Expected impact of Brexit on the UK tech sector

Technology companies are behind 24% of UK exports and 3 million jobs. However, the UK’s high-tech industry is likely to suffer as a result of the vote to leave the EU. This is expected to occur as a result of the significant network effects that impact this sector of the economy.

Network effects in this case refer to the dependence of a transactions value on the number of people doing related transactions. Network effects are cited as one of the main reasons why the technology sector is full of monopolies. Brexit is likely to have a significant influence on the tech industry in the UK and 4 reasons for this are outlined in the following sections of this post.

1. EU determines privacy and competition laws

The UK accounts for only 1% of the global population and 3% of world GDP. Membership within the EU gave the UK greater influential power, as the EU makes up a much larger proportion of both global population and GDP. Post-Brexit, the UK will have even less influence on IT markets.

The US isn’t as concerned about competition and privacy laws as the EU. This therefore means that the EU is effectively the world’s privacy regulator, as no other body has as great an influence on the world market. This means that irrespective of the deal that the UK comes to with the EU post-Brexit, the rules and standards set within the EU will still have a huge influence on UK firms. This will therefore increase costs for firms operating within the UK.

2. UK companies could face pressure to move EU data to European data centres

The first Data Protection Act was brought in by Margaret Thatcher in order to allow UK firms to process the data of Europeans. Without this banks in London would not have been able to store data on German account holders in their UK data centres. Post-Brexit there are fears that a tech startup in England may be pressured to use European data centres to store the data of their EU citizens.

The many international treaties that affect our trade can be obstructive and sometimes infuriating; they are the negative network externalities of the information age. The idea however that Britain can somehow ignore all these regulations is irrational.

3. UK startups may be more expensive after Brexit

Startups that serve customers directly are likely to be slowed due to the need to comply with EU privacy law. Startup costs are significant in the tech industry in particular due to the presence of network effects. When a new market opens there is often a race in which the winner will take all. This winner in most instances is the firm that is able to get the network effects running in its favour first.

4. Brexit will close doors for talented engineers and scientists

Generally speaking technology firms tend to cluster in specific areas. This occurs as a result of agglomeration economies or in other words the cost savings from locating in close proximity to other firms within the same industry. For example, in cities such as San Fransisco, Boston and Bangalore there are thousands of specialist engineers and scientists that are able to work for technology firms in this region. These cities offer specialist subcontractors, good universities and an environment in which tech workers can share information.

Britain has technology clusters in London and Cambridge currently but it is feared that these areas will become less attractive to workers once the UK leaves the EU. In most cases, tech clusters are located in areas in which it is a nice place to live. Usually, these tend to be open and liberal places in which diversity is accepted and thrives. The decision to leave the EU taints the UK’s image as an open and liberal place to live as many claim the Brexit vote was motivated by xenophobia.

Research commissioned by techUK reveals that British employers in digitally intensive industries are particularly reliant on overseas talent, with 45% of recent vacancies filled by foreign-born workers. If workers are deterred from coming to work in the UK, the tech sector may be unable to function and this could therefore lead to problems.

“There is no sector more dynamic, more innovative, more resilient than tech, but that doesn’t make it immune to Brexit,” said Jacqueline de Rojas, the trade group’s president and the UK managing director of the software firm Sage. The future impact on the tech industry yet to be determined. With negotiations set to continue for a significant period it is yet unclear what the future will be for firms in the UK.