Why Brexit Matters to Growth Companies

06/13/2016 11:21 am ET

The Grand Experiment that is today’s European Union began to take real form after the devastation of the Second World War. The political and civic leadership that had suffered two catastrophic wars, which destroyed large swaths of Europe and many other parts of the world, believed that closer trade, coordination of policies and a greater shared political understanding could prevent further conflict and create a more prosperous community of European nations.  In 1957, significant moves were made to liberalize trade and reduce tariffs between European countries leading to what became known as the European Economic Community (EEC or Common Market). Years of negotiation focused on harmonization of regulations, areas of common political interest and common social policies ultimately led to the formation of the European Union (EU), which was ratified by the Treaty of Lisbon in 2009. The EU now has 28 member states, over 500 million inhabitants and represents a total GDP of over $19 trillion — about the same as the USA.

As with any group of nations, there are more than enough issues to foster disagreement and discontent, and the economic collapse of 2008 generated greater fear for future economic prospects. In the UK, the “Euro-skeptics” have mostly focused on perceived loss of sovereignty, fear of losing control of important economic decisions and, most recently, immigration. This has led, after years of postponed promises, to the forthcoming referendum on whether the UK should stay in the EU or leave. Both sides of the debate are filling the information channels with predictions, fearmongering and plenty of hot air!

Much has been said about the impact of the “Brexit” on governments and multinational organizations. But the impacts are still profound for small, venture-backed, growth companies looking to build a global market. My company, Lehigh Technologies, is working across many segments in the chemical industry in many countries around the world. Europe, a market we have been developing for over two years now, will be a crucial part of our growth strategy. So why is the outcome of the referendum important for companies such as our own?

Any small company establishing a foothold in Europe needs a deep understanding of regional trade agreements to establish an effective business model. The Brexit discussion has introduced uncertainty around future trade relationships with the UK. For companies like ours, it would not make sense to establish a plant that could face tariff burdens exporting to the members of the EU.

Shipping products across Europe before the Common Market had several challenges and inefficiencies that many of us have forgotten about. At each country border, trucks were checked and perhaps inspected—in all cases slowed down. The delays cost truck time and drove up costs. Shipping times were unpredictable and put more inventory in transit, hence more inventory was being held by customers, forcing companies to carry higher working capital. Multinationals can more easily overcome these obstacles, but for smaller companies carrying higher working capital diverts cash from other, more productive, uses. If the UK exits, doing business with UK customers will clearly become more expensive.

Before the introduction of the Euro, the back office costs for doing business across Europe were much higher than today. All the paperwork (and then it was paper!) required to convert funds from one currency to another, maintaining multiple accounts, delays in banking transactions and the inevitable errors, all led to higher cost and inefficient trading. If Brexit leads to more countries leaving-going back to the bad old days with higher administrative costs and a slower paced business environment can only hurt growth stage companies.

The free movement of people across the EU has allowed companies to hire the best and brightest, regardless of country of origin. It has led to much better educated, trans-national young professionals choosing where it is best to study, live and work. This allows growing companies to recruit highly experienced commercial talent acclimated to working across many countries, languages and cultures. With the UK outside of the EU, ambitious UK professionals will find it much more difficult to pursue rewarding careers in Europe.

Instability is always bad for business, and uncertainty slows down investment in people and assets. Brexit and the potential consequences can only make it harder for companies to grow. A stable Europe, albeit with plenty of issues to work through, is much better and allows companies to focus on growing their markets and servicing their customers.

In a few weeks from now the results of the UK referendum will be clear. A narrow outcome-either way-will likely prolong the uncertainty and provide little resolution. A decisive “stay” vote will be good for the UK, good for Europe and good for venture-backed growth companies like Lehigh Technologies. Fingers crossed.

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