What is the real impact of Brexit on Ireland?

As the implementation of Brexit gets underway, Ireland - as an English-speaking country with secure access to the European single market - is looking more and more attractive as a European base for American businesses making the leap across the pond.

There have been numerous reports of significant economic growth during 2016, buoyed up by growing uncertainties around Brexit. The ‘big four’ professional services firms, for instance, have benefitted, as are finance businesses, and the European Investment Bank is likely to transfer investment from the UK to Ireland, promising opportunities to improve Irish infrastructure, creating work in the country and making it more attractive to international investors.

There’s still a question lingering in the air, though: what about Irish businesses? How are their prospects after Brexit - and will they be looking away from the UK market when the time comes for them to go international?

Background: Ireland’s development

Ireland has a history of encouraging international investment and development - particularly from US businesses, and particularly in the tech sector.

After decades of work by International Development Agency Ireland and other bodies, the country now hosts the EU head offices of Google, Facebook, Twitter, Apple, Amazon and more. Despite some controversies - such as the Apple tax scandal which ruled out further sweetheart deals of the kinds offered to US companies in the past - Ireland still offers a low tax rate, significant local talent, and a lot of potential.

Ireland’s economic growth is not limited to the tech and associated service sectors, either. After a rough start following fiscal autonomy from the UK in 1922, the Republic of Ireland introduced tax relief programmes and liberalised trade. Membership in the EEC, achieved in 1973, reduced dependence on the UK market, and the further expansion of foreign direct investment in the 1990s saw Ireland become more and more competitive on the world market.

Again, the picture is not entirely rosy. The banking, construction and planning crisis of the late 2000s affected Ireland’s economy as they did others. Ireland is a state in debt following the 2010 bailout.

However, the Irish economy expanded by 5.2% in 2016, building on a period of intermittent growth which has continually exceeded economists’ expectations. However, the uncertainty of the UK market damages prospects for Irish exporters, so the Central Bank of Ireland predicts a more modest 3.3% growth for 2017.

Internationalising from Ireland

For high-growth Irish businesses, internationalisation talk comes early. There are only 4.6 million potential consumers in the Irish market. Further growth means going abroad.

The natural first step for Irish businesses looking for a growth market has been, of course, the UK: a ready-made market of 65 million English speakers with a similar culture. Trade with the UK supports 400,000 jobs in Eire, and is worth over €60 bn.

Brexit won’t destroy that market completely. However, it will make it much more difficult for Irish businesses to access, particularly if the border with Ulster becomes a true international frontier - as the FT describes it, “a 500km long border post.” There was even talk of negotiating an EU membership for a united Ireland, so serious is the concern about a return to hard borders.

Danny McCoy of the Irish Business and Employers Confederation has called the potential hard Brexit “an economically calamitous divorce” and “a policy of self harm”; IBEC has also called for a €1bn state aid programme to protect Irish firms from the “adjustment period” it predicts.

Mr McCoy says this money would be spent on helping Irish firms to innovate, train staff, and diversify into new markets - but where will they go?

EU or US? Challenges and successes

Historically, Ireland’s membership in the EU has oriented its policy towards Europe, and talk of a ‘City Brexodus’ suggests that Dublin may emerge as a new European financial hub. The EU already accounts for a third of Irish goods and services exports; the trade infrastructure is in place.

However, Irish economic recovery owes a lot to American trade. With Ireland emerging as a net contributor to the EU budget, and with EU policy threatening its tax competitiveness and relationship with major US firms, the Republic may find itself looking over the Atlantic for friends and partners, with EU membership becoming more of a burden than it has been in the past.

Both markets offer challenges. The EU is nearby, but there is an undoubtable language and cultural barrier. The US is in many ways more similar, easier to do business with, boasts established Irish communities in New York, Boston and, increasingly, San Francisco - but distance and time zones are an uncomfortable prospect.

Both have some proven successes to show off as well. Of the top 20 Irish startups, 10 have premises, investment or operations in the US; six operate in the EU, and five in both. Software and security providers Logentries and comms designers Intercom both opt to split the difference, with their business HQ moving to the US but their R&D arm remaining in Ireland.

Perhaps the right choice is to avoid choosing at all. Hassle.com was funded by VC from Silicon Valley, but has been bought up by Berlin-based Helpling. This $6m to €32m success story makes a case for keeping a foot in both the EU and the US - unless, as Viddyad CEO Grainne Barron claims, you need to take a hands-on approach. “You can’t just hop on a flight back to Europe”, says Barron, and “trying to set up conference calls between Dublin and New York is a killer.”

It’s a difficult call. The one thing we know for sure is that the first step is no longer obvious. Only two of the top twenty startups in Ireland focus on Anglo-Irish business, suggesting that the smart money’s on diversifying early. Where once the route to growth was clear, now there’s a real choice to be made between three markets - and they all have a lot to offer.