Ways in which Brexit Affects New Venture Starts Up In UK Health and Construction Industry

Introduction

The UK electorate in June 2016 voted to leave the European Union. Following Article 50 of the Treaty on European Union, Theresa May the prime minister in UK reminded the president of the European Council Donald Tusk on 29TH March 2017. This was after David Cameron in January 2013 alleged a speech where he pledged that the UK government would leave the EU before the end of 2017. The issue was as a result of discontent of the UK residents on EU, including its attempts to increase integration and inflow of migrants from EU to the UK labour market (Mclntosh and West, 2017). Mclntosh and West (2017) explain that the Conservative party was divided in two, on whether to remain or leave the EU. This led the Conservative party to undertake a referendum with Cameron renegotiating the terms of the UK remaining in Brexit which would at least make the UK citizens opt to remain in the union. A hard Brexit would affect different sectors in UK including the construction and the health sector.

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The UK participation in the international market is particularly founded on the geography, rules that are friendly for businesses as well as abundant skilled labour. These factors are the dictators of the country’s comparative advantage in the trade of goods and services.  These same features are significant in determining the direction of foreign direct investment (FDI) flows in the UK. The economic extensively of UK (small) requires the import and the export market in the UK to formulate efficient scale of production while also increasing the accessibility of majority of producers in the UK. The reasons for the correlation between FDI and trade are due to the prominence role played by global value chains in the UK economy. Although the United Kingdom is a chief exporter of services like media, IT and financial, as well as sophisticated goods like cars and pharmaceuticals; it highly relies on importing technical know-how, inputs and capital. According to Office of National Statistics (2016), the largest net FDI flows generated by communications, IT and financial services in 2015, was approximately 39% of the FDI stock in the UK while the manufacturing industry generated 17%.

The History of the UK in the European Union

When the United Kingdom decided to follow the Brexit, it was not for trading purposes instead was a form of economic and political union. However, after the European integration continued, and the national sovereignty of the UK was repeatedly approved, the public became more discontented with the EU. This has led the UK to be the only nation to out rightly opt to leave the union. Although the United Kingdom became part of the EC in 1973, it had applied for EEC membership in 1961 (Baker, David, and Schnapper, 2015). It was after the UK as well as Denmark and Ireland conducted successful referendum upon entry to the union. After entry, Bache and George (2006) argue that the UK made an “in-out” vote in 1975 which made the UK to introduce pressure on the EU as well as renegotiating the EU to favour UK. However, the Prime Minister Edward Heath assured the government that the national sovereignty would not be eroded and made clear that being an EU member would not result to monetary union. 

The reason why the UK joined the EU was to reduce the cost of trade and increase exports. During the period of entry to the EU, the UK had a GDP of -1% and an increasing inflation of 20% (Bache and George, 2006). In addition, Pettinger (2012) argues that the UK was experiencing a national debt and a trade deficit. The inflation was also tremendously increased by oil shock which not only increased inflation, but also led to a real recession. However, this effect was not only experienced by the UK only but by other EC members, though in different proportion. However, Prime Minister Margaret Thatcher in 1979 led the government to a period of privatization and deregulation where also the economy experienced a recession on 1980-1981. However, Thatcher’s government introduced a tightening of fiscal and monetary policies (Podmore 2008).

While joining the EC, Beaverstock et al (2005) explains that the UK requires structural changes. However, being a member of EU, as during the first two decades after membership, the nation faced difficulties. During this time, the UK, residents did not see any benefits of being a member of the EU. Some of the evident concerns during that time included an increment in trade deficit resulting to low barriers to trade in the country as well as disquiets economic contributions to the EC. However, in 1975 the UK government made re-negotiations of its contribution to the EU where they were to limit their contribution as the UK was the third largest contributor to the EU. One of the issues that the UK government identified was that UK in 1980 was the largest contributor yet it had the third largest gross domestic product in the EC. This means that UK made more contributions than it was supposed to in comparison to its relative influence to the EC.

The reason why the UK contributed more to the EU was due to the more imports outside the EU which increased their tax levies. The second reason is that the consumers in the UK spend more in comparison to the relative wealth of the country resulting to low income tax. 

Effect of Brexit on the healthcare and medical sector

A hard Brexit would negatively affect the health sector in the UK.  A hard Brexit can be defined as the process of the UK leaving the EU without agreeing to the exit terms set by the EU. Fahy et al (2017) explains that a hard Brexit would result to unavailability of medical equipment and medicines produced in the UK. Simpkin and Mossialos (2017), explain that Brexit would affect medical researchers, medical device makers, pharmaceutical companies and the drug approval process, and NHS (National Health Service).

Exiting from EU requires the UK to negotiate their terms, and a vote to exit will greatly affect the medical sector. According to Fahy et al (2017), the life science contributes approximately to 10% of GDP in the UK. Numerous big pharmaceuticals companies like GlaxoSmithKlein and AstraZeneca in the UK majorly rely on EU-UK for approximate 25% of their total revenue. The impact of Brexit in healthcare sector is hastened by the drug approval agency of the EU as the ’The European Medicines Agency (EMA)’ is located in the UK. According to Simpkin and Mossialos (2017), 20% of EMA’s operations are in the UK. However, this is likely to change if the UK exits from the EU as the EU may locate the EMA to London making the UK to lose its EMA position. Therefore, the influence of UK on market authorisation process and its role in the EU’s centralized body hence reduce its influence. 

Another area that the Brexit will change in the health sector is the Medicines & Healthcare products Regulatory Agency (MHRA) which regulates drugs in the EU. According to Simpkin and Mossialos (2017), the MHRA is responsible of conducting approximately 33% of its operations in EMA where Brexit will result to delays in drug approvals. Another likely impact is increasing the compliance burden of the health sector due to separation of regulatory processes from the EU. As a result, the accessibility of innovative medicine in the UK would be delayed which would be a challenge to the UK health firms to innovate. Haskel, Pereira and Slaughter (2007) explain that the UK health sector is at risk of competitive disadvantage as the EMA and US Food and Drug Administration continues to align the policies to simplify the accessibility of the markets. Also, Brexit will affect pharmaceutical firms in ‘inversions’. Such deals have made the EU and US companies to integrate their business to institute affordable tax rates.  However, with trading, treaties, and tax laws relationships will result in upheaval which may be unfavourable in the previous inversions which may call for re-evaluations.

Research funding is another sector in health sector as they look and consider for requirements after the UK exits the EU. The EU grants approximately 16% of funds used by the life sciences firms in the UK (Bank of England, 2015). This will be challenging for the UK life sciences companies as they will lack the funds and grants they were sourcing from European Research Council. One of the countries that receive a high fraction of funds from European Research Council is the UK particularly in university based research. A Brexit according to Haskel, Pereira and Slaughter (2007) would result to reduction of $8 billion in EU funding in the research sector over the coming four years. 

Exit of The UK from EU will heavily affect the National Health Service (NHS). This was after a BBC report on 22nd May 2018 that an exit from EU would negatively affect the EU.  Some of the concerns raised during this report included economic issues, talent recruitment and research funding (Dhingra et al., 2018). Dhingra et al (2018) explain that in the past few years, the NHS has suffered from several budget pressures and the reduction and strains of the NHS will in future affect timeline, access and quality of care. Another funding effect on NHS is its impact on the industry as a purchaser. This is because the available money to spend on NHS as a private supplier will be reduced and may make the sector to identify better value per pond spent. 

Currently, the NHS is facing challenge on talent recruitment and retention. According to Bruno et al (2016), approximately 56,000 of employees in the UK are EU nationals as in February 2016, and majority others are in the long-term care sector. Exiting from EU would negatively affect the talent pool, in turn increasing salaries, quality of care and accessibility of care. Another department in the health industry that will be affected by talent which may be in relation to the regulatory fallout and funding cuts from Brexit which can greatly affect scientist who will migrate to regions they get conducive conditions (Sole et al., 2014). However, Brexit will result to a high competition between the NHS and the private sector. The reduction in funds received by NHS will boost the private healthcare market in the UK. This is because the regulators in the industry would be in tumult where the competition is likely to cause an increase in accessibility and improvement in quality in the United Kingdom healthcare model (Flear, 2017).

According to Ward and Baker (2017) the UK will face indirect financing effects. The NHS is the largest discretionary of public expenditure (Ward and Baker, 2017) where if the UK economy is affected, the NHS will be greatly affected in terms of financing. According to Economist Intelligence Unit, there will be an approximately £7·5 billion increase of NHS expenditure out of £177 billion.  Many scholars and the UK residents have drawn their reassurance from the short-term performance of the UK economy so far as there lacks no change has taken place. One of the core concerns in relation to the impact of exiting from the EU is that the EU governs approximately all aspects of medicine licensing (Ward and Baker, 2017). Less visible due to equal significance is the effect that it will have on other medical products like radioisotopes and medical devices.

One of the benefits of the UK is hosting European Medicines Agency (EMA) which has assisted the country in consolidating its situation as the foremost region for pharmaceutical industry in the Europe. The UK will be in a better position to continue participating in the EMA operations even after hard or soft Brexit. However, the UK would face challenges while setting global standards for pharmaceuticals due to International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (Ward and Baker, 2017).

A failed Brexit will result to immediate disruptions while making imports of health items which are not directed by WTO laws/. In addition, failed Brexit will negatively affect the availability of radioisotopes applied in the diagnosis and therapy of cancer patients where the UK sources mostly from Netherland. After the creation of European Economic Community in 1957, a Euratom treaty was formulated and it governs the handling, transportation and generation of radioisotopes within Europe. Majority of UK operations greatly depends on EU regulatory networks and structures which ease the trade in the country, hard Brexit would result to frictions to trading medical devices, medical equipment and pharmaceuticals (Galsworthy and Mckee, 2017).

In conclusion Brexit will greatly affect the health and the National Health Service (NHS) in the UK. This is because the health sector particularly the NHS greatly relies on EU for health personnel.  Another threat of Brexit is the issue of financing in the health industry which will have a great effect to the UK’s residents. Other threats include accessibility of capital funds as well as the general economic performance of the country.  In addition, exiting from EU will jeopardise organ transplant, blood donations, technology and pharmaceuticals (Galsworthy and Mckee, 2017). According to Ward and Baker (2017), Brexit will threaten information used in international comparisons as well as affect delivery of services in some regions in the UK. Brexit will also cause some governance effects in the research, trade law, competition and public health. Nonetheless, Brexit will also have some positive effects like improvement opportunities in areas like flexibility of training and competition law (Bowcot, 2017). Generally, a soft version of EU exit would reduce health threats whereas hard Brexit or failed Brexit would negatively affect the nation.

The implications of Brexit on UK construction

The construction sector greatly relies on market confidence and certainty. The continuing uncertainty in the construction industry will greatly affect the funding, red-tape, materials and workforce and which will be discussed in the below sections. Brexit regulation will have a great impact in the construction sector (Adler-Nissen, Galpin and Rosamon, 2017). Some of the issues in the sector supply chain, gaps in the results from skill market, and revisions to regulatory framework. For example, the Carillion which is the greatest construction company in the UK has fallen due to distress. According to Adler-Nissen, Galpin and Rosamon (2017), approximately, 50% of the companies in the UK construction sector are feeling the impact. 

  1. Workforce

Mclntosh and West (2017) identifies that the greatest impact of Brexit in the construction industry is on workforce. This is because the construction industry greatly relies on EU migrant either skilled or non-skilled. The workers ensure smooth running of the industry as Ramiah, Pham and Moosa (2017) argue that the UK lacks enough employees in the construction industry and the exit will risk the country and make the issue worse. One of the effects of reduced workforce would be high costs on projects. This is because the demand for workers would be more than the supply of the country and the available workers would seek for higher salaries. In addition, it could negatively affect the government attempts of building approximately one million new houses. The reduction of housing would increase the housing crisis particularly in large cities like London.  Another issue would be as a resultant of replacement schemes which are applied by the government which are not promising. For example, UK workers may be deterred by the new visa working system. Although such a system may be time consuming and apply complex procedures, it may also be unattractive in comparisons to European countries not using the visa. This would be in turn affect construction industry as they would experience costly and lengthy procedures while employing foreign nations. According to Adler-Nissen, Galpin and Rosamon (2017), 66% of the professionals in the construction industry are feeling the Brexit negative impact. Majority of these companies fear future trends of reduced qualified workforce in their industry due to issues aggravated by the immigration status of non-UK residents. This is after a Deloitte research that approximately 36% of persons in the UK will leave UK workforce by 2022 (Dorling, 2016). Among qualified or skilled employees, the status is likely to be at 47% where each company in the UK construction industry employs 1 migrant employee among three employees. This statistics is disheartening to the construction sector in the UK (Goodwin and Heath, 2016).

  1. Construction Materials

According to Doring, (2016) approximately 33% of construction materials are imported from EU directly. This would have a double effect. The first problem would be reduction in the value of the pound which in turn would increase the cost of imported products. The second problem would be that the UK would be at risk of tariff loss due to reduced accessibility to single market as well as limiting the quantities and duty imposition. However, it would also have a positive effect among all relevant parties in the industry like the contractors, employers and the investors with a likelihood of a collaborative approach to limit the negative government effect. Due to the overreliance of the UK construction sector on importation, the EU is responsible for delivery of approximately 62% building materials is in estimate is equal to £5.7 billion in supplies (Goodwin and Heath, 2016).  Another rising issue is the construction industry is the increasing costs in the supply chain. Between 2011 and 2017, there has been a tremendous increase in the cost of building components. If no actions are taken for cost minimization, the cost of building materials will continue to rise. If the beneficial agreements are not replicated by the UK, there is a likelihood of increasing inflation where some companies have increased that building materials have increased with 20%. The situation is worse because the cost for imports is also increasing (Bowcott, 2017; Adler-Nissen, Galpin and Rosamond, 2017). In addition, tariffs changes may greatly affect the growth of the construction sector where products entering the UK will have elevated prices.  

  1. Red tape

The proponents of Brexit argue that as a result there will be a disappearance of complex procurement regulations and the red tape regulations. However, it is evident that Brexit would not terminate the businesses between the UK and the EU. However, the Great Repeal Bill assisted in the reduction of uncertainties in regard to the form of deal that will be applied. Nonetheless, the newly exerted bill is likely to follow the existing trading standards where it is operating towards the conversion of directly EU laws that are applicable in UK law (Bowcott, 2017). 

  1. Funding 

According to Goodwin and Milazzo (2015), the UK has greatly benefited from the EU and the potential losses from the exit will greatly affect their operations at long-term. Loss of funding will greatly affect the existence of future trends in the construction industry like the Crossrail and High Speed 2(HS2).  Losing EU funds will close some funding doors that have the ability of opening new doors in the industry. However, after the UK rebalances the lost funding, the weak pound in the UK will be more attractive to foreign investors. This is positive impact not only to the construction industry’s as well as to other industry as it would be easier to perform businesses in the country (Goodwin and Heath, 2016). Nonetheless, the construction industry will face challenges in it attempts to positively present itself to the foreign investors as attractive for investments irrespective of the political uncertainties facing the country after the UK exit from the EU Goodwin and Milazzo (2015). Through this, it is evident that the level of uncertainties in the construction industry will continue haunting the industry. 

  The impact of Brexit on foreign investment in the UK

Foreign direct investment (FDI) increases the productivity of a country as well as wages and output in the country. This is because international companies are likely to increase the managerial know-how and technological expert which has the ability of increasing output in the nation’s operations. Another impact of FDA is that it stimulates local companies to improve, for example, by tougher competition and stronger supply chains (Tyler, 2015). According to Dhingra et al (2016), an FDI can be defined as investments from outside a nation that would help the country to stat-up a subsidiary, acquire new companies or expand on already establishments. The United Kingdom is a major beneficiary of FDI approximately £1 trillion, which is approximately 50% of what is received by other EU members (UK Trade and Investment (UKTI), 2015). The only two countries receiving more FDI are China and the United States. 

FDI is attractive to majority of nations as it has the ability to increase productivity, which in turn increases salaries and output of a nation. The significance of FDI is that the foreign investors pay more to the domestic firms which in turn increases productivity. In addition, the FDI results to indirect benefits as domestic firms adapt the new managerial know-how and technological innovations by adoption of the supply chain of the foreign investors (Harrison and Rodriguez-Clare, 2009). Another effect of FDI is the increased pressures which increases the performance of managers.

Exiting from the EU, will greatly affect the UK because:

  1. The first reason is that multinational investors apply more co-ordination costs and complex supply chains between the local branches and the headquarters. Leaving the EU would make the process more difficult for the foreign companies to invest. For example, tougher migration controls would limit the intra-firm transfers and component parts would be subjected to varying costs and regulations. 
  2. The second reason is that exiting from EU would make the UK a Single Market which would attract more multinational to export in UK due to the reduced large tariffs costs as well as non-tariff barriers when exporting to other countries in EU. 
  3. The third reason is that it will cause uncertainties on future trade arrangements between the EU and the UK which in turn would inhibit FDI (Dhingra et al, 2016).

Bruno et al (2016) explains that several factors determine where a nation should be located and invest. Some of the factors affecting foreign investors include richer and bigger markets where there is increased accessibility to customers. Whether in or out of EU, the UK has a highly educated workforce, flexible labour markets and a strong rule of law which makes it attractive for foreign investors. However, as a member of EU, the investment and the trade cost of UK is reduced by EU, which will greatly affect and control all other factors. In conclusion, Brexit will negatively affect the inward FDI where according to Dhingra et al (2016), exiting from EU will reduce the FDI inflows to the United Kingdom by 22%. This loss as explained by Dhingra et al (2016) will damage productivity in the UK as well as a reduction of real incomes by 3.4%

Reference

Adler-Nissen, R., Galpin, C. and Rosamond, B., 2017. Performing Brexit: How a post-Brexit world is imagined outside the United Kingdom. The British Journal of Politics and International Relations19(3), pp.573-591.

Bache, Ian and Stephen, George (2006) Politics in the European Union, New York: Oxford University Press

Baker, David and Schnapper, Pauline (2015) Britain and the Crisis of the European Union. Basingstoke: Palgrave Macmillan

Bank of England (2015) ‘EU Membership and the Bank of England’ (http://www.bankofengland.co.uk/publications/Documents/speeches/2015/euboe211015.pdf).

Bowcott, O., 2017. Brexit may cost MPs and peers the power to pass laws, says former judge.

Bruno, R., N. Campos, S. Estrin and M. Tian (2016) ‘Gravitating towards Europe: An Econometric Analysis of the FDI Effects of EU Membership’, Technical Appendix to this report (http://cep.lse.ac.uk/pubs/download/brexit03_technical_paper.pdf).

Dhingra, S., G. Ottaviano, T. Sampson and J. Van Reenen (2016) ‘The Consequences of Brexit for UK Trade and Living Standards’, CEP Brexit Analysis No. 2 (http://cep.lse.ac.uk/pubs/download/brexit02.pdf).

Dorling, D., 2016. Brexit: the decision of a divided country.

Fahy, N., Hervey, T., Greer, S., Jarman, H., Stuckler, D., Galsworthy, M. and McKee, M., 2017. How will Brexit affect health and health services in the UK? Evaluating three possible scenarios. The Lancet, 390(10107), pp.2110-2118.

Flear, M.L., 2017. Ensuring post-Brexit UK is a ‘maker’rather than a ‘taker’of global norms and standards: the case of the International Council on Harmonisation.

Galsworthy, M. and McKee, M., 2017. A plan for UK science after the European Union referendum. Science355(6320), pp.31-32.

Goodwin, M. and Heath, O., 2016. Brexit vote explained: poverty, low skills and lack of opportunities. Joseph Rowntree Foundation31.

Goodwin, M. and Milazzo, C., 2015. UKIP: Inside the campaign to redraw the map of British politics. Oxford University Press.

Harrison, A. and A. Rodriguez-Clare (2009) ‘Trade, Foreign Investment, and Industrial Policy for Developing Countries’, NBER Working Paper No. 15621.

Haskel, J., S. Pereira and M. Slaughter (2007) ‘Does Inward Foreign Direct Investment Boost the Productivity of Domestic Firms?’ Review of Economics and Statistics 89(3): 482-96

Office of National Statistics (ONS) (2016). Inward foreign direct investment (FDI) involving UK companies. URL: https://www.ons.gov.uk/businessindustryandtrade/business/businessinnovation/datasets/foreigndirectinvestmentinvolvingukcompanies2013inwardtables  Google Scholar

Paton, J., 2017. Health care faces funding strain if Britain chooses hard Brexit.

Pettinger, Tejvan (2012) The Economy of the 1970s, EconomicsHelp. URL: org/2010/02/economy-of-1970s.html”>http://econ.economicshelp.org/2010/02/economy-of-1970s.html

Podmore, Will (2008) British Foreign Policy since 1870, New Jersey: Xlibris Corporation

Simpkin, V.L. and Mossialos, E., 2017. Brexit and the NHS: challenges, uncertainties andopportunities. Health Policy, 121(5), pp.447-480.

Solé, M., Panteli, D., Risso-Gill, I., Döring, N., Busse, R., McKee, M. and Legido-Quigley, H., 2014. How do medical doctors in the European Union demonstrate that they continue to meet criteria for registration and licencing?. Clinical Medicine14(6), pp.633-639.

Tyler, G. (2015) ‘Financial Services: Contribution to the UK Economy’, Economic Policy and Statistics Section, House of Commons Library, February SN/EP/06193.

Tyler, Gloria (2015) Financial Services: Contribution to the UK economy (Policy Brief 06193), House of Commons Library. URL: http://researchbriefings.files.parliament.uk/documents/SN06193/SN06193.pdf

UKTI (2015) ‘UKTI Inward Investment Report 2014 to 2015’ (https://www.gov.uk/government/publications/ukti-inward-investment-report-2014-to2015/ukti-inward-investment-report-2014-to-2015-online-viewingWard, A. and Barker, A., 2017. EU exit spurs call for deal on radiotherapy. Financial Times (London).

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