On June 24th, 2016, the majority of U.K. citizens voted to leave the European Union. The ‘Brexit’ decision was supported by 52% of the population, but the ‘leave’ votes came primarily from England (except for London) and Wales.
There have been reports that even more countries are threatening to leave the EU and the pound plummeted to a 31-year low. Prime Minister David Cameron has also announced his resignation.
The results of the referendum evoked an enormous wave of negative responses, including shock, regret, disappointment, disbelief and a lot of uncertainty, but what does the Brexit vote translate to in terms of technology and innovation?
The first effect of Brexit on technology has to do with the recruitment pool: U.K.-based companies will simply have less candidates to choose from. Those with experience with start-ups can tell you that a good portion of their founders and employees come from outside of the U.K. The government itself has a number of initiatives specifically designed to attract professionals from the EU and encourage them to start their own business in the U.K. - instead of their own country. The Brexit vote has inadvertently put an end to this: if you’re a start-up owner, you’ll naturally want to start your company in a country that gives you easy access to new customers and with legislation that enables and encourages international trade.
Moreover, in 2014 and 2015, the U.K. was the top destination for foreign investment in the EU, receiving its largest contributions from the U.S., India and France. U.K. tech companies and start-ups were seen as an easy way to gain access to the EU market – something that will now be much more difficult, thanks to the Brexit decision. In addition, the European Union provides funding for a number of projects and initiatives to help new businesses grow and develop that the U.K. will no longer receive.
If the U.K. can’t attract employees and founders from the EU anymore, and can’t receive funding from the union that it is no longer a part of, why can’t it simply use its own graduates to boost the economy? The answer is simple: there just aren’t enough U.K. graduates with math and science backgrounds to fill all the available positions in the engineering and technology industries. Leaving the EU puts enormous barriers to immigration and recruiting – a decision that is going to hit small business ventures and start-up companies the hardest. Additionally, the travel restrictions are going to put more strain on these tech companies as traveling to and working in Europe is going to be more expensive and challenging. EU rules have so far helped reduce both roaming costs and airfares to the continent, but these regulations apply only to countries that are actually part of the union.
These are just some of the practical implications of the U.K.’s decision to leave the European Union. Smaller recruitment pools, higher costs for doing business, and less funding for start-ups are not the only effects of Brexit on the British economy and technology, in particular. According to experts, the Brexit vote will have the most detrimental effects on academic research and innovation. A good portion of the research in science and engineering depends on EU funding – in fact, in 2013-2014, more than 16% of the research income in U.K. universities was due to EU contributions.
Another major implication are the new trade tariffs, which are expected to take years to negotiate. According to the EU laws, the United Kingdom has two years to negotiate its leave from the union, and once this happens, the U.K. would trade with the rest of the European Union under the World Trade Organization rules. Apart from having to pay new trade tariffs, U.K. will also need to renegotiate more than 50 free trade deals that the EU has with countries such as South Korea and Canada. The extent to which the Brexit vote will impact tech companies and consumerism overall will, naturally, largely depend on their international partners.
British start-ups are now also faced with the issue of dependency and have to ask themselves if they can afford to depend on British citizens to invest in their products and businesses. Jonathan May, CEO of London-based fundraising software company, Hubbub, mentions that Britain now offers limitations in an economic sense.
“London was a very, very attractive home whilst it remained in the EU, giving us access to the integrated European market both from a staffing and a customer base point of view, as well as good access to the U.S. East Coast market. But now we will need to look at growth elsewhere.”
He further explained that the company will immediately switch marketing resources away from the U.K. with a greater focus on new hires in their U.S. branch as the United States will be able to offer them a “wider access” to skills than the “go-it-alone” country that Britain is becoming.
“We are looking at whether a base in Berlin would more appropriately serve the (geographical) European market, and give us access to the EU skills market,” he added.
With a startup perspective from outside the U.K. market, Oisin Hanrahan, the Irish CEO of New York-based on-demand cleaning company, Handy, suggested Brexit might elevate Dublin’s position as a European tech hub, given that it’s English-speaking but, unlike London, remains securely fixed within the EU.
“Maybe there’s room for Dublin to become the new London of Europe,” he said. “I do think there will be real questions around the U.K.’s place in Europe. I think that’s a real challenge.”
He added that, from a volume and revenue perspective, London is Handy’s “second most important city.” Following the Brexit vote, there is now a cloud of uncertainty hanging over the city.
An anonymous small business owner said that he fears Britain’s capacity to back them on a global level and to help them become an international success. Reports have shown that it is highly probable that young start-up companies might just up and leave to start over somewhere with more resources, more economic backing and more safety. As one of the entrepreneurs asked: what is the point of setting up shop when the country is carrying around one big plate of uncertainty?
While it’s too early to identify and estimate the exact implications of the Brexit vote on technology and innovation in the U.K., it’s safe to say that leaving the EU will cause a massive transitional period; a reduction on the recruitment pool, discouragement for foreign investors/entrepreneurs from funding/starting businesses in the U.K. The loss of EU research grants will also greatly impact technological development and innovation- particularly in the fields of science and engineering. One thing is certain: the effects of Brexit will be significant and will have a long-term influence on the technological start-up ecosystem.