Rob Earnshaw

Rob Earnshaw, director, Digital City

Decisions which impact on us all

Rob Earnshaw, director of Digital City, asks what Brexit and devolution mean to the North East’s digital sector.

The decision to leave the EU has already had a profound effect on the country’s economic landscape. Britain’s digital sector – proportionality the largest of any country in the G20 – obviously will not escape the impact of such a huge change. 58% of North East voters decided they wished to leave the EU and our region must now adjust to a post Brexit landscape even if none of us are entirely sure what this is going to look like.

So based upon what we do know, what does this mean to the North East’s Digital Sector? Digital as defined by the Office of National Statistics is any company that is supporting tech infrastructure (that is hardware, software, telecoms) and e-commerce / e-business (trading goods or services over computer networks such as the internet). Therefore the impact of any change will more than likely touch the majority of our region’s businesses.

During a time of uncertainty the areas that will have an immediate impact on our North East’s digital economy will be around corporate location, talent, valuation and our ability to trade fairly online and a longer term impact around investment and business support.

Talent and Skills
The North East has one of the fastest growing digital clusters yet currently has the lowest number of digital skilled workers in England. Along with the rest of the UK we are in a skills shortage crisis and we need to attract more overseas workers to meet our talent demands. Although freedom of movement will apply for at least another two years the very fact of the Brexit vote and the weakened pound will mean a number of highly skilled workers will be more attracted to moving to other countries such as Germany.

Digital Single Market
We all talk about access to the Single Market, however the ability to trade through the European Digital Single Market (DSM) is where our region can really benefit.

The DSM was set up to synchronise Europe’s online marketplace. The DSM allows for better access to businesses to sell their goods and services, creating the right conditions for networks to grow (including our protection around cyber security and regulation on inflated roaming charges) and making it easier for us to share data.

It is estimated that between 2008-2015 the North East digital economy has turned over between £8-12 billion, the majority of this is through e-commerce purchases and mobile technology (apps). We are a region of exporters, missing out on the DSM benefits will be one of the most serious implications of Brexit for our regional businesses.

Attractive valuations
The North East’s digital sector is one of the fastest growing outside of London. While we still see a significant disparity in inward investment into our region, the number of digital scale-ups has increased. The quality of our digital companies alongside the decline in company valuations will make the North East Digital companies even more attractive targets for acquisition.

Corporate location
Many international companies (outside the EU) base their European operations in the UK creating thousands of jobs. Although the North East has fantastic infrastructure to support large digital corporates, clearly there are changes ahead for these operations, making countries such as Germany and Ireland arguably a more attractive place for operating centres. The North East will have to work twice as hard to ensure an attractive offer for corporates to be attracted to the region… or even stay.

Investment and business support
The longer term impact will be around the significant investment into the region’s digital sector through European money. The European Investment Fund was the largest investor in our region’s venture capital firms; if this funding disappears it could have a serious impact on the North East’s digital start-up and scale-up scene.

In addition, the growth of the region’s digital sector has been largely down to ecosystem and business support offered through programmes such as Digital City, Sunderland Software City and Digital Union – all largely funded through Europe.

So what is the impact of devolution?
Both the North East LEP and the Tees Valley Combined Authority recognise the growth of the digital cluster, improving digital infrastructure and digital adoption as key to our region’s economic success. The main areas of the devolution deal were around the control of regional investment, skills and business support. Whereas the Tees Valley Combined Authority (TVCA) opted to sign for control and leadership in those areas, the North East Combined Authority (NECA) decided against, which included a £30 million per year investment fund. So what does that mean for our region’s digital economy?

Although I am certain that NECA will be able to come out strong it is reasonable to say that at this moment in time the Tees Valley is in a much stronger position to be able to shape its own future when planning for Brexit and is a much more attractive place to run a digital business.

The threat to the North East’s digital sector around skills, business support and investment is real. With devolved powers the TVCA will have the authority to ring-fence and shape funding and support to maintain the region’s fastest growing sector.
The TVCA will be able to review and design the education system around digital skills and employment support. It will be able to continue to offer world class business support for digital start and scale-ups, invest into economic growth of the sector and have the power to re-invest business rates the digital cluster pays back into supporting the cluster rather than go to central government.

What we can say about our region’s digital cluster is that it is innovative - our attitude has always been to capitalise on disruption. The fundamentals of the North East’s digital scene remains strong. Most of our digital businesses did not want Brexit and would have voted for devolved powers, but now it is here our attitude will be to just get on with it and make the most out of the situation.