Tech Companies Take Stock of the Brexit

By: Evan Engstrom and Hinh Tran

As the dust settles from last week’s stunning Brexit vote, the broader tech community, which staunchly supported remaining a part of the European Union (EU), is taking stock of the potential repercussions of the decision. While the United Kingdom (UK) and the EU still have to negotiate the exact terms of the deal (assuming the British can cobble together a new government committed to the Brexit), uncertainty surrounds several key issues important to the tech community. We take a look at some of them below:

Digital Single Market

Since 2014, the European Union has been working on the Digital Single Market (DSM) Initiative to harmonize regulations across 28 member nations in order to create a unified market that facilitates greater trade and innovation. This effort would, among other things, reform and simplify consumer and data protection rules, telecom regulation, and copyright laws, and was scheduled to be completed by the end of 2016. While EU officials indicated that the initiative would move forward “with or without” the UK, Wolfgang Schäuble, finance minister of Germany, Europe’s largest economy, signaled a hardline on Britain retaining access to the single market, opposing UK access to the EU market without conforming to EU rules (such as respecting the freedom of movement, a right that emerged as a key part of the Brexit debate). For many tech companies based in the United Kingdom, the prospect that the UK might be left outside of the DSM is deeply unsettling, as it would impose significant costs due to market and regulatory fragmentation.

Privacy Shield

Last October, the European Court of Justice (ECJ) invalidated the European Commission’s “Safe Harbor” agreement with the United States, which regulated EU-US personal and consumer data flows. The decision threw many American startups with European users into legal limbo, as the court held that the NSA’s mass surveillance programs violated fundamental privacy rights, rendering the Safe Harbor invalid under EU law. Faced with expensive, time-consuming, and complicated alternatives, many startups had to choose between closing off access to their European users or maintaining the status quo at significant legal and regulatory risk. However, the EU and the US are set to approve a new data protection agreement called the “Privacy Shield” on July 5th, which may provide startups with legal certainty. Two open questions remain: First is whether the new Privacy Shield can withstand judicial review by the ECJ, as some critics allege that the agreement still violates European privacy rights. It’s also an open question as to whether the UK and its intelligence agency, the GCHQ, which is known for its extensive intelligence dragnet, can and will comply with its provisions once they are no longer part of the EU.

Passporting and Home Country Control

For many tech companies and startups looking to enter the European market, the United Kingdom seems like the perfect country in which to set up shop. It has ready access to capital (in the form of London and its financial institutions), speaks the lingua franca of English, and is known for an entrepreneurial culture and friendly regulatory regime. In addition, EU rules allow companies to “passport” and operate their businesses across the Continent from a single location within the bloc, without having to set up costly satellite offices in every country. Startups operating in certain regulated industries with harmonized rules also get to report to a single regulator in their country of origin. However, with the Brexit looming, many companies may have to relocate their offices to retain passporting privileges to the EU market and reduce the burden of regulation. This does not bode well for UK’s currently thriving startup sector.

EU Regulatory Creep

For many tech startups (and giants), doing business in the EU means dealing with Europe’s stern regulators. From data protection oversight to anti-trust investigations, European regulators have a reputation for zealously pursuing their mandates. In just the last couple of years, tech giants such as Google, Facebook, and Amazon have been investigated for violating data protection or anti-trust laws, while erstwhile startups like Uber and Airbnb fight ongoing battles with local and national level regulators in countries like Spain, France, and Germany. However, the UK has long made it a priority to fight unnecessary and burdensome EU regulations, and it takes the same light touch approach at a national level (with regards to Uber or Bitcoin, for example). But the impending Brexit will likely deprive Britain of a voice when it comes to creating and enforcing EU regulation, tipping the scales towards countries that are in favor of more stringent regulation of tech companies. That would endanger the EU’s ability to attract and grow many startups which can get their start in a more friendly regulatory environment.

Freedom of Movement

The freedom of movement for workers has long been enshrined as a fundamental right within the EU’s single market. Workers from any of the EU’s 28 member nations, and 4 other countries with access to the market, could live and work freely, enabling millions of people to pursue opportunities and livelihoods across the European Union. In London’s burgeoning tech startup sector, it is estimated that 20 percent of tech workers come from another EU country, reflecting the tech industry’s intense competition for the best and brightest, wherever they may come from. The Brexit vote, unfortunately, now calls into question whether both EU and British nationals will continue to have immigration and residency rights in the UK and across the EU.

Though it is still unclear whether the United Kingdom will move forward with the Brexit and what the terms of that divorce and any continued association with the EU might look like, it is clear that startups and entrepreneurs will suffer. From increased regulatory uncertainty, market fragmentation, loss of access to financial capital and human talent, and overall economic distress, this vote demonstrates how bad policy decisions can cause unintended consequences for the startup ecosystem.

Evan Engstrom is the Executive Director of Engine. Hinh Tran is Engine's Google Policy Fellow for Summer 2016.