Will Brexit Put the Brakes on British Innovation?

Exit

The UK to exit the EU: What are the Implications for Tech Companies?

Most analysts agree:  the economic consequences of the UK leaving the European Union will be bad, and, in all likelihood, the long-term political implications will be even more dire. For British technology firms the prognosis is no better. Leaving the EU means shortage of skills and limited ability to employ non-UK workers, new trade regulations and tariffs, and uncertainties concerning EU’s data protection directives.

In the chaos of the Brexit we’ve nearly forgotten that one of the primary initiatives of the EU was to catalyze long term economic growth through higher levels of collaboration and deliberate investments in innovation. The EU supports several interlinked programs that provide member states €120 billion over the period 2014 – 2020 for research, development and innovation. The largest program is Horizon 2020 with a budget of just over €70 billion.

After Brexit, UK firms will no longer have easy access to EU research grants. Some are quick to dismiss these grants as they represent only a small fraction of the UK’s technology R&D budget, and point out that the UK is actually a net contributor to the EU budget. Between 2007 and 2013, the UK contributed €77.7 billion to the EU, which amounted to 10.5% of the total EU income from member states, and received €47.5 billion in EU funding (6% of the total).

But they may be missing the point.

I interact frequently with the technology and business community in Europe through client work and conference presentations. I was also privileged to work on two projects for the European Commission and presented the findings to the EC in Brussels, which gave me an interesting perspective about how “united” the European union really is. But that’s a topic for another conversation.

Some of my European colleagues like to criticize the bureaucracy of the European Commission and admire the innovation culture of Silicon Valley and the seemingly endless supply of VC funding for early stage companies.

They, too, may be missing an important point.

We tend to underappreciate the importance of setting long-term goals and funding core research and industry initiatives of the kind that Silicon Valley entrepreneurs and private investors may not be interested in (at least not yet). We underestimate the importance of encouraging global (or, in this case pan-European) collaboration, establishing centers of excellence, creating standards, providing open access to research and innovation information access, and engaging in initiatives that contribute to a strong culture of technology and business innovation.

A good example of one of these initiatives is the European Commission work on the Industrial Internet of Things (IoT) as part of a long-term strategy to digitize the European manufacturing industry. Unlike many industry analysts that insist on counting connected devices and companies that struggle to define their role in this nascent and fast-moving space, the European Commission set a long-term strategy and high level goals for a unified digital market, and articulated the role of digitization and Industrial IoT (or Industry 4.0, as the Europeans prefers to call it) technology. The commensurate long-term funding strategy through 2020 is aimed to drive pan-European research collaboration and work towards common business and societal goals in an always-connected world.  Arguably, this approach (together with the expected bureaucratic overhead and red tape) puts the European Industrial IoT market maturity ahead of the US.

There is clearly an irony here in that while the EU is focused on connectivity the UK would choose to disconnect.

The Brexit drama is still unfolding, and will for some time. Nobody knows for certain the long-term economic and political downfalls for the UK and the rest of the EU.  But it’s quite clear that lack of EU research grants and less collaboration with EU research and technology will hurt the competitiveness and market growth of British technology firms.

Post-Brexit, the UK will be a harder place to start or operate a tech company. While the tech sector may not be hit as hard as others, in particular, banking and finance, companies, entrepreneurs and investors will be assessing their options. One intriguing option is to stay in the UK but seek e-residency in Estonia and become a virtual Estonian.

 


Image: © Joe Barkai

  • André Badenhorst

    John F. Kennedy’s words come to mind when I read this article: “The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger – but recognize the opportunity.” A take-away from this might be fresh look from both the British and EU side onto the next “danger/opportunity”, i.e. Digital Disruption, taking into account the human factor as evident in the Brexit saga. Please refer to this article to follow my argument: http://www.linkedin.com/pulse/5-striking-commonalities-between-brexit-digital-mathias-t%C3%B6lken & https://www.linkedin.com/pulse/how-brexit-reads-like-digital-disruption-justin-roche

    • Hi André,
      Thanks for the comment and the links (BTW, the second link is broken). Of course Brexit represents a risk, but also an opportunity, at least in some people’s minds. The issue we need to debate is the probability and magnitude of the risk vs. those of the opportunity. I see the general parallels to “digital disruption” and, in fact, any organizational transformation triggered by a need/desire for a change. But these similarities and general observations do not necessarily lead to the same conclusion.
      There are also important differences that might make simple analogies dangerous. For one, leaving the EU is one huge irreversible move, whereas transformation is gradual, and the disruptors, if they are smart enough, have the time to align and make course corrections, or even retreat, if necessary. Despite the popularity of the term “disruption”, most of them disappear rather quickly with little or no collateral damage (other than, perhaps, the founder’s pride and VCs’ money). The likelihood of an unprecedented collateral damage here is very high.
      I certainly agree with you that Brexit is a mandate for both the UK and the EU to examine what had led to this saga (regardless of the referendum’s outcome) and how to forge a better future.

  • Larry Stolle

    The stout British heart will persevere. Our friends have made a decision to remove thmeselves from the rule and influence of other countries, politics and elitists…can you say 1776? this was not about being easy…it was about being right!