Difficult to remember Brexit amidst the Covid crisis? It’s still there. Caterina Moschieri and Daniel J. Blake, Professors at IE Business School, analyse the far-reaching implications of Brexit on organisational structure and strategy.
Based on the paper titled “The organisational implications of Brexit” penned by Caterina Moschieri and Daniel J Blake in the Journal of Organization Design, 8:1.
From the end of the Second World War through to the early 1970s, the world witnessed growing economic integration facilitated by the creation of international institutional arrangements such as the World Trade Organisation, ASEAN, and the EU. Fast forward a few decades and look around one more time. This time you’ll see the Catalan uprising for independence, President Trump’s withdrawal from the Trans-Pacific Partnership and Brexit. What do these events have in common? The answer: the rather disquieting, and yet growing, sentiment of anti-globalisation. Let’s take Brexit as an example to highlight the unsettling changes on company strategy and organisational structure that inevitably follow a powerful disruption to the institutional foundations of economic integration.
When the gateway to Europe starts crumbling
For many non-European countries around the world, the UK has been the perfect “gateway to Europe.” A stable currency, relatively liberal economic policies and strong institutions made the UK an ideal manufacturing hub. The automotive industry, for instance, is an excellent example of a top exporter from the UK to Europe. But, Brexit is going to change the game by, in all likelihood, raising barriers to trade and incentivising UK-based exporters to transfer much of their production process from the UK to countries which are part of the EU.
What is less obvious is that even firms which were producing predominantly for the domestic market will suffer. These firms often rely on raw material imports from the EU for their production. With Brexit looming on the horizon, these firms have to either find local suppliers or vertically integrate more of their value chain domestically. The firms who stand to gain from this transformation are the UK-based manufacturers of substitutes for European imports who can seize this opportunity to strengthen their position in the domestic market. This, however, could be countered by European suppliers who may choose to establish independent operations in England in order to hold on to their markets there.
Unfortunately, tariff barriers and mounting transaction costs constitute only the tip of the iceberg. A major likely outcome of Brexit would be the loss of regulatory harmonisation, which will require firms to ensure compliance with two separate sets of certification procedures for their products – one for the EU and another for the UK. This would cost them not just money, but also a lot of time.
Say goodbye to ‘passporting’…
Thanks to a process called ‘passporting,’ London-based financial institutions had the right of automatic access to European financial markets owing to the license they have from the UK government. But once Brexit is finalised, the authorisation by the UK government will cease to be a valid passport to operate in the rest of EU. On top of that, the European Central Bank has restrictions on the extent of operations that European banks can establish in “third party” countries, and this will come into effect for the UK once Brexit renders them a “third party.” As such, it’s no wonder that many banks have already begun to strengthen their operational presence in other financial hubs such as Paris, Frankfurt and Dublin.
The aviation industry is in a similar position with carriers such as Ryanair and EasyJet facing a potential struggle to maintain licenses to operate between EU destinations. Such firms may look to restructure their ownership to ensure they are minimum 50% EU owned and controlled in order maintain access to the intra-EU travel market. But that is certainly easier said than done.
…And hello to brain drain
With English being a commonly spoken second language in the EU, the UK has been a popular destination for some of Europe’s best talent and consequently, a centre for innovation. But post-Brexit, barriers to immigration are likely to be much more significant given the fact that immigration was a dominant issue in the debate surrounding the Brexit vote. These barriers threaten the supply of skilled and unskilled workers to the UK, and the overall competitiveness of Britain’s workforce. A post-Brexit brain drain from Britain may be further exacerbated by the limited access that British universities will have to European funding for research. Once again, firms investing in research activities in the UK may have to start shifting their R&D activities progressively outside the UK. But the good news is that they can relocate to emerging markets since proximity to market is not always critical when it comes to R&D activities.
Re-organising in the face of uncertainty
Multinational firms operating across Britain and Europe will soon find themselves operating in increasingly distinct jurisdictions. This may trigger them to create a regional structure, similar to EMEA, to account for the proximity, and yet the differences, between the EU and the UK. This would call for a shift towards a multi-domestic or transnational strategic orientation with greater autonomy granted to local units operating in the EU and Britain respectively to enable them to adapt to different local regulatory and institutional demands. Consequently, organisations, in terms of vertical structure, business units, individual roles, and reporting lines will be affected significantly.
It took over two years of wrangling between the EU and the UK to reach a Brexit deal. Moreover, negotiations over the future of the EU-UK economic relationship have only just begun and progress is likely to be delayed due to the region’s efforts to contain and manage the COVID-19 pandemic. Under this prolonged cloud of uncertainty, many firms will continue to withhold investments in the UK. They are hedging their bets by setting up operations in mainland Europe while not completely closing down activities in the UK yet. Regardless of the post-Brexit deal that is reached, Britain has lost some of its credibility as a country with a reliable and predictable business environment.
Bearing the brunt of Brexit
Brexit will, beyond a vestige of doubt, be accompanied by high adjustment costs. These will include direct increases in transaction costs associated with restriction on cross-border activities as well as the costs associated with re-locating employees and operations. These additional costs will be passed on to shareholders and consumers too, meaning all concerned parties stand to lose.
One might assume that domestic firms that are not engaged in cross-border activity will suffer less, but that is not necessarily the case, particularly for British companies. For instance, the British construction industry still currently benefits from easy access to labour and just-in-time supply of raw materials from the EU. A post-Brexit disruption in these two areas will inevitably affect construction firms.
Although we still do not know the final terms that will govern EU-UK economic relations post-Brexit, a difficult and costly period of adjustment beckons. Such is the price of operating in a global business environment where the institutions that guide the global economy are always subject to pressure and change, and where nation-states have the scope to quickly re-establish borders that had become increasingly irrelevant.
- View Prof. Caterina Moschieri and Daniel J. Blake‘s academic profiles
- Discover IE Business School
- Read a related article: EU Trade Agreements and their True Impact on Consumers
- Download this feature and others in Global Voice magazine #13.
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