investment decisions will be put into a holding pattern, or be diverted to more stable jurisdictions.
Third, when there has been a significant event such as a referendum vote, businesses initially take a ‘wait-and-see’, ‘business-as-usual’ position until it becomes clear what the outcome will mean for them. They don’t necessarily wait for the final outcome, but assess the direction of travel.
Yet, there has been very little indication of the direction of travel so far from the UK government (aside from photographs of government aides carrying hand-written notes). Moreover, what little there has been – such as the secret but evidently attractive deal designed to prompt Nissan into continuing its investment in the UK – will give many business leaders pause-for-thought.
A framework for understanding business decision-making in politically unstable times
In the lead-up to the 18 September Scottish vote on independence in 2014, colleagues and I conducted in-depth interviews with 75 leaders of medium and large UK companies and industry bodies. We also conducted surveys with industry groups to understand business attitudes towards the independence referendum, and how they might make decisions under different constitutional scenarios.
We found that there was a relatively small number of factors driving business responses in such situations. We then developed this into a framework for looking at the UK referendum on EU membership. It turns out that the same factors apply.
The factors shaping business attitudes towards such political events, and the decisions that flow from them, include: a) where the balance of trade takes place for the company (e.g. UK, EU, Global); b) the ownership structure of the company (e.g. employee-owned/partnership, private, publicly traded); and c) where the company is headquartered (e.g. UK, EU, Global), and location advantages to being located in the UK.
Where trade takes place
We found that if companies are located in the UK, but have significant amounts of trade in the jurisdiction being seceded from (e.g. in this case the EU), then a referendum outcome to ‘leave’ presents a significant challenge. Trade, in this sense, can involve where the majority of their consumers are, but also where their suppliers are located.
If, on the other hand, trade is UK-based, or diversified globally, business leaders may be less concerned, or indeed even see some opportunities in an ‘out’ vote (for example, a reduction in regulatory burdens or taxes). This is why many of the large banks located in London but reliant on ‘passporting rights’ in the EU came out so strongly against Brexit, but some wealth managers, whose client base is global, were less concerned, or on some occasions pro-Brexit.
Employee-owned businesses and partnerships, for example, may or may not be happy with the referendum outcome. But because there are likely to be a variation in views in the company, and decision-making depends on widespread agreement across the company, they are more likely to weather whatever the outcome is by adopting a ‘business-as-usual’ approach in the face of changing circumstances.
Privately owned companies, again, may have a positive or negative view of the outcome. But because the risks (and opportunities) posed by the outcome are absorbed personally by the directors, and the companies may be more embedded in the seceding jurisdiction (in this case the UK), they are also more likely to weather the outcome.
Publicly-traded companies, which tend to be larger, have to respond to their shareholders. Such companies, if they are exposed to risks through a changing business environment, are most likely to be perplexed by a referendum outcome to secede, as they will be compelled to make decisions designed to mitigate any negative impact on their companies’ competitiveness and performance.
Headquarter location also influences attitudes and is closely linked to location advantages to investing in the seceding jurisdiction.
Those companies who have their headquarters located abroad, for example, are likely to be more willing to relocate business activity to other countries if their businesses are exposed to downside risks from a vote to secede. They will carefully monitor the advantages of being invested in the UK, whether it is access to markets, political (in)stability, currency value, social cohesion, quality of infrastructure, fiscal environment (i.e. competitiveness of the tax and regulatory environment), and so on.
Subsidiaries of global companies tend to ‘compete’ for investment decisions from the global parent, and so any deterioration in the competitiveness of the business environment will reduce its attractiveness in the medium to long term.
Implications of Brexit for business
In the lead-up to the referendum on EU membership, numerous surveys of business views offered some insight into how business might react in the medium-to-long term. Five business surveys are particularly important. They are from the Confederation of British Industry (CBI), the British Chamber of Commerce (BCC), the Institute of Directors (IoD), the Federation of Small Business (FSB) and the British-American Business (BAB) Association. The attitudes captured in these surveys are shown in the chart below.
Business attitudes toward the EU referendum, 2016
Taken together, these surveys represent a good cross-section of the private sector businesses in the UK economy. Their memberships range from predominantly large businesses (250+ employees) in the CBI, through small and medium-sized business (SMEs) in the FSB (0-249 employees), to a mixture of different sized businesses in the BCC and IoD, and both American and British-based multinationals in the BAB. The industries and sectors represented in these membership bodies also reflect the make-up of private sector business in the UK.
The CBI, for instance, consists of a significant number of large companies. Many of these are publicly traded, and have significant exports to or integrated supply-chains with the EU. The FSB, by comparison, has a much higher proportion of privately owned businesses with largely UK-based activities. The BCC and IoD, alternatively, have a more mixed membership, which is reflected in the surveys.
There are, however, a number of prominent pro-Brexit business leaders of large, successful UK companies. James Dyson (of Dyson), Lord Bamford (of JCB) and Tim Martin (of Wetherspoon’s) are three examples. If you look at their businesses through the framework above, it helps to explain their position. Dyson and JCB, for example, are privately owned companies with a majority of their exports and growth markets diversified globally. Weatherspoon’s, while being traded publicly, has all of its trade in the UK and Ireland.
The British-American Business Council, however, is an interesting contrast. There are a number of reasons why multinationals locate subsidiaries/operations in the UK, including education, language, social stability, and access to a skilled workforce, amongst others. However, access to the single EU market is frequently cited as a significant reason for locating in the UK (88% of the 127 American companies surveyed, employing 327,000 individuals in the UK).
The BAB estimates that there are 7,500 American companies in the UK, employing 1.2 million people. If the UK were to be outside the EU, their survey suggests that 89% would not move their operations, but 11%, or 1/10, would. In addition, their survey also suggests that ‘Brexit’ would have a negative impact on future investments in 70% of companies, meaning that while they might maintain operations in the UK, other subsidiaries located outside the UK might benefit from a UK EU exit.
Business decisions will depend on the scenarios that begin to materialise
How businesses respond to Brexit will depend entirely on what scenario begins to materialise. A ‘soft’ Brexit, for example, where the UK remains part of the EU single market and customs union, with perhaps some restrictions on immigration, may mitigate many of the risks posed by Brexit and faced by companies based in the UK.
A ‘hard’ Brexit, on the other hand, where the UK is outside the single market and customs union, and resorts to World Trade Organisation (WTO) rules once they have been negotiated, could evaporate many of the advantages that make the UK as an attractive country for business. While the world is global, the reality is that there are certain ‘gravitational’ effects at work in world trade, and geographic proximity to markets will continue to be one of the most important factors in trading relationships for the foreseeable future.
In the event of a ‘hard’ Brexit, though, it is still conceivable that the UK could remain an attractive place for business to invest. Lowering corporate tax and income tax to maintain competitiveness or to compensate for the higher costs of trading with the EU, reducing regulatory burdens, enhancing management talent and increasing productivity, for instance, may all be appealing for some types of businesses.
However, a great irony of the position the UK finds itself in is that, in a ‘hard’ Brexit scenario, un-mooring from the relative shelter of the EU harbour would expose the UK to the full force of globalisation. It would inevitably force a policy path of pursuing relentless competitiveness, and most likely, the oft talked about ‘race to the bottom’. Over time this would almost certainly have profound implications for public spending and social policy, and the heaviest burden, as always, would likely fall on the shoulders of the so-called ‘jams’ (people who are ‘just about managing’).