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Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited
Brexit and international business
In the last 100 years or so, the world has seen different facets of globalisation and nationalistic tendencies. Before the First World War, the movement of people across the globe was easy as long as one could afford the travel cost. There were no passport or visa requirements. In a way, globalisation was in place without any explicit effort to usher it in. Between the First World War and Second World War, there was fierce nationalism. The nations or at least the ruling regimes of that time believed that prosperity and wealth could be assured by creating protective walls between nation states. But the Second World War changed that view.
After the Second World War, efforts started towards globalisation, albeit, in measured steps. The creation of multilateral bodies such as the World Bank and International Monetary Fund was a major step in that direction. A little later, six countries of Western Europe, through the Treaty of Paris, took the first step to develop institutions for co-operation in some specific economic sectors such as steel and coal. These countries were Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. Then, through the Treaty of Rome in 1958, they formed the European Community (EC). Later on, Denmark, Ireland, the UK, Greece, Portugal and Spain joined in phases. Thus the strength of EC became 12 by 1980s. Starting initially, to create a barrier-free trading zone, the Group became a Customs Union, which meant a form of economic integration where all tariff barriers are removed within the group and a common trade policy is adopted towards non-members. So, the outside countries exporting to the Economic Bloc would face the same tariff levels. The next level of integration was the creation of the Common Market where, along with the common trade policy, there was also freedom of mobility of factors of production such as labour and capital. Going further, the Group attempted to create a unified monetary and fiscal policy, same tax structure and common currency. Finally, the name of the Bloc was changed to European Union (EU).
While these measures to intensify the integration process were being taken, the expansion of the EU continued. As on 23 June 2016, the day of the Brexit referendum, the number of countries in the EU stood at 28. European integration has seen half a century of peace, stability and economic development. Needless to say, EU wields enormous economic and political power in the world today.
The best thing about this unification is that it has been happening through a democratic process. Each new country joined after the voters of the country wishing to join decided to do so through a referendum or parliamentary approval. The UK, though not a founder member, joined the Union in early 1970s. There have been always some voices against the EU and their functioning in all member countries; the UK was no exception. But few believed that a day would come too soon for Brexit to happen. The term is a combination of two words: Britain and Exit. Now that the British voters have made a choice on 23 June 2016, with about 52 per cent in favour of exit and 48 per cent against it, let us look at tentative political and economic consequences of this vote.
Two major reasons have been highlighted as the cause for Brexit. The first one is the unceasing wave of immigration from within Europe as well as from other parts of the world. Educated and technically qualified immigrants pose no problem; in fact they add to the economic strength of the country through their skill and labour. But the problem comes from those who, in the perception of the local population, come to seek the benefits that the State provides in terms of social security, health services and public services. The local population tends to believe that the immigrants raise the level of unemployment and lower the wages of existing workers.
The second reason for the voters in favour of Brexit was possibly their perception that the EU headquarters in Brussels (Belgium) imposed too many rules and regulations on British citizens, and that this situation can be reversed only if Britain opts out of the EU.
Brexit poses a general threat to European integration in as much as citizens of some other countries may think on similar lines as British citizens. Political leadership in the region will have to play a proactive role to contain this imitative sentiment wherever and whenever it arises.
The immediate economic consequence was seen in terms of the British pound falling by more than 10 per cent and a downward trend in all major capital markets. Of course, these changes were temporary since financial markets, in general, are much too sensitive to any politico-economic event. However, the long-term consequences would be felt at the firm level as the process of formal exit sets in.
The capital of the UK, London, is the world’s leading financial centre. Firms from the world over use this centre to raise capital and to invest abroad. London Interbank Offered Rate (LIBOR) is used as a benchmark interest rate. The question is: what will happen to the status of London as a leading financial centre after Brexit?
Many international business firms have been using the UK as their gateway to enter the large EU market. Now many of them may have to curtail their operations in the current form and spend resources to relocate in some other part of EU. This reorientation and relocation will have a cost that will dent their profitability. For example, hundreds of Indian companies have set up their affiliates to do business in EU. Some of the leading names are Tata Group, Infosys, HCL etc. Can things continue for them as usual after Brexit?
The UK itself will have to renegotiate many bilateral and/or multilateral economic agreements with different countries, which hitherto were dealing at the EU level only. These renegotiations and rearrangements will have an impact on international operations of hundreds of business firms.
Be that as it may, the most immediate task for the UK Government and the EU headquarters is to carry out the Brexit in legal terms. The UK continues very much to be part of EU until it is notified to be out of EU. Both sides will have to form teams to negotiate a formal legal exit. All the EU laws and regulations apply to the British people and their institutions for the moment. Things will change only when Brexit is legally notified, after a due process of law.
So far, English has been the leading language in the working of EU institutions and businesses. Will the dominance of English continue or will that change?
Till all the questions arising from the Brexit are settled, international companies will continue to factor the risk and uncertainty in their operations. Let us wish that a more meaningful, beneficial and humane integration and globalisation continue marching forward despite the setback like Brexit.
The issues discussed above are examples of dynamics that international businesses face. As researchers and practising managers, we need to look into these situations more closely. We invite academics to deal with research issues arising out of these dynamics.