The Risks And Opportunities Of Brexit To Multi-National Companies

Introduction

Britain has been a part of the European Union (EU) for about 46 years since 1 January 1973. At the present moment, the volatility of the UK (England, Scotland, Wales and Northern Ireland) market has been an escalating concern amongst multi-national companies (MNCs) operating in the UK due to the foreseen and unforeseen implications of BREXIT. MNCs are businesses that manage a wide range of operations within their home country as well as in other parts of the globe. If BREXIT occurs in 2019, this will adversely affect MNCs’ day-to-day operations in the UK, so it is presumable that MNCs will have to restructure their business strategies in order to remain competitive in the market. BREXIT is a tie-up of two words; ‘Britain’ and ‘exit’. The usage of the word, BREXIT, is a more convenient way to touch on the matter of UK leaving the EU. EU is a collaboration of 28 countries, galvanizing towards better economic communication and co-operation amongst each other, hence casting down the plausibility of any trade wars to provide assurance to MNCs in the EU. The purpose of this dissertation is to point out the prospects and predicaments to MNCs within the UK in relation to BREXIT. This dissertation starts off by introducing the opportunities of BREXIT towards MNCs in the UK then the risks. Both these matters mentioned will incorporate the repercussion since the arising topic of BREXIT in 2016 and future implications towards businesses in UK if UK leaves EU on 29 March 2019.

Opportunities

Firstly, MNCs in UK are likely to benefit in the long-run although they are anticipated to face some obstacles in the short-run, such as the restriction of trading freely in the EU after BREXIT. Jon Moulton, founder and managing partner of private-equity firm Better Capital LLP, mentioned that “The long-term approach is to have better, simpler, more properly run regulation than the rest of Europe”. If UK sets looser bureaucracy for businesses, it would attract more investors into the UK as the process of doing business is relatively more convenient. For example, communication is more rigorous when working with EU countries due to the language barrier and this reduces incentive for greater productivity hence leads to lower investment levels. Therefore, Britain’s decision to leave EU could be a sensible move to construct an economy with more straightforward rules and reduced bureaucracy as MNCs in UK do not have to abide by the laws of the EU in particular, agricultural laws or justice and home affairs.

Secondly, according to Lila Snyder, president for global e-commerce at Pitney Bowes Inc. , there could be a hike of sales and revenue for MNCs operating in the UK in the short-run due to BREXIT. In July 2016, it was a shock to many researchers as some of them were proved wrong when trade levels actually rose by 0. 04 as compared to the previous year. Only two days after Britain’s vote to exit EU, the market price of sterling had dropped by 10%. As the value of pound (£) declines, it increases the purchasing power of consumers from other countries because UK goods and services are now cheaper. As said by Mark Carney, Governor of Bank of England (BOE), expansionary monetary policy will be carried out by the central bank. Over a month after the June 2016 referendum, the tactic utilised by BOE had gained investors’ confidence, resulting in more income for MNCs in UK. These boosts in UK exports would give improvement towards UK’s net exports (X-M) and subsequently lower the country’s large current account deficit (CAD), uplifting it’s credit rating.

Risks

Although BREXIT brings around opportunities towards MNCs in the UK, it also causes risks. The fact that 50% of UK’s goods were exported to the EU in 2016, BREXIT will hugely affect UK’s balance of payments. The first risk of BREXIT is there could be a sharp spike in the level of unemployment (UE) rate in UK. Larry Bass, head of Shinawil, the TV production company, has a strong belief that Ireland will be the Hollywood of Europe after 29 March 2019. There are many big-league movie franchises that are based in the UK and to name one; Harry Potter. Bass claimed that some of these major movie brands may opt to relocate to another country i. e. Ireland, where it is less of a hassle to travel around EU due to looser red tapes. If only one or two major UK movie franchises transfers to Ireland, it could still massively advantage the Irish economy by generating beyond 10,000 creative job opportunities for the people of Ireland. However, a huge pool of UK’s artistic workers will be made redundant thus contributes towards the rise in UK’s UE rate.

Secondly, the enactment of June 2016 (Britain’s vote to leave EU) may result in decreased investment levels for MNCs running their business in the UK. This point is backed up by Barbour ABI’s declaration that the number of trade deals in the infrastructure industry had dropped by a significant 20% in July 2016 as to the previous month, which means there are less customers for MNCs in the UK. As claimed by John Cridland, the CBI director general, 'Firms want what is best for jobs and growth, and there is genuine concern that an exit would hit business investment and access to the world's largest trading bloc'. This is due to the fact that UK will then have to take on more red tapes and bureaucracy if they were to trade within the EU, after BREXIT. As reported by CBI’s survey, 86% of firms and traders have voiced out that UK’s previous freedom to penetrate the EU market will diminish. Nigel Green, deVere Group’s CEO, also suggested that there will be countless of changes in the UK market until the final BREXIT agreement is polished. Until then, there will be no end of uncertainties on how BREXIT will affect the UK economy. In consequence, the current precarious economy in UK lowers business confidence hence investors will opt for countries which are more stable, detrimentally affecting FDI inflows into the UK. On top of that, the UK Treasury also said that the collapse in asset prices would only deter external investors’ interest because of the high risks. Thirdly, MNCs in UK will be obliged to greater costs and more sophisticated management for its company post-BREXIT. For instance, MNCs in the UK will have to suffer trade barriers like tariffs, customs or even embargo if they plan to export its goods or services into the EU. The head of EU, Michael Dean, had commented that protectionism such as tariff, quota or embargo could be borne upon Scottish businesses if Scotland decides to stay put as a member of UK. If they remain, Scottish MNCs will be charged import or export taxes hence this reduces the profit levels for them. In the long-run, this could be a more serious setback when other MNCs in other countries overtake Scottish MNCs in the industry, lowering the international competitiveness of Scottish products. Furthermore, the EU may fix very strict red tapes for imports, such as implementing various types of exemptions or complexities which are sloppy. This is to delay the process of Scottish exports from entering the EU market.

Conclusion

Since the 2016 BREXIT referendum, it is indisputable that more risks have been yielded rather than opportunities towards MNCs in the UK. Conferring to George Osborne, Exchequer’s UK Chancellor, the vote will cause a retardation of economic activities in UK, resulting in a 3. 6% deterioration of the country’s gross domestic product (GDP). Besides that, UK employment is also forecasted by the UK Treasury, to decline by a minimum of half a million. Other than that, lower FDI levels, greater costs and more sophisticated management are representations of threats in view of BREXIT. As an illustration, profit-maximising firms in the UK may spend an abundant amount of time looking for new suppliers that offer the best deal, at the least cost. In addition, the persistent uncertainty on the aftermath of BREXIT has triggered a consequential drop of business investment by 2. 2% from the last quarter of 2017 to the third quarter of 2018. However, this discussion could have gone more into detail by conducting manifold face-to-face interviews with the directors of MNCs functioning in the UK, gathering their honest perspectives on the BREXIT deal to compose a more established set of arguments. Therefore, the summary of the findings stated is parallel with the 48% of UK voters who are against BREXIT.