The one thing that’s for sure is that nobody knows how Brexit will play out.
The United Kingdom voted to leave the European Union last week and there’s been a panic ever since about what sort of effect this could have. One question that’s persisted is whether or not this could deeply hurt the British economy. What’s even more uncertain, is whether this could chill the country’s innovation.
According to Adriana Sanford, a professor of management at Arizona State University and visiting scholar at Georgetown University Law Center, the fear that Brexit brings is that it could cut off connections to European markets. The U.K., she says, is "basically a gateway for accessing the EU market." Lots of U.S. companies are headquartered there, there are several manufacturing firms, and British companies generally work freely with those in different countries. With Britain leaving the EU, it brings up concerns about how trade will be affected.
"For innovation, you need cross fertilization," she says. "London is known for having all types of people working together." Once Brexit takes effect, there will likely be fewer people to talk to and work with.
Ultimately, believes Sanford, what will dictate whether or not British innovation is significantly impacted is what happens with trade. "They’re going to have to negotiate some good free-trade agreements," she says. If not, it could have a huge effect on companies both inside and outside the country. "It’s going to effect our supply chain," she adds.
One of the other issues that could have a major impact is talent sourcing. According to Ed Zimmerman, chair and cofounder of the Tech Group at the Lowenstein Sandler law firm, London in particular is viewed as a wonderful place to acquire new talent—be they from the U.K. or from another European country. Now, the allure of doing business in the city may be diminishing, given recent events. "I’m not so sure it’s going to be as easy for talented people to be as magnetically drawn to London," he says.
The other issue with talent is company acquisitions. Many U.S. companies look toward Britain's capital as a place to buy up smaller companies and thereby open up new offices in new markets. Now, there may be more reticence to make these kinds of moves, with London companies no longer being in the EU. "I think there is significant uncertainty," he says, "about how permeable the border is."
Recession is another problem the country could face. If the country’s economy continues to go south, it could have an obviously significant impact on how businesses and entrepreneurs perform. Says Zimmerman, the moves that larger companies make during recessions "aren’t particularly innovation." They are, instead, "making investments because they don’t want to be left behind."
A 2010 study from the Harvard Business Review echoes this. The authors looked at how large companies fared during recessions over the last 30 years and what sort of preventive measures they made to stay afloat. They found that 17% of companies didn’t survive the recession. And for those that did, 80% of them "had not regained their recession growth rates for sales and profits three years after a recession."
What’s interesting is that this goes against a business myth that’s been passed down for nearly a century: that recessions can lead to unforeseen innovation. "How many times have you read that Procter & Gamble, Chevy, and Camel flourished during the Great Depression because they advertised heavily?" the study asks. Despite these stories, the reality is more stark: Recessions can heavily impact companies. And worse, most companies’ preventative measures don’t bode well for near-future innovation.
Right now, the U.K.’s future isn’t so bleak. There are a bunch of unknowns that will remain that way until the dust settles. According to Sanford, how the company handles trade will impact the country’s future innovation. More, how the country handles immigration. All these policies will dictate whether or not the businesses will be able to "cross fertilize."
As Zimmerman put it, the tech scene is very international—that’s part of its appeal. What could happen to its cosmopolitan nature? "I think that will change," says Zimmerman. "That will have to change."