Breaking research

Over a million UK businesses see Brexit as major obstacle to success

The number of small and medium-sized enterprises (SMEs) that view Brexit as a major obstacle to success has increased significantly since the referendum, according to research published in the journal Regional Studies by Ross Brown and John Wilson from the Centre for Responsible Banking & Finance at the University of St Andrews and Jose Liñares-Zegarra, University of Essex.

Examining one of the largest attitudinal surveys of UK SMEs undertaken, the research found that almost a quarter of businesses surveyed in 2017 viewed Brexit as a major obstacle to their success, up from 16% in 2016. The activities most affected are investment and exporting. Plans for future capital investment have been scaled down by around two-thirds of SMEs (62%) and plans to increase export sales are being scaled back by over three-quarters (77%).

Previous research on the impact of Brexit has typically been speculative and focused on large firms with overseas ownership. This study explores the impact of Brexit on SMEs and how it varies according to their size, geographic location and industry sector. SMEs account for 99% of all UK firms and 60% of total private sector employment. The researchers used a business survey compiled by the Department for Business, Energy and Industrial Strategy, one of the largest attitudinal surveys of SMEs undertaken.

“SMEs represent a core part of the UK economy and are crucial for job creation, innovation and productivity growth,” says Dr Ross Brown, Reader in Entrepreneurship and Small Business Finance, University of St Andrews. “They are also disproportionately impacted by uncertainty and generally have a lower resilience to unexpected shocks. Our results suggest that Brexit-related concerns among them are escalating. Larger, internationally-oriented and knowledge-based SMEs are particularly concerned, as are those located in key urban and peripheral geographic areas.”

The authors examined the implications of their findings on policy issues including immigration and international trade. Their analysis suggests that increased political autonomy through devolution of power could help peripheral regions mitigate negative economic impacts of Brexit. For example, labour-intensive industries and high-tech firms might benefit from devolved immigration policy and regions could also implement discretionary funding to support export development.

Brown claims: “Worryingly, those most concerned – innovators and exporters – are the SMEs deemed most important for UK productivity growth.  Yet to date, the UK government has paid scant regard towards assisting them to prepare for the disruptive effects of Brexit”.

The single largest factor worrying SMEs is uncertainty regarding future regulatory change, with 74% citing this as a concern. Micro and small SMEs are particularly concerned about regulatory change (81% and 80% respectively), as are exporters (86%), and those located in urban areas (76%). Other major concerns include increased import costs (52%) and uncertainty regarding future access to EU markets (59%).

The bulk of survey evidence suggests that for most SMEs, maintaining frictionless and borderless trade is crucial for their operations.  For example, SMEs located in Northern Ireland are likely to be particularly affected given that many products cross the Irish border several times during the manufacturing process. Overall, available evidence suggests that SMEs remain unconvinced of the potential opportunities arising from the pursuit of an independent trade policy and most express a strong preference for retaining UK membership of the single market and the EU customs union.

The data from the research covers a total of 15,867 responses from UK small business owners and managers, taken during a major longitudinal survey. Extrapolating the number of businesses surveyed to the overall population of SMEs suggests that over 1.25 million SMEs have significant concerns regarding the potential impact of Brexit on business success.

“Given the intensely politicised nature of Brexit, more research is urgently required in order to help small businesses and policy makers navigate this unprecedented and profoundly turbulent economic and political period,” says Brown.