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Multinationals leaving the UK. Could their ex-employees provide a silver lining to this cloud?

Date:11 March 2019
Author:Pedro de Faria and Bart Los
Could there be a silver lining to multinationals' decision to leave the UK due to Brexit?
Could there be a silver lining to multinationals' decision to leave the UK due to Brexit?

Several multinational companies (MNCs) have announced plans to reduce their activities in the United Kingdom. The uncertainties associated with Brexit are a common reason. These strategic decisions often imply the closure of subsidiaries and have immediate consequences for UK workers currently employed by these companies. Local communities and regions suffer as well. What do we know about the chances of displaced MNC-employees finding new jobs in local enterprises? Do they have specific skills from which these local enterprises could benefit? And if so, what concerted actions are needed to deploy these to make cities and regions more resilient to the detrimental effects of Brexit?

The Brexit referendum took place in late June 2016. Almost three years later, it is still unclear whether the United Kingdom will really leave the European Union and if so, when exactly. Moreover, most of the quarrelling in British politics has been about the so-called withdrawal agreement (the "terms of divorce"), rather than about the nature of the future relationship between the UK and the EU. This prolonged uncertainty has caused serious harm to the UK economy already, through various channels. Reduced investment in physical capital is one of these, since firms often decide to postpone investment projects (or to cancel them altogether) when facing uncertainty about future demand levels or production costs. According to research at the London School of Economics (Breinlich et al., 2019), investment into the UK by firms with headquarters in the EU27 was about 11% lower than if Brexit would not have been imminent.

Several multinational companies are not limiting their reaction to Brexit to adjustments of their investments in UK subsidiaries. Some of them are contemplating or have already decided to close subsidiaries altogether and to relocate parts of the activities to other countries, in the EU or elsewhere. Companies like Honda, Nissan, Panasonic, Sony, Airbus, Goldman Sachs, Discovery and Deutsche Bank are among the prominent examples. As soon as such disinvestments materialize, employees will lose their jobs and the economic prospects of entire towns, cities and regions will be affected. In such a situation, a question of utter importance is:  What is the likelihood of these laid-off employees finding appropriate alternative employment opportunities within the foreseeable future? That is, how will the local labour markets readjust to the employment shocks associated to the closure of multinationals driven by Brexit?

A multinational’s decision to close a subsidiary is driven by performance comparisons with existing and potential, new subsidiaries in other countries. In the current context, multinationals are comparing the potential performance of UK subsidiaries with subsidiaries in countries that will not be (directly) affected by Brexit. Decisions to close a subsidiary are not driven by an evaluation of the productivity of employees in the subsidiary relative to the productivity of employees performing similar tasks in local firms. That is, Brexit might well cause unemployment of highly productive and qualified employees. While working for multinationals, employees often have the opportunity to learn about state-of-the-art technologies, procedures and approaches developed abroad. They can also develop specific skills that are transferable to other organizations, like managing international teams and developing relationships with a variety of clients or suppliers. Research has shown that local firms value these knowledge, skills and abilities of former employees of multinational firms indeed, especially of those who had managerial responsibilities (Sofka et al., 2014).

The closure of multinational subsidiaries caused by a hard Brexit will undoubtedly have severe economic and social impacts (Bailey et al., 2012). Still, we also see some opportunities for both employees and local firms. The skills and knowledge that employees acquired while working for these multinational subsidiaries may allow them to find new and well-paid jobs that will create value for local firms and help local economies to be more resilient to Brexit. Highly qualified managers, for example, can introduce practices that raise productivity (Bloom et al., 2014). This might alleviate the UK’s productivity problem. Increases in competitiveness may also lead to more employment for workers without MNC experience. However, we believe that this potential can only become a reality if two conditions are met. First, government must implement support measures aimed at guaranteeing short-term social stability and economic safety for affected employees and their families. Evidence shows that if active measures are not taken in response to the closure of important firms, the impact on local economies may be substantial, since employees will move to other regions to search for new jobs (Holm et al., 2017). Second, local firms must perceive the closure of multinational subsidiaries as potential opportunities to hire employees with valuable skills and knowledge that they would not be able to hire otherwise. Satisfying this condition might be a task to which business associations like the Institute for Directors (IoD) and the Confederation of British Industry (CBI) could contribute. It would be even better if local and regional institutions could play an active role in this, but as emphasized by Billing et al. (2019), this governance layer is largely missing or not sufficiently powerful.  

Further reading:

  • Billing, C., P. McCann and R. Ortega-Argilés (2019), “Interregional Inequalities and UK Sub-national Governance Responses to Brexit”, Regional Studies, forthcoming.
  • Bloom, N., R. Lemos, R. Sadun, D. Scur and J. van Reenen (2014), “JEEA-FBBVA Lecture 2013: The New Empirical Economics of Management”, Journal of the European Economic Association, 12(4), pp. 835-876.
  • Breinlich, H., E. Leromain, D. Novy and T. Sampson (2019), “Voting with their Money: Brexit and Outward Investment by UK Firms”, CEP Brexit Analysis No. 13, London School of Economics (http://cep.lse.ac.uk/pubs/download/brexit13.pdf).
  • Holm, J. R., C.R. Østergaard and T.R. Olesen, T. (2017), “Destruction and Reallocation of Skills Following Large Company Closures”, Journal of Regional Science, 57(2), pp. 245-265.
  • Sofka, W., M. Preto, and P. de Faria (2014), “MNC Subsidiary Closures: What is the Value of Employees’ Human Capital in New Jobs?”, Journal of International Business Studies, 45(6), pp. 723-750.
  • Bailey, D., C. Chapain and A. de Ruyter, (2012), “Employment Outcomes and Plant Closure in a Post-Industrial City: An Analysis of the Labour Market Status of MG Rover Workers Three Years on”, Urban Studies, 49(7), pp. 1595-1612.