Most innovative and economically important SME’s to be hardest hit by Brexit – St Andrews Uni

UK Small and Medium-Sized Enterprises (SMEs) thought to be the most significant for boosting productivity and economic growth may be the most negatively affected by Brexit, according to new research from the University of St Andrews.

In the first such study of its kind, researchers found that Brexit is likely to result in lower levels of capital investment, reduced access to external finance, lower levels of growth, reduced product development and lower levels of business internationalisation.

It was also found that future plans for capital investment within innovative SMEs seem particularly likely to be negatively impacted.

The findings follow the publishing of a paper published by the Scottish Government chief economist Gary Gillespie last week that said Brexit could reduce business investment in Scotland by £1 billion by 2019.

The report on the state of the economy warned that while Scotland’s economy was expected to grow in 2018, not only could uncertainty over Brexit see business investment cut or deferred, it could also result in unemployment increasing by 0.8 per cent by 2019 – the equivalent of 21,000 job losses.

Another impact could be reduced GDP growth over this year and next year, it suggested.

Independent forecasts for the Scottish economy point to GDP growth of between 0.7 per cent and 1.4 per cent in 2018 – with the report noting these “remain below Scotland’s long run trend rate of two per cent”.

In conducting their own research, experts at St Andrews led by Dr Ross Brown and Professor John Wilson from the Fife university’s Centre for Responsible Banking and Finance, in conjunction with Dr José Liñares Zegarra from the University of Essex, examined the potential impact of Brexit on UK SMEs by drawing upon detailed econometric analysis of the UK government’s Longitudinal Small Business Survey, one of the largest attitudinal surveys of SMEs undertaken in the UK, encompassing approximately 10,000 firms.

Following the result of the referendum, the UK government inserted a number of Brexit-related questions into the survey which enabled the analysis.

Dr Brown, reader in entrepreneurship and small business finance at the University of St Andrews, said: “The results of our analysis suggest that Brexit-related concerns could result in a range of negative consequences for UK SMEs, especially the impact on reduced capital investment, which critically weakens and undermines their ability to grow and prosper.

“Most worryingly, these perceived negative impacts appear to be foremost in the minds of entrepreneurs and managers located in the types of innovative and export-oriented companies, which are often viewed as the high growth ‘superstars’ of tomorrow.

“In other words, SMEs thought to be the most significant for boosting productivity and economic growth may be the most negatively affected by Brexit.”

The research discovered that concerns about Brexit are not felt uniformly across the population of UK SMEs. The results suggest that Brexit-related uncertainty is likely to affect larger, export-oriented firms and those operating in hi-tech and service-related industries the most. Innovative SMEs in particular seem particularly concerned by Brexit.

“There appears to be a deep-seated uncertainty permeating UK small businesses about the ramifications of Brexit,” said Dr Brown.

“Owing to its highly complex, contested and indeterminate nature, Brexit is unlike most other types of institutional instability because it has the potential to fundamentally re-write the rulebook for how firms do business in the UK.

“These concerns seem to be most acutely felt within certain types for firms. By and large, the larger, more innovative, more export-oriented and hi-tech you are the more likely you are to have concerns regarding Brexit for your business.”