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Business and innovation

How to remove the uncertainty of Brexit for physics-based business

02 Apr 2019 James McKenzie
Taken from the April 2019 issue of Physics World, where it appeared under the headline "The other uncertainty principle".

James McKenzie reflects on how the UK can improve the long-term prospects for physics-based firms after Brexit

Brexit business uncertainty illustration
Whatever next?: Brexit has fuelled uncertainty, but it could be a chance to re-energize UK hi-tech firms. (Courtesy: Elly Walton/Ikon Images/Superstock)

By the end of next week, the UK may have left the European Union (EU) after 46 years as a member of one of the world’s biggest and most successful trading blocs. Or perhaps, given the huge political division over Brexit – and the resulting parliamentary impasse – the UK is still a member and leaving has been deferred again. Even if the UK has quit, the government’s proposed Withdrawal Agreement largely maintains the status quo, with the UK still paying into EU coffers until the end of 2020 (but having no say in any EU decisions).

In short, despite a (slim) majority voting to leave the EU in a referendum that took place more than two and a half years ago, no-one has any clear idea what kind of Brexit we will get. The situation is hugely uncertain and it may be another two years before we really know the full details of the UK’s future relationship with the EU. I sympathize with politicians, for whom Brexit is a hornet’s nest of issues that will affect every aspect of the economy and our lives.

As physicists, we’re all familiar with Heisenberg’s uncertainty principle. But most people operate by another uncertainty principle, which is that the more uncertainty there is, the less likely they are to do something new. It’s why high-street spending has fallen since the referendum and why people are increasingly reluctant to move house, buy a new car or book a holiday – especially in Europe.

The uncertainty over Brexit is also affecting business. Fewer people are being hired. Companies are investing less in new facilities or products. The potential for extreme currency fluctuations is making profit margins unpredictable especially for hi-tech equipment manufacturers. And to people who say, don’t worry, the UK can just trade under World Trade Organization rules if there is no Brexit deal, I’m afraid you’ve missed the point entirely. Such an arrangement would be disastrous.

Beyond Brexit

At the recent Business Innovation and Growth conference held at the Institute of Physics (IOP) at the end of February, Brexit was the word on which no-one wanted to dwell. Business leaders, scientists, investors and officials from government agencies, such as Innovate UK and the Knowledge Transfer Network, instead focused on how the UK and Ireland can realize the full benefits of the next technological and industrial revolutions underpinned by physics. The conference also heard from successful companies – including IOP Business Award winners – about their innovation stories, with delegates keen to find out what more could be done to support and nurture such high-growth businesses.

Physics-based firms currently contribute around £177bn and 23.3bn each year to the UK and Irish economies respectively, which is fantastic. But if you look at the 36 countries in the Organization for Economic Co-operation and Development, the UK is firmly mid-table for R&D investment. As a percentage of gross domestic product (GDP), the UK spends less than half as much as France, Germany, South Korea or the US. So what needs to change if the UK is to meet its target of boosting R&D investment from 1.7% of GDP to 2.4% by 2027?

No company will fork out money on R&D without being sure they’ll get a decent return on investment (meaning that any cash they do spend should dramatically boost overall GDP). One important initiative in this regard will be the UK’s Industrial Strategy Challenge Fund, which seems well thought out and was described at the BIG conference by Innovate UK director Mike Biddle, who is a physicist and a fellow of the IOP.

A recurring theme at the meeting was that physics-based businesses take far longer to develop than, say, a restaurant. But once off the ground, such firms have a sustained competitive advantage and often export globally. Thankfully, investors are aware of the long start-up times and an increasing number of patient capital investors are realizing that the future lies in “deep” technology businesses – those that are underpinned by science and depend on know-how, patents, skilled staff and advanced manufacturing techniques.

However, many physics-based businesses are still at risk even after they develop their technology, with product scale-up costs often being tens or hundreds of times more than for developing the initial prototype. Unfortunately, most government initiatives to support firms are focused on early-stage R&D and we need more help for firms to cross the so-called “valley of death” so they can go from designing prototypes to selling real products.

Cashflow is another challenge. Take the EU’s Horizon 2020 programme, which gives businesses grants to get products out of the lab and into markets across Europe. The grants are paid in advance, which is great because UK government grants, in contrast, are generally paid quarterly in arrears – forcing firms to find cash up-front. What’s worse, we don’t know if UK firms will still be eligible for EU funding post-Brexit, which merely adds to the overall uncertainty.

Even the UK’s successful R&D tax-credit scheme, which lets firms claim back part of their research spending, is not perfect. The tax authorities, for example, don’t always accept a company’s claim for how much money it invested. Moreover, the scheme requires a firm to file annual accounts before making a claim, which can mean a long wait (up to 18 months) until it gets any money back. I believe the time is ripe to reform the tax-credit system to make it easier for a company to prove it has invested in R&D and/or get funding for later-stage work.

Next steps

It’s clear there are huge global businesses opportunities in photonics, medical, clean tech, quantum technology and many other areas of physics. If we can reduce the barriers to market, get the Brexit uncertainty out of the way as fast as possible, and free us from unnecessary EU regulations, then perhaps the UK government can more fully capitalize on the world-class research base it has already invested in.

That at least is my post-Brexit hope.

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