Brexit presents both opportunities and challenges for Ireland’s digital sector

IIEA22nd September 20166min
Capitalising on Brexit will require an honest assessment of Ireland's strengths and weaknesses.

Capitalising on Brexit will require an honest assessment of Ireland’s strengths and weaknesses

It is now almost three months since the people of the United Kingdom voted in favour of a decision to leave the European Union. In the period since, much effort has been made to quantify its likely impact on Ireland, and provide a modicum of certainty for those most likely to be affected by it. But the situation for Britain, as articulated by Sir Paul Jenkins, former Treasury Solicitor and Head of the UK Government Legal Service, is that the Brexit process will be the “largest legal, legislative and bureaucratic project in British history except for a world war”. In this context, uncertainty will inevitably remain a feature of both the UK and the Irish economic landscape for some time and Ireland’s digital technology sector will not be immune to this.

So what are the opportunities and threats to the digital sector in Ireland in the aftermath of Brexit and where is Ireland most exposed?

In terms of the direct impact, the negative fallout is likely to be limited and the digital sector is one area that may even benefit from Brexit. As one of only two remaining English speaking nations in the EU (once the UK officially departs), together with a common law system, a well educated workforce, access to the single market (both the physical one and the burgeoning Digital Single Market), multiple air routes to both the US and the EU and high digital readiness and competitiveness levels, Ireland remains an established, attractive location for large multinational companies (MNCs), and will continue to attract increased inward investment in the future.

Survey data gathered by PWC in the aftermath of Brexit also shows a high level of satisfaction by those MNCs with existing investment in Ireland, and there is no evidence of a reduction in this occurring in the run up to the vote for Brexit. Ireland’s corporate tax rate provides a crucial competitive advantage too, and the country’s access to talent, bolstered by EU freedom of movement – something that is unlikely to be available to the UK after Brexit – is also important.

Furthermore, Ireland has managed to capitalise strongly on earlier waves of foreign-direct investment (FDI) by a range of technology companies, from Intel to Google. The digital sector has grown by 40% since 2012, employs over 116,000 people either directly or indirectly and accounts for 6% of Ireland’s Gross National Product, according to figures from the Department of Communications, Energy and National Resources. This has also resulted in a solid startup sector, parts of which are performing particularly strongly, such as fintech.

Although it still accounts for a relatively small proportion of venture capital activity in Ireland, investment in the fintech sector has increased substantially in recent years, producing a number of innovative players along the way, such as CurrencyFair, Future Finance and Fire Financial Services.

Fintech is one area where Ireland potentially stands to gain much from Brexit. Its financial services sector is well developed and it has improved its reputation for regulatory compliance in recent years. Its continuing membership of the EU also means it can offer passporting rights to prospective financial services providers. In the immediate aftermath of Brexit, this was notably cited by Taavet Hinrikus, CEO of London based unicorn TransferWise, as part the country’s appeal. The advent of the Revised Directive on Payments Services (PSD2), obliging banks to provide open access to their application programming interface at the customer’s request, should also enhance this.

But Brexit also poses challenges to Ireland’s digital sector, alongside several domestic factors that would leave it poorly positioned to compete with other cheaper, highly digitised EU destinations such as Berlin.

Much of the digital technology sector in Ireland is heavily dependent upon financial investment, and a possible implication of the kind of uncertainty brought on by Brexit is a reduction in this. Ireland’s level of venture capital has been increasing for some time, but digital technology related venture capital activity in the United States has slowed somewhat in 2016. There has also been some consolidation amongst US technology companies, the most high profile example of which has been Microsoft’s acquisition of LinkedIn. It’s unlikely, but Ireland’s startup sector could start to see a reduction in access to capital if it were to come to be seen as a risky bet, depending upon the digital implications of Brexit negotiations.

Furthermore, while Ireland is strong on startups it is relatively weak on scale ups. Companies like Stripe are the exception, not the rule, and this will factor into entrepreneurs’ thinking when considering whether to locate here. The deficient state of much of the country’s digital and other infrastructure and the current housing shortage presents additional challenges. Ireland also fares badly on certain digital particulars, including broadband and mobile internet speeds and costs. And although the country makes for an attractive fintech destination for all of the reasons outlined, its strict regulatory environment is viewed by some in the industry as an obstacle to full realisation of the industry’s potential, and antipathetic to innovation.

Perhaps the most important context in which to consider the digital implications of Brexit is data protection.

Much effort has been made on both sides of the Atlantic to restore security of and trust in data flows, within, to and from the EU. The most far reaching of these is arguably the General Data Protection Regulation (GDPR).

Approved by the European Parliament in April 2016 and due to come into force in May 2018, the GDPR provides for the imposition of fines of up to €20m, or 4% of annual turnover, whichever is greater, for breach of data security obligations. This will greatly incentivise data controllers and processors to comply with GDPR provisions. In the process, it will also both strengthen individuals’ data protection rights and simplify the regulatory environment within the EU.

The GDPR also provides for a Lead Supervisory Authority, or primary point of contact between data protection authorities and the EU location where a data processor or controller has its “main establishment”. In many cases that establishment is Ireland.

For now existing EU data protection law applies to the UK, but when/if it separates from the EU, any UK based entity that processes, controls or exchanges data with the EU will be required to demonstrate compliance with the new GDPR standards. As businesses and organisations across the United Kingdom begin to measure the extent and cost of this burden, they will be forced to consider whether this can be more easily met inside or outside of the EU.

Ireland is undoubtedly an attractive EU destination for digital technology companies, with unique advantages, but it is not the only one. Capitalising on Brexit will require an honest acknowledgement of this reality, and a combined effort by businesses and policymakers to optimise its strengths and remedy its weaknesses.