Scottish independence: how do business leaders view risk and opportunity?

Ahead of the 2014 independence referendum, businesses in Scotland were typically focused more on the risks posed by uncertainty than on potential opportunities. Circumstances have changed – most notably the UK’s exit from the European Union – which may lead to different assessments in a future vote.

Navigating uncertainty is part and parcel of leading a business. Minimising risks and maximising opportunities come with the territory. But constitutional change raises the prospect of institutional uncertainty of a different magnitude to that of day-to-day market competition.

That is because institutions – whether they are regulatory regimes, legal frameworks, fiscal policies, or trade agreements – set the ‘rules of the game’ for business. Firms configure themselves to optimise performance within them. But unlike a single fiscal, legal or regulatory change, a referendum on independence brings the uncertainty of possible wholesale change.

Ultimately, the decisions that business leaders make at an individual firm level – whether to invest, divest, consolidate, grow, and whether to enter or exit a business, market, sector or industry – cumulate and amplify to have a profound impact on local, regional and national economic performance.

How business leaders make sense of such uncertainties, identify the risks and opportunities that they present, and ultimately act at a micro level has implications for short- to medium-term prosperity at a macro level. Establishing how they make decisions under conditions of constitutional uncertainty is therefore critical to understanding wider economic performance and prospects.

How do business leaders make decisions under conditions of uncertainty?

Decision-making under conditions of uncertainty generally, and political uncertainty specifically, has been an area of economic inquiry for many years. Research has often focused on pro-active versus uncertainty avoidance strategies when there is policy or regulatory uncertainty. Depending on whether such decisions are viewed as an opportunity or risk, investments might be delayed or pre-empted (Bernanke, 1983; Bloom et al, 2007).

Evidence from studies of responses to regulatory uncertainty and changes of policy have been mixed (Doh and Pearce, 2004; Dutt and Joseph, 2019). When facing a significant policy or regulatory change, many businesses adopt a ‘wait-and-see’ position (Holburn and Zelner, 2010; López-Gamero et al, 2011; Marcus and Kaufman, 1986; Yang et al, 2004).

But other research indicates that this is not always the case, particularly where decision-makers identify a ‘first-mover-advantage’ – whereby a firm can benefit by acting before its competitors (Aragón-Correa and Sharma, 2003; Carrera et al, 2003; Hoffmann et al, 2009; Marcus et al, 2011). Some businesses may also come under pressure from external parties – such as investors and financial analysts – who pressure decision-makers into addressing uncertainties that may affect future performance (Wiersema and Zhang, 2011).

Some research also shows that strategies to deal with uncertainty will vary depending on whether the uncertainty is likely to yield slow continuous change, rapid high velocity change or uneven, discontinuous change (Doh and Pearce, 2004).

Constitutional uncertainty falls into the last category as it brings the prospect of disruption to multiple institutions simultaneously and change to the rules of the game for business (good or bad).

Suffice to say, there is relatively limited research on the impact of independence movements on business behaviour. Seminal studies of the economics of secession have focused on such issues as the economic determinants of secessionism, the political economy of secessionism and regional economic inequalities (for example, Collier and Hoeffler, 2006; Griffiths, 2014; Horowitz, 1985; Sambanis and Milanovic, 2001; Sorens, 2005).

Studies of business more specifically have tended to focus on voting preferences. They note that large businesses tend to oppose significant constitutional change, while smaller businesses are more inclined to support it (Dion, 1995; Gagnon and Lachapelle, 1996; Lange, 1998; Lynch, 1998; Medina and Molins, 2014).

Yet others have argued that the size of a business is ‘merely a surrogate for several things poorly understood’ (Darnall and Edwards, 2006). For example, research shows that other characteristics, such as ownership structure, may have greater explanatory power of why certain strategies are adopted over others in specific circumstances (Darnall and Edwards, 2006; Mascarenhas, 1989).

The Scottish independence referendum and business

The 2014 referendum on Scottish independence provided an opportunity to investigate how business leaders make sense of the uncertainties created by such votes.

One study – based on interviews with 75 leaders of businesses with a significant economic footprint in Scotland – found that around 90% reported uncertainty associated with the independence debate (MacKay, 2013).

The interviewees represented sectors such as business services, electronics and technology, energy, engineering and manufacturing, financial services, food and drink, and life sciences. They were asked whether they faced any uncertainties related to the constitutional questions, if they perceived the independence referendum to be an opportunity or a threat, and, as a proxy for decision-making, whether they were making contingency plans for different outcomes.

In addition to the reports of overall uncertainty, in 2014, these business leaders were more readily able to identify risks than opportunities. The risks were most pronounced in large, publicly traded companies with head offices in Scotland, and for which trade with the rest of the UK was important.

For these companies, the prospect of being regulated in a jurisdiction outside where most of their business took place, the question of what currency would be used, complexities around tax, employment and access to the European Union (EU) market were most commonly cited.

It was these businesses, often prompted by pressure from shareholders or customers, that were most likely to be putting in place contingency plans (for example, moving their ‘brass plate’ elsewhere or setting up alternative supply chains).

Participants from large and medium-sized companies that were privately owned were also likely to emphasise the risks of independence over opportunities. But without the pressure of being publicly traded, they did express a greater willingness to absorb any short- to medium-term downside risks. Partnerships, given their management structures and diversity of views, were less likely to express strong views either way.

Participants from large subsidiaries of global companies were most likely to emphasise their experience of working across multiple jurisdictions. Such companies were more likely to rely on business continuity plans already in place than to initiate contingency planning specifically related to the independence debate.

For these participants, decisions about whether to invest, divest, consolidate or grow, and whether to enter or exit a business, sector or industry in Scotland were closely connected with the reasons that they were invested in the first place. For these participants, the overall business and trading environment that emerged following a referendum vote was also an important consideration.

Participants from businesses whose customers, labour and supply chains were primarily in Scotland or global were more sanguine about the prospects of independence than those that had significant trade with the rest of the UK.

Even within industries such as financial services, variations in participants’ responses were divided along such lines. For example, a hedge fund headquartered in Scotland but with a global customer base and investment profile may have been less concerned about the risks posed by the prospect of independence than a retail bank or insurer whose customers were primarily in England.

Half of the participants who took part in the study were unable to identify additional opportunities that independence might bring beyond those already available.

Of those participants that did identify opportunities arising from the constitutional debate, only 10% emphasised opportunities over risks. These participants tended to be from medium-sized businesses with a significant proportion of their trade being either in Scotland or global.

Opportunities tended to be more specific to their business, such as the prospect of dispensing with an adverse licensing fee controlled by the UK government or the possibility of greater research and development support from an independent Scottish government, rather than more general opportunities that might arise from an independent Scotland. In these instances, the opportunity to be able to influence government in a smaller country was frequently cited.

The interviews conducted for this study add granularity to survey findings conducted at the same time. Other surveys in 2013 and 2014 – conducted in partnership with the Scottish Chamber of Commerce – found that the main uncertainties listed by the 759 respondents included business and personal taxation, regulation, currency and Scotland’s relationship with the EU (Bell and McGoldrick, 2014).

Half of the participants in the study were able to identify some associated opportunity with independence, including policies more appropriate for Scotland, improved business support from government and close identification with the Scottish brand.

But strikingly, only 4% of respondents identified business growth as an opportunity, and 47% couldn’t identify any opportunities at all. Of the 24% of business that have a risk register, only about half listed the constitutional question, and these businesses tended to have their trade in the rest of the UK or EU.

Indeed, along similar lines, analysis of a longitudinal panel of business investment in 3,589 Scottish firms in the lead-up to the 2014 referendum found that listed firms, firms on the border with England, firms that are financially constrained or whose investments are likely to be irreversible had greater sensitivity to the political and policy uncertainty generated by the independence debate (Azqueta-Gvaldon, 2020).

Echoes of the Scottish independence referendum in the Brexit debate

Findings from the study of business attitudes and perceptions during the Scottish referendum shed light on the responses to industry-led surveys ahead of the referendum on the UK’s membership of the EU in 2016 (see Figure 1).

Surveys of industry bodies with membership drawn from predominantly larger businesses (such as the Confederation of British Industry) tended to find more negative attitudes to leaving the EU than those with membership drawn from smaller firms.

Figure 1: Business attitudes towards the EU referendum, 2016

Source: Surveys conducted by the Confederation of British Industry (March 2016); British Chambers of Commerce (May 2016); Institute of Directors (May 2016); Federation of Small Businesses (September 2015); British American Business (March 2016).

Digging into a survey of 2,231 firms conducted by the British Chambers of Commerce in May 2016 helps to explain why.

Businesses exporting to the EU were much more likely to be in favour of remaining part of it (62.1%), while that figure dropped to 46.7% for those that only export to the rest of the world. Only 30.7% of firms that sell to the EU were biased towards leaving, while that figure increased to 50.1% for those that only export to the rest of the world.

Of non-exporters, 42.8% were inclined to vote to remain in the EU, while a slightly higher 46.4% expressed support for leaving. It was also non-exporters who were most inclined to respond that they didn’t know whether to opt for remain or leave, at 10.2%.

Evidence from the Brexit debate supports the findings reported here: that it is not so much the size of the business that is important, but how they are structured and where they have significant business activity.

What can we learn from Brexit for any future debate on Scottish independence?

In January 2021, the UK exited its transitional membership of the EU’s customs union and single market. While the effects of the Covid-19 pandemic have complicated assessing the impact of Brexit on UK economic growth, exports and imports between the EU and UK fell sharply in 2020: by 14% and 19% respectively. This was even more pronounced between the fourth quarter of 2020 and the first quarter of 2021, with exports falling by 18% and imports by 25% (Ward, 2021).

Evidence from the Bank of England and the National Bureau of Economic Research suggests that the Brexit process, and uncertainty about future outcomes, have also depressed business investment and productivity. This has resulted from, amongst other factors, the culmination of a multitude of firm-level decisions.

The reasons for this drop will become clearer over time, but even with the UK-EU Trade and Cooperation Agreement (TCA) between the EU and UK covering goods (but not services), it has created border frictions.

Indeed, according to analysis by the Office for Budget Responsibility (OBR), in the longer term, both imports and exports will be around 15% lower than had the UK remained an EU member. Similarly, productivity will be about 4% lower due to non-tariff barriers compared with if the UK had remained an EU member.

Given that many new trade agreements between the UK and countries outside the EU largely replicate the agreements that the UK had as an EU member, forecasts suggest that, as with the UK-Japan Comprehensive Economic Partnership, these will be largely immaterial for GDP growth (OBR, 2021). Businesses’ perceptions about the impact of leaving the EU on market access have therefore largely been borne out in practice.

Wider economic performance is based, in part, on business leaders’ perceptions and the decisions that stem from them. The survey findings reported here are largely consistent with research showing that uncertainty can influence business decision-making, as investments are deferred until future outcomes become clearer.

It’s not necessarily all bad news either. Government provision of tax incentives and the need to upgrade assets neglected due to the uncertainty created by the Brexit process has led economists to forecast a strong domestic recovery for business investment following the transition period to a new UK-EU trading relationship (Romei, 2021). This suggests that the deferral of business investment due to political uncertainty can rebound once such uncertainty is resolved.

Yet Brexit also shows that the realities of increased complexity of exporting to European countries, even with goods covered by the TCA – the non-tariff barriers – are likely to dampen exports. This is because the costs for businesses begin to limit the benefits and opportunities of trading in some areas.

With the end of the Brexit transition period, compliance with relevant ‘rules of origin’, EU standards, regulatory checks and differing authorisations between EU countries (which ‘passporting rules’ once circumvented) all add costs to businesses.

As the implementation of the TCA comes into force in 2022, with full border checks in the UK, and businesses have had time to adjust with reconfiguring supply chains and labour, the full impact of the Brexit will become clearer. Some initial surveys of business leaders suggest that in the short term, a third of businesses that trade with the EU have experienced declines in trade (Institute of Directors, 2021).

Indeed, recent data published by the world trade monitor appear to show British exports underperforming the rest of the world (CPB, 2022). This has led the OBR to remark in their economic and fiscal outlook that trade flows of exports and imports were ‘lagging behind the domestic economic recovery’, and they suggest that ‘Brexit may have been a factor’ (OBR, 2022, p. 62).

The experience of Brexit gives an indication of some of the challenges and opportunities that might arise for business and the economy in the event of a Scottish vote for independence from the UK. While the UK is and will continue to be Scotland’s largest trading partner irrespective of independence, the prospect of rejoining the EU presents another complex dimension to the debate.

Conclusion: the past as prologue?

Research looking at business perceptions and decision-making in the lead-up to the referendum on Scottish independence in 2014 shows that factors such as ownership structures, location of key markets, as well as those of labour and supply chains were key determinants in how participants made sense of the uncertainties presented by the constitutional debate (MacKay, 2013). These also contributed to whether they perceived there to be opportunities or risks associated with independence.

With a Scottish population of around 5.5 million people, and a population of approximately 61.5 million in the rest of the UK, large businesses in Scotland were likely to have 80% or more of their UK business outside Scotland. Government data also routinely suggest that 60% or more of Scottish exports at present go to the rest of the UK, largely reflecting the difference in the size of the respective markets.

The factors shaping perceptions of uncertainty, and whether uncertainty presents opportunities or risks are unlikely to be significantly different in a second referendum. Business behaviour and decisions around whether to invest, divest, consolidate or grow, and whether to enter or exit a business, market, sector or industry are clearly more nuanced than simply attributing such outcomes to the size of a business.

Some circumstances in Scotland have clearly changed since 2014, particularly with Brexit, but also in terms of the sectors attracting investment. Given these changed circumstances, how factors shaping perceptions of uncertainty interact might conceivably lead to different perceptions of opportunity and risk in a second referendum.

It is likely that the rest of the UK will continue to be Scotland’s most important trading partner for the foreseeable future. The UK economy, it is important to emphasise, is highly integrated. The impact that Brexit may have on business attitudes towards the opportunities and risks posed by the prospects of a second referendum remains to be seen. It is likely that patterns would not be significantly different.

In the short term, listed firms and firms with significant trade in the rest of the UK will be most anxious and prone to defer investment or move part or all of their operations in the event of a ‘yes’ vote. Subsidiaries of multinational companies, privately held firms with the majority of their trade in Scotland, firms with global markets or those that see growth opportunities in Europe might be comparatively more relaxed.

The lessons from the Brexit negotiations and the challenges and opportunities we have experienced throughout the process will also undoubtedly play an important role in shaping the views of business.