A few days ago, I had lunch with two British colleagues and asked them about their personal takes on the looming “Brexit” scenario. As professionals active in business and economics, they were both understandably concerned about its implications for the UK. One colleague, a distinguished international economist, lamented that his grandchildren would not have the opportunity to grow up as Europeans—a reminder that Brexit is not merely an economic event but also a cultural one.
At the time of our lunchtime conversation, the next steps for Brexit were not clear. After the momentous referendum in June 2016, the UK had a new prime minister, Theresa May, who had not yet clarified what steps she would take to implement the will of the people. Interestingly, the theoretical options ranged from treating the referendum as non-binding, which it is legally, (i.e., to continue in the EU) to what is being described as “hard Brexit” (i.e., to leave the EU completely.)
Since then, however, Prime Minister May has announced she will invoke Article 50 of the EU treaty by end March 2017, setting in motion a withdrawal process that would take a minimum of two years. Paradoxically, this does not lessen the uncertainty to any appreciable extent, as it leaves open many critical questions: What will replace the current arrangements? How long will it take to negotiate an alternate set of arrangements? Will either side play hardball and thus make a hard Brexit the most likely option? For those of us who enjoy game-theoretic analysis, this is an interesting practical setting to mull over. For example, there is an argument to be made that invoking Article 50 without pre-negotiating the terms of a new trade regime places the UK in a weaker bargaining position.
“Perhaps the UK economy will weather the storm eventually, given its fundamental dynamism, resilience, and global networks.”
From the standpoint of understanding business in an interconnected world, Brexit is a fascinating and arguably epochal development. Clearly, the UK is making a tradeoff between economic uncertainty and cultural identity, seeking a preferred balance between the benefits of being part of the EU’s large market and the cost in terms of giving up control over immigration and aspects of law. Meanwhile, the economic implications are potentially huge. Upon the announcement of the Article 50 invocation by March 2017, the pound has fallen to a 30-year low. Major business investments are on hold—e.g., Japanese automakers that have UK manufacturing plants aimed at EU markets are in no position to upgrade their factories since they don’t know if their products will attract punitive EU tariffs after the split. A hard Brexit is estimated to cost 71,000 jobs and GBP 10 billion in tax revenues, according to one estimate. In particular, there is concern that London’s privileged status as the financial capital of the EU may be in danger.
“Clearly, the UK is making a tradeoff between economic uncertainty and cultural identity, seeking a preferred balance between the benefits of being part of the EU’s large market and the cost in terms of giving up control over immigration and aspects of law.”
On the other hand, perhaps the UK economy will weather the storm eventually, given its fundamental dynamism, resilience, and global networks. Either way, the transition will be marked by significant turbulence for policymakers as well as for businesses. (Indeed, the October 2016 IMF report cites Brexit as one of the reasons why a low-growth scenario is projected for the near term.)
If this scenario sounds like a case study in managing in a volatile, uncertain, complex and ambiguous world (VUCA, as we say, in strategy-speak), it is because Brexit is precisely that. Here’s the good news if you’re a Katz student: You can include this live case study in your curriculum by participating in the London-Brussels Global Research Practicum (GRP) during the Spring of 2017. After a week of meetings with business executives and policymakers on both sides, you will come back with a current understanding of where things stand. Best of all, unlike the bulk of case studies in the MBA classroom, you will know as much about the status and likely scenarios as anyone else!
The Brexit-focused GRP is only one of the programs happening this year. There is also a GRP project to China being led by Professor Jen Shang and a GRP project to Argentina being led by Professor Jo Olson. I encourage you to check both of them out as well by visiting the GRP web page.
Watch this Video about the GRP
Professor Ravi Madhavan is also the director of the International Business Center at the Joseph M. Katz Graduate School of Business and College of Business Administration. The IBC supports education programs for students and industry that have an international focus.