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The big impact of Brexit on Ireland’s small businesses

The big impact of Brexit on Ireland’s small businesses

Opinion: there is no doubt that Brexit will impact small businesses, but the impact is and will be different for different sectors

The economic and political uncertainty surrounding Brexit is a constant in our news cycle since the referendum in the UK in 2016 and there is little sign of the uncertainty dissipating. Estimates of Ireland’s national level of Brexit trade-related risk exposure are in the region of 10% of GDP. Estimates of this magnitude are not surprising, given our trade and business links to the UK.

Ireland’s small businesses particularly exposed to Brexit. In Ireland, over 90% of businesses are micro-businesses with less than 10 employees and almost eight percent are small businesses with between 10 and 49 employees.

There is no doubt that Brexit, whatever its final form, will impact small businesses, but the impact is and will be different for different businesses. Businesses that trade with the UK will potentially be affected by currency risk, trade tariffs and new regulations. Small and micro businesses account for 85% of all Irish enterprises exporting to the UK, with micro-businesses accounting for over half of all Irish firms exporting to the UK.

For some businesses, supply chains will be affected – for example, businesses that source products, components or services from the UK. In fact, Irish small businesses are likely to be disproportionately affected by a shock to supply chains as they comprise the majority of importers in certain sectors.

While some businesses do not have direct links with the UK, they will be affected by any contraction of the Irish economy in the aftermath of Brexit. There is evidence that Irish consumers are already predicting difficult times ahead as evidenced in February’s Consumer Sentiment Index. The uncertainty caused by Brexit will also be an impediment for potential start-ups. Exporting to the UK usually serves as a training ground and testbed for new businesses and entrepreneurs.

In fact, the uncertainty caused by Brexit is already impacting how small businesses in Ireland do business. Typically, in booming economies, businesses invest and expand, but Brexit is already adversely affecting business confidence and investment. As Ireland’s economy continues to grow, the AIB Brexit Sentiment Index reports that one in three small and medium-sized enterprise (SMEs) in Ireland have either postponed or cancelled investment plans due to Brexit. We know investing in innovation and technology is important for productivity and job growth, and so delayed investment and barriers to innovative activities in small businesses will have knock-on effects for the wider economy.

A dampening of investment and innovation by small businesses is also worrying in the context of the widening gap between the most productive firms and the least productive firms in our economy. The most productive firms in Ireland tend to be concentrated in a small number of sectors that are largely-foreign owned, and are often referred to as “frontier” firms. Typically, these firms are multinationals. However, non-frontier firms, which are usually smaller and indigenous, have seen declines in productivity.

This situation is not unique to Ireland, with many developed economies attempting to grapple with the “productivity gap” between frontier and non-frontier firms. Economists are increasingly pointing to the diffusion of innovations and best practices as potential drivers of firm productivity. In other words, digital technology adoption, process innovations and best management practices are all important drivers of productivity in small businesses.

It is welcome to see Future Jobs Ireland focusing on “Improving SME Productivity”, with specific ambitions outlined in terms of exploiting technology and business process improvements and improving leadership and management skills. However, data on innovation, digital technology adoption and management skills is limited, particularly for Irish micro-businesses. While micro-businesses account for over 90% of all businesses, they are often excluded from surveys of innovation (e.g. the CSO’s Innovation in Irish Enterprises) and digitalisation (e.g. the OECD’s digital adoption survey) due to sampling limitations.

If we don’t know where we are starting from, how do we measure success, or failure, for that matter? What digital technologies are micro-businesses using? Does ambition, networks or sectoral norms influence adoption and implementation? How innovative are our micro-businesses, not only in terms of the goods and service they provide, but also in relation to processes, organisational structures and management skills?

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