Mastering Brexits Through The Ages

Nigel Culkin, Richard D Simmons

• Publisher: Emerald Publishing Limited
• Year: 2018
• ISBN:
  9781787545007
• Topic: Business
• Subtopic: Imprenditoria
• Index: Business

Brexit is arguably the most significant UK foreign and economic policy event since at least 1945. Opinion is bitterly divided between whether to leave, when to leave, how to leave and even on what Brexit is. Mastering Brexits Through the Ages: Entrepreneurial Innovators and Small Firms - The Catalysts for Success explores these dynamics through the lens of three previous 'Brexits' – the end of Roman Britain, the Henrician Reformation, and the Elizabethan age. Using multiple historical epithets, it illuminates insights into innovation needs, smaller firm growth, previous step change events and related economic understanding. This book paints a broad picture of possible UK post-Brexit landscapes. Echoing an earlier European Treaty (Versailles, 1919), fourteen action points that can contribute to mitigating downside risks and making post Brexit UK a leading force in the Global Economy are identified. At all times, dynamic entrepreneurs and small companies are at the centre of the narrative. This book is both a key contribution to understanding implementation risks and to identifying what a 'winning' post-Brexit UK economy should look like. Drawing on extensive research, the book identifies the strategic framework and associated practical measures needed to realise a positive outcome. It concurrently analyses Brexit mythology through carefully unpicking and demystifying complexities, anticipated Brexit risks, impacts, implications and unknowns. A book for academics, policy makers, advisers and interested bystanders alike.

Chapter 1

Today’s Landscape

Extinction is the rule. Survival is the exception.

– Carl Sagan (2007)

It is likely that almost every British citizen has a view on what Brexit will mean for him or her; some will see it as a dreadful end, others a glorious beginning. Whilst expectations may differ, hopes and aspirations are likely to have far more in common, namely to build a better and easier world, a component of which is positive economic development that supports a rise in individual and household living standards. The ‘story’ as to how all our expectations will translate into reality is yet to be written, but we can be sure that aspiration will remain throughout the writing.

Our narrative is a contribution to this journey; one that starts with the question ‘How can we use changes to deliver economic development that helps deliver aspirations?’ Innovation and an associated rise in productivity are the main determinants of economic development. ‘From acorns, mighty oaks do grow’ is a simile that justifies our stress on the importance that entrepreneurs and their Micro, Small and Medium Sized Enterprises (MSMEs) play in driving growth. Our part in this unfolding drama will be to seek (with the aid of the window of historical characters and anecdotes) to outline a set of 14 propositions that seek to help enable growth, and minimise negative impacts through learning from the mistakes of previous shocks. Past lessons are combined with today’s capacity to innovate to offer suggestive hope as an alternative to the current bout of seemingly existential nihilism.

As of November 2017, there were in excess of 5.7 million MSMEs operating in the United Kingdom with each one at its own individual unique stage of development (BEIS, 2017). MSMEs operate in different markets, develop differently and possess varying capabilities. Additionally, the type of innovation each engages in can be different according to the ambitions of their founding directors. In our context, innovation can be defined as the process of commercialising or bringing into common usage an invention, concept or design for a new or improved device, product or process (Freeman, 1982).

1.1. Innovation and Productivity

The term innovation was first employed at the start of the twentieth century during a time when the field of science was changing beyond recognition. New products were developed for both industrial and consumer markets, which in turn led to a further rapid development of technologies across a wide range of industries, to sustain economic growth, from the 1950s onwards. As markets advanced and became increasingly global in reach, businesses and public research organisations turned to patents to protect the outputs from research and development programmes. However, growth in patenting corresponded to new modes of innovation research practice, which placed more emphasis on knowledge networks and markets than the individual firm as we approached the twenty-first century.

The original definition of innovation was too narrow to reflect the role that patents and knowledge networks play in innovation and economic performance and the OECD was tasked with broadening its scope. The update – announced in 2005 – now asserted that innovation was ‘the implementation of a new or significantly improved product (good or service) or process, a new marketing method, or a new organisational method in business practices, workplace organisation or external relations’ (OECD/Eurostat, 2005, p. 17). Although the definition above is well understood today, it was Schumpeter who saw innovation very broadly as a product, a process and organisational change that does not necessarily have to arise from new scientific discoveries, but that may combine already existing technologies or their applications in a new context.

Productivity is a main determinant of economic development. Growth in productivity is, therefore, one of the major driving forces behind wealth creation and economic prosperity; and, strong economic growth is behind enhancements in living standards. We can measure productivity growth as the ability to produce more with less or the same overall level of inputs and inter alia it is the result of some combination of improved products, services, processes, technologies, organisational structures and ideas. Evaluating how these elements evolve can inform us how efficient an economy is functioning in both a static and dynamic sense. Economists usually distinguish between two main types of efficiency: allocative or productive efficiency, and dynamic efficiency (Hodgson, 1988). The former can be expressed as the Production Function that looks to combine the different factors of production at a given state of technology to drive specific momentary levels of measurable productivity. Conceptually, the latter, dynamic efficiency relates to how the overall relative price system allocates resources across competing needs to arrive at an overall optimal resource allocation or ‘General Equilibrium’. This allocation ensures resources are not misallocated into producing products that do not have market demand. Long-run growth rates are determined by changes in the Production Possibilities Frontier that reflect innovation and the pushing forward the technological frontier. Large step changes in technology often require government involvement to investing in new technologies (where risks are too high for the private sector to bear) to encourage firms to innovate and improve (Mazzucato, 2013; see Box 1.1).

Box 1.1. The State as Active Driver

Prior to his inauguration as the 34th president of the United States, Dwight Eisenhower was president of Columbia University (1948–1953), which, in itself, included a sabbatical when Eisenhower became Supreme Commander of NATO. According to Jacobs (2000), Eisenhower’s time at Colombia was not without controversy, punctuated as it was by his activity with the Council of Foreign Relations (CFR). His work at the CFR focused on the implications of the Marshall Plan and on the American Assembly; an area that he was particularly keen on and that helped shape his latter position on economic policies. Eisenhower saw the potential for the Council to become a great cultural centre where business and governmental leaders could meet to discuss and reach conclusions concerning problems of a social and political nature (Wiesen Cook, 1981).

Perhaps not as successful an academic administrator as his brother Milton (widely regarded as one of the most successful presidents of John Hopkins University, among others), Dwight Eisenhower did put his Colombia experiences to good use when, in 1958, as a direct response to the Soviet’s success in launching Sputnik, he, as American President, funded the Defence Advanced Research Projects Agency (DARPA). Eisenhower was concerned that the United States was in danger of falling behind its Cold War rival in technological achievement, especially in the technologies of war fighting and defence. DARPA’s role was to fund, and coordinate, research programmes carried out by the military, private industry and academia to fulfil its mission of avoiding and creating technological surprise. Today, the agency claims it has spearheaded initiatives that changed the world – a phrase frequently heard at DARPA, to ensure a focus on transformative innovation, as opposed to incremental improvements in existing technologies (Mehra, 2013; National Research Council, 2009).

DARPA’s achievements have included seminal roles in the development of the Internet from the perspective of both technology and human capital. In her book The Entrepreneurial State, Mariana Mazzucato points out that DARPA not only increased the flow of knowledge among research groups, it also engaged in increasing the pool of scientists and engineers available to propel innovations into the market. The agency funded the establishment of computer science departments at universities across the United States, thereby acting as a catalyst for ground-breaking research and development undertaken by industry and academia (Mazzucato, 2013, p. 77).

1.2. Accelerating Product Innovation and Consumer Expectations

The United Kingdom is living and competing in a rapidly changing global market. There are many examples of this change. Here are two technological examples. First, the information and data revolution is leading to exponential increase in saved and searchable data storage and thereby creating new product opportunities. Second, cost-effective human genome mapping and advances in human immune system understanding are being combined into new focused cell-based therapies that can target treatments towards individuals with specific genetics, thereby transforming effectiveness.

Equally in consumer facing sectors, for many products, the commercialisation process has shifted from seasons to ‘fast fashion’ with constant updates. There are moves from generic products to ones with rapid changes, in size, colour, function and style within constantly evolving consumer markets. One only has to look at the frequency of ‘App’ updates on ‘Smart Phones’ to appreciate this pace of change. Today’s hot product is tomorrow’s dinosaur; today’s hot technology will be tomorrow’s platforms waiting to be usurped. Change is fast, change is global, and consumer expectations are moving at the same pace.

The Japanese economic miracle went from ‘cheap plastic items’ in the mid-1960s, to initial leading edge electronic products of the 1970s (e.g. Sony Trinitron TV), to being the global product sector leaders in key sectors such as automobile design and manufacture and consumer electronics by the 1990s, to be followed by an unplanned unexpected stagnation. As shown in Box 1.2, yesterday’s success and market leadership no longer guarantees future success, even in the medium term.

Box 1.2. Smart Phone Wars

Despite a five-year head start over the iPhone, Research in Motion’s (RIM) Blackberry, once the world leader in ‘smartphones’ and adored by the corporate mobile world, now only provides enterprise mobility management (EMM) and mobile security, having outsourced manufacturing of its handsets in 2016.

From the start a technical leader, within four years of its conception, RIM became the first technology firm, outside of Scandinavia to produce connectivity products for Mobitex wireless packet-switched data communications networks. Their next move was towards smart pagers that would exploit packet-based networks to offer wireless Internet access.

By 1998, their RIM950 Inter@ctive Pager captured the imagination as Intel CEO endorsed it saying any employee who could demonstrate a need could have one. Next with the Blackberry 5810, there was a device that could receive ‘push’ email from a Microsoft Exchange Server and that featured mobile web-browsing with a full QWERTY keyboard. By 2000, the stage was set for future enterprise-orientated products from the company, such as the BlackBerry 957, the first BlackBerry smartphone – a huge global sales success.

Competition would inevitably catch up, and Blackberry’s fate was sealed when ARM Semiconductor Ltd (whose relationship with Apple dates back to the Newton – the world’s first PDA) created a business model around licensing its microprocessor core to customers and allow them to add custom circuitry to create a final integrated circuit (Tubbs & Gillett, 2011). While RIM’s secure encrypted network was attractive to corporate clients, their handsets were viewed as less engaging to consumers than the iPhone and Android alternatives. Developers simply found it easier to produce Apps on the IOS and Android platforms, which is why they continue to be ubiquitous today.

As a result, in just three years, Blackberry lost over 60 million of its users. Revenue fell from US$11 billion in 2013 to just over US$1.3 billion. In 2017, cash reserves dropped by over US$220 million, while an increase in operating costs led to a reduction in net income from losses at US$208 million to losses in excess of US$1.2 billion (CNBC, 2017).

1.2.1. Innovation Comes in Different Forms: All Forms Matter

Every innovation matters and every innovation can help drive competitive performance. Every viable business matters, but not every business is the same. Keeley, Walters, Pikkel, and Quinn (2013) identify 10 types of innovation ranging from the business model, to business processes, to the product itself and finally to the route to market. They stress that much progress can be made to how an existing firm works and to evolving new products in the same essential genre by improving how an existing company works. Equally there is potential for new market disrupters, ‘Big Bang Disruptions’ such as the Googles, Facebooks and Amazons (Downes & Nunes, 2013). In addition, as Haldane (2017) argues that we may be on the edge of a step change as artificial intelligence, robotics, the Internet of things and other innovations kick in. These changes will disrupt existing companies whilst opening space for whole new industries as yet unimagined. In global leadership terms, driving success requires a company to be in one of the top two slots globally, in a specific market segment (Welch, 2001). Blockbuster disrupters depend upon three developmental tiers: (i) basic research, (ii) development of this research into products that can be manufactured and (iii) market offers that meet profitable customer needs. Entry can be made at any tier in the structure, but the rewards from commercialised products flow from participating in the top tier. To obtain a top tier place is a common objective globally.

All types of company matter and all companies are at a variety of developmental stages. An emphasis on growing ‘stars’ for tomorrow must not be at the expense of failing to adapt today’s workhorse companies to make them competitive in today’s global markets. We need evolving processes to nudge the long tail of slow innovators to catch up with the trailblazers, whilst affirming and supporting the trailblazers to continue pushing forward (Haldane, 2017). Bringing all companies into the top-performing productivity quadrant equips them for both survival and future growth, to be at the leading, but not bleeding edge. As Andrew Carnegie once said, ‘Pioneering don’t pay’, (Hughes, 1986) inferring that companies should adopt innovations once a clear payback is visible; an insight highlighted in Mazzucato (2013) that successful entrepreneurial innovation either requires that risks be reduced into market digestible chunks, or that the state needs to partner business to make the risk digestible.

1.2.2. A Perception of Risk: Entrepreneurs vs. Professional Managers

It is recognised that entrepreneurs and their associated MSMEs are key in the innovation and risk-taking process (OECD, 2010). What is equally important to understand is that entrepreneurial risk perception differs from that held in most mature ‘managerial’ businesses. Professional managers are rewarded on their ability to constantly increase earnings. This process can often occur through acquisition and subsequent cost stripping/asset sales because these offer easier risk-and-return estimation than that required in innovating a whole new product line. Product gestation and new capital investment are uncertain and therefore incur sizable risks, especially if the new product is intended to disrupt a market. It is easier and safer to buy something already developed but without the global marketing reach. Since Professional Managers’ rewards comes from meeting targets and increasing the share price, they are often incentivised to see their share options increase in value, thereby giving them a short term rather than long term view. This perceived performance improvement also helps reduce the threat from Private Equity Houses and Activist Investors who may seek to replace managements that fail to deliver this growth in earnings. Examples of this in action can be seen in many companies; three such examples are Valeant (grown by acquisition followed by ruthless cost cutting especially in research and development), Heinz after its merger with Kraft under the sponsorship of 3G Capital and the 2016 failed 3G Capital bid for Unilever.

1.3. Financialisation has Interrupted Business Credit Mechanisms

We live in a financialised world. Ageing societies and financial markets responding to consequent lowering risk appetites tend to focus upon secure returns and safety for the invested principal. These returns are derived substantially from existing assets and cash flows and not from funding for new capital investment. Capital investment funding comes either from internal company financing such as in Alphabet/Google, issuing bonds (in some limited cases), equipment leasing and asset-based financing or from Capital Markets and, to a much lesser extent, Business Angels.

Banks have over the last 40 or so years significantly reduced the share of business lending and in doing this greatly increased lending to residential mortgage markets, arguably a reason for the strong relative rise in the price of residential housing assets in relation to earned incomes. This shift in lending has been reinforced by regulatory changes associated with the development of the Basel Capital Accords. This change in lending patterns is a major change with deep implications because restrictions in bank finance to smaller businesses have not automatically or adequately been matched by openings in new types of finance. In the United States, there is now a sophisticated and mature Venture Capital market, whereas in the United Kingdom and the European Union, the Venture Capital as an asset class is – notwithstanding London’s role in this sector – neither as mature as that in the United States nor as ubiquitous as Private Equity, so funding flows are consequently more restricted. Real wealth increases require real productivity increases, which in turn require real capital investment and real innovation (Haldane, 2017). The juxtaposition is that savings products and derivatives effectively re-sell cash flows from previous capital investments, less the fees and commissions charged by each intermediary involved in the resale. These are no...