Introduction

In the year 2016 United Kingdom voted to move out of the European Union which is a single market union. This was mostly driven by the need to close borders and restore UK markets which had suffered from increased competition from EU based companies. There was also increased unemployment that was attributed to influx of immigrants from other EU countries who were willing to be paid much less compared to UK residents thus rendering a number of UK citizens jobless. This created anti EU sentiments that led to the exit of the United Kingdom from the economic and the monetary union. There were challenges that came with the exit of UK from European Union which included supply chain challenges and loss of key markets. These challenges were evaluated in the light of theories such as Dunning eclectic paradigm which indicated that the key sources of competitive advantages of firms were possession of ownership, location and internationalization advantages. The aim of this discussion is therefore to examine the challenges and opportunities that are encountered by UK as a result of Brexit. The first part of the discussion is the introduction followed by the main body that discusses the theoretical frameworks, challenges and opportunities affected by Brexit. The last section is the conclusion.

 

Conceptual or theoretical framework

In order to identify the challenges that Brexit brought about to companies in UK, there were theories that were applicable in identifying such issues internationalisation theories, international value chain model, entry modes and Europeanisation theory. For this analysis the internationalisation theory using Dunning eclectic paradigm or OLI framework and Europeanisation theory were preferred. The OLI theory examined why firms internationalise their operations and the factors that they consider in order to move to other markets. This theory held that there three critical factors that made companies move or trade in the international markets and they are ownership advantages, location advantages and internalisation advantages (Rahman et al.., 2018). The ownership advantages were advantages that accrued to a firm as a result of its organisation and ownership advantages. This included management capabilities, ownership of critical assets and infrastructure that helped firm either to reduce costs or access and control huge market or supply chains. Firms with the ownership advantages preferred export as a means of internationalising and expanding to other markets.  The other critical factor for internalisation was that of location advantages (Kim and Aguilera, 2016). Some location had advantages such as low cost labour, access of technology or availability of raw materials and capital that made the firms to be very competitive. Hence, firms could prefer to internationalise or relocate operations to geographical locations that were enabled the firm to access these location based resources.  According to Peng and Meyer (2011) the internalisation advantages focused on the advantages that a firm acquired as a result of retaining its production and value chain. This was achieved through creating of joint ventures or greenfield investments in foreign countries. This theory was advantageous as it evaluated firms’ capacities to internationalise and operate in the international markets. It also helped the firms to identify locations that had favourable regulations and conducive business environment for the business to operate profitably. This theoretical framework was essential in evaluating the challenges that firms were likely to encounter as a result of UK exiting from EU. The framework could assist in demonstrating the whether EU provided the UK based firms with ownership, location and internalisation advantages (Johnson and Turner, 2016).

The other framework relevant to this discussion is the Europeanisation theory. This was the integration economies through adoption of common market policies among the European states in order to create a single market union. The Europeanisation implied the use of common market policies across all European countries Johnson, D. and Turner, C. (2016). This implied similar policies such as the monetary policy, the competition policies, regulatory and standards policies as well as immigration policy. The aim of this was to harmonise accessibility of markets and locations so as to have free movement of labour, goods, services as well as information across the entire European continent. This was anticipated to create trade and market opportunities for companies in the EU through the market access, accessibility of labour and through availability of goods and services in the entire continent. This was expected to give companies within EU access to a large markets as well as access workforce diversity (Guay, 2014).  This theory was advantageous in acknowledging advantages that Europeanisation brought to firms within the EU such as: market access, availability of labour and accessibility of affordable services due to economics of scale provided by the large market. Thus exit from EU meant loss of these benefits. This discussion sought to identify review the challenges that were likely to be experienced as a result of moving out of the single market Union.

 

Critical review

Sectors affected by Brexit in UK

Brexit had its share of implications on companies that were in the United Kingdom. These implications mostly affected companies that were in manufacturing sectors, technology automotive and agriculture industries. The manufacturing sector was mostly faced by the shortage of manufacturing components especially the inaccessibility of chips and other critical components required in manufacturing (Johnson and Turner, 2016). The situation was made worse by shortage of affordable labour that was mostly provided by the immigrants. The immigrants were providing affordable labour in the UK.  The automotive industry was equally negatively affected due to shortage of labour as well as due to inaccessibility of the EU market. Also the industry was heavily impacted by the inaccessibility of raw materials and components from EU countries such as Germany due to high costs as a result of imposed trading tariffs (Figus et al., 2021).

The services industries such as retail industry were also impacted by shortage of labour and disruption of supply chain which led to slowdown in service provision. The services sector were mostly affected by the shortage of labour specifically in industries such as retail as low cost labour from EU members was no longer available. This was a result of travel and immigration rules that locked out EU citizens from migrating to UK. There were also implications of Brexit on the financial service sector where over 7500 jobs were lost (Bailey and de Propris, 2017).  . This was a result of relocation of major banking companies from UK to EU countries. This was due to the need for the firms in the finance sector to possess location advantages especially by ensuring that headquarters were in countries that could give them access to the EU market and location in UK after Brexit meant loss of the EU market (Barron and Boutary, 2021).

The other sector impacted by the Brexit was the stock market. After the announcement of the Brexit the stock market fell thus demonstrating the negative implication that Brexit had on the stock market.  It was anticipated that with Brexit UK would lose the bargaining power that it had courtesy of EU. EU was a large trading block with trading size of over $15.6 trillion annual trade within the block while UK had a trade size of $2.8trillion (Stolk and Hafner, 2021). With UK exiting this market, it was obvious that UK would get trading terms that were less favourable as it had a lesser bargaining power compared to the EU. As a result it was expected that companies within UK would have lesser barging power and lesser access to the EU markets as well as markets outside the EU (Whitman, 2016).

Challenges brought by Brexit to UK businesses

One of the challenges that Brexit brought to the UK was that of supply chain disruption. The supply chain disruption came as a result of tariff and non-tariff barriers that were imposed on exports to UK by EU members (Guay, 2014). This made the cost of importation high. Also, Brexit came with immigration rules. These rules reduced the available labour and created supply chain disruption due to non-availability of labour. Also supply chain disruption came as a result of non-tariff barriers that were mostly used as a result of restricted market. The Brexit implied increased customs for UK imports from EU. This saw reduced supplies by suppliers due to the increased customs and regulations. There were also tariffs on critical imports such as aluminium and steel which were critical in manufacturing (Barron and Boutary, 2021). Most of the companies were not ready for the increased tariffs and hence the high tariffs led to disruption of production as well as delays in delivery of goods to the UK market. Thus, creating shortage of supplies intended for the UK market. The supply chain disruption implied UK lack of location based advantages required in manufacturing. Instead UK had location based advantages related to the services sector.  (Moradlou et al., 2021).

The other crucial challenge brought about by Brexit was the workforce challenge. Brexit led to the closure of UK from immigrants (Peng and Meyer, 2011). The immigrants were mostly those from other EU countries. The closure of immigrations stopped the flow of affordable labour to UK manufacturing and services industries that were labour intensive. The UK experienced labour shortage as a result of Brexit since most of the non UK citizens had to leave for other countries. This made the cost of production in the UK to go higher as a result of high cost labour. It also led to supply chain disruption as industries grappled with lack of labour to support production. The other reason why Brexit had negative implication was that it led to the discontinuation of the UK Erasmus student exchange program. This was a student exchange program for the EU countries that enabled immigration of students to other EU countries. This was meant to enhance integration between the countries through the international exposure of the students (Ridgway, 2017). This closure of this exchange implied shortage of highly skilled workers that came from other EU countries through the student exchange programs. This made UK to lose location based advantages that it possessed in the services sector due to availability of highly skilled workers in the country.

Then there was the challenge of reduced foreign direct investment. The Brexit came with a lot uncertainties that made investors to reduce their investment in the United Kingdom (Bulmer & Quaglia, 2018). This was mostly attributed to the UK’s reduced market as it Brexit restricted UK based companies to UK market. Hence foreign investors that were interested in accessing the entire EU market had to shift their operation to another EU member country instead of United Kingdom. For instance banking sector and banking companies moved their headquarters from UK to the continental Europe and other countries in EU that could enable them to continue accessing the EU market. This move alone was saw the movement of over $1 trillion work of financial assets move from UK to the EU (Thissen et al., 2020). Also foreign direct investors were cautious about the shrinking UK market and the implications that it could have on UK markets that needed reduced profitability as result of reduced market access. Thus the Brexit came with the challenge of reduced investment into the United Kingdom’s market.  This demonstrated loss of location and internalisation benefits that came with UK’s EU membership. Most of the foreign direct investment that was intended for UK was moved to other markets that could enable the companies to access the entire EU market. The loss of FDI particular had negative effect on businesses especially small and medium enterprises as this implies loss of capital and loss in terms of opportunities of partnership and expansion into foreign markets (Dhingra, Machin and Overman, 2017).

Then there were challenges that were related to the intellectual property rights and agreements. The intellectual property rights prior to the Brexit were mostly regulated by the EU Intellectual Property Office (Billing et al., 2021). However, with the exit of UK from the EU, it was anticipated that there would be intellectual property rights disagreements.  This is because the EU trademarks and copyrights no longer covered the United Kingdom. This meant that for companies in the United Kingdom needed to file trade marks for the EU market in order to retain their copyrights for the EU market (Glunz, 2021).  Additionally, it implied that EUTM (EU Trade Mark) was no longer recognized in the United Kingdom and EU companies had to file for UK trademarks in order for the trademark to be actionable in the United Kingdom. This duplication of trademarks filing increased costs of doing business in terms of registering and filing for new trademarks in the United Kingdom. This acted as a challenge for businesses in the United Kingdom (Islam, 2021).  Another implication was that the UK attorneys for patents and copyrights were no longer admissible to the EU Intellectual Party Office and Court. They had to seek alternative qualifications for them to qualify to appear before the EU Court of Justice and EU IPO. This was expected to put the UK companies and copyright holders at a disadvantage as they were likely to lose ownership of the crucial copyright unless they find an alternative. It also implied loss of ownership advantages provided for in the Dunning eclectic paradigm on the ownership advantages of firms.  The ownership advantages were mostly derived from the ownership of copyrights and patents as well as the enforcement of these patents and copyrights. With Brexit, UK firms are likely to lose their ability to enforce patents especially those that are not protected by WTO Intellectual Property Organisation (WIPO) agreements as the UK can now resort to the use of WIPO instead of EUIPO (Giles, 2021).

Then there were also regulatory and standards challenge. With the EU, most of the regulatory powers rested on Brussels. This meant that regulatory agencies in UK were enforcing the regulatory agreements and policies as well as standards that had been set in Brussels (Sindakis and Aggarwal, 2022). With Brexit, UK gained regulatory autonomy. This implied that UK now had the responsibility of setting the trade regulations and policies and standards for products and services.  This created a challenge for UK as it implied that the country had to diverge from EU regulations and put in place its own set of regulations. One of the challenges that emanated from Brexit was that EU indicated that goods from UK placed in the EU market will have to need the EU standards and regulatory framework (Sindakis and Aggarwal, 2022). This implies that UK exports they faced an extra huddle and extra requirements of adhering to the EU regulatory framework while maintaining UK’s regulations and standards. This was anticipated to increase costs of doing business in UK especially for manufacturers and traders in UK intending to access the EU market. On the other hand, it implied that’s EU countries access in UK market also have to meet UK requirements. The divergence of regulatory framework between UK and EU implied increased costs of doing business which were likely to have negative implications on companies in the UK seeking to sell goods into the EU single market (Bulmer and Quaglia, 2018). This was likely to make UK lose location and internalisation based advantages especially for firms seeking to export their products to EU countries as they had to contend with two types of certifications and standards in order to operate in the EU and UK markets.

Opportunities brought by Brexit

Nonetheless, there were opportunities that came with Brexit one of these opportunities was that it allowed United Kingdom to establish new trading partnerships with other countries (Kenourgios, Dadinakis and Tsakalos, 2020). Previously the trading relationship that existed was between the EU and the other trading partners such as countries like US, China, Japan, Brazil and India which have higher market due to their large populations. However, with the Brexit, UK was in a position to negotiate for better training terms with these partners. It enabled the country to negotiate for trading terms that were specific and favourable to the United Kingdom rather than to the entire trading block.  This helped the country to build good and better trading deals with these partners as more trade barriers could be eliminated.  The UK businesses could now access to bigger and larger markets that were previously were cautious about the EU trading block (Billing et al., 2021).  This was anticipated to improve the productive capabilities of UK manufacturing especially due to availability of huge markets outside Europe.

The other opportunity that was provided by Brexit was that of localised production. Prior to Brexit there was over-reliance on the global supply chains which were disrupted as a result of Brexit. Suppliers from EU became more expensive as a result of non-exemption of UK from tariff and non-tariff barriers (Moradlou, et al., 2021).  This high cost of supplies led to investment in local production and building the capacity for local production of critical components in each industry. For instance UK automotive and technology industries have started investing in local chip manufacturing to reduce its reliance on EU based chip manufacturers. The increased local production implies increased jobs for local citizens and increased gross domestic product as a result of increase production. Local production is likely to enhance other industries due to spill over to industries such as finance and the housing and sectors which can help in providing support services to the workers. Thus, brexit had the advantage of spurring the local production and reducing offshore production which was negatively affecting the country through unemployment and loss of jobs. The local production repatriated jobs back to the country.  The localised production was anticipated to stir up manufacturing and which could give the country location based advantages especially due to availability of local labour. Also localised production eliminated supply chain disruption occasioned by delocalisation which has been identified where countries stop importation of critical supplies to other countries.  Hence UK will have its supply chain operational especially in regard to the supply of critical components (Bailey and de Propris, 2017).

 

Conclusion

In conclusion, this discussion identified that the Brexit had its implications on UK economic sectors. The Brexit affected industries such as manufacturing negatively due to supply chain disruption that eventually stopped manufacturing. The services industries were equally impacted by Brexit due to staff shortages as a result of restriction on mobility and immigration into UK from EU. The other sector impacted was the financial sector. This was due to the movement of headquarters from UK to EU countries leading to loss of jobs in the financial sector, the stock market was also negatively impacted by the Brexit. The main challenge with Brexit was supply chain disruption. This denied UK firms the internationalisation and location based advantages that came with having global value chains.  The other challenge was that of loss of FDI. The Brexit brought about uncertainties about the future of the UK market and many of the investors were not comfortable with investing in the UK market. This reduced the FDI into UK relatively compared to other EU member countries. The other challenge was that of intellectual property rights and agreements. The UK intellectual property not registered with EU was not recognised by EU. Also lawyers not registered in EU could not appear before EU court of justice were also not recognized. This increased costs of filing patents for small companies without capabilities of filing in EU. Despite these challenges there were advantages that came with exit from EU. One of the benefits was that that UK gaining new trading partners such as Canada, Australia, China, and Brazil which had better terms of engagement than EU. Other advantages was that of enhanced localized production which helped in alleviating supply chain disruptions.

 

 

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