Max Nathan is an economic geographer, currently Deputy Director of the What Works Centre for Local Economic Growth at LSE and a Senior Research Fellow at NIESR. He is a co-founder of the Centre for Cities think tank, and affiliate at IZA, the Spatial Economics Research Centre and Centre for London.
I’m sitting in one of London’s boldest pieces of place branding: the Hoxton, Holborn. It is mid-afternoon and the wide lobby is full. Fashion-forward people sit behind MacBooks – glancing over someone’s shoulder, I spot lines of code. Others hold meetings about digital marketing strategies. Waiters in button-down Oxfords and chinos deliver flat whites, Chemex filter coffee or bottles of water. Next door is another Old Street transplant, the Holborn Grind, serving up a minimalist mix of coffee, high-end sandwiches and cocktails. I’m waiting for a friend. She is late, having gone to the sister hotel on Great Eastern Street – ‘The Hoxton Hoxton’, she explains.
It’s all too easy to make fun of this virtual Shoreditch environment. But how seriously should we take the digital businesses and activity that lie behind it, and behind much of East London’s recent metamorphosis? What place do these businesses have within London’s broader economy? How will it develop? And what contribution does it make – or could it make – to meeting London’s big challenges?
Beyond the hype
Between 1997/8 and 2014/15 the number of information and communications technology-producing firms in the capital – for simplicity’s sake let’s call them ‘digital industries’, as they make hardware, software, web content and other digital products and services – grew from just over 33,200 to over 91,000. 1This work includes analysis based on data from the Business Structure Database, produced by the Office for National Statistics (ONS) and supplied by the Secure Data Service at the UK Data Archive. The data is Crown copyright and reproduced with the permission of the controller of HMSO and Queen’s Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS or the Secure Data Service at the UK Data Archive in relation to the interpretation or analysis of the data. This work uses research datasets that may not exactly reproduce National Statistics aggregates. All the outputs have been granted final clearance by the staff of the SDS-UKDA. Figure 1 shows four distinct phases to this development: slow growth in the late 1990s followed by a dot com spike, further expansion through the mid 2000s, instability from 2008 as the country moved into recession, with a strong dip from 2010, then a slow recovery from 2012.
We see a similar pattern when it comes to employment, which grew from over 324,000 to about 550,000 positions over the same period (figure 2).
At first sight these graphs make for surprising reading. There is real growth since the late 1990s. But despite the recent hype, London’s digital sector appears to have shrunk since 2010, with much of the 2000s surge wiped out, and has only recently turned the corner. Macro shocks are part of the answer: the capital’s digital creative firms, which still dominate the sector, were always going to be vulnerable to recession, as clients cut back on advertising, design and web services. Another possibility is churn: a lot of recent start-ups haven’t got very far. 2BSD data excludes sole traders and firms who either do not have staff on PAYE, do not pay VAT or both. According to DueDil analysis for Tech City UK, the number of new digital companies in London rose by 59 per cent between 2010 and 2012, but counts fell the following year, from 1,663 in 2012 to 1,591 in 2013. 3Tech City UK (2015): Tech Nation, London: TCUK. These figures also need be treated with a bit of caution, since not all companies registered in the capital will trade here – but they largely chime with what observers see on the ground.
We are seeing the emergence of new hybrid sectors: fintech – financial technology services – is perhaps the most important of these
The importance of the East London cluster can be overstated – it is just one of many London hotspots. As Figure 3 shows, firms and job counts around Old Street also took a dip after 2008: there is little sign of a ‘policy bounce’ after 2010, when David Cameron launched the Tech City initiative to support and promote the area. But recovery has been faster in East London than in London as a whole. And the area is certainly home to a genuine cluster (figure 4): in 2014/15 17 per cent of jobs in Clerkenwell, Hoxton and Haggerston were in digital firms, well above the London average of 9.6 per cent.
Cities are great engines of innovation and productivity. Their ‘agglomeration economies’ – shared infrastructure, deep labour markets, rich networks of collaborators and support services – help firms become more productive. Cities also help new ideas to form and flow, so that firms and workers can learn from each other. Perhaps paradoxically, these advantages are especially important for technology companies. Digital businesses often like to cluster very close together: face-to-face communication is still best for developing ideas or building up relationships. In an industry with lots of freelancers and small firms, such networking and collaborative working is essential. Neighbourhoods with ‘soft infrastructure’ – bars, cafes, coffee shops and other third spaces – help that creative work get done, and help communities form. Other bits of the local ecosystem – such as accountants, law firms and early stage finance – are equally important.
London’s digital industries also look quite a lot like the capital’s existing industries, but with new, sometimes disruptive digital layers. And as a whole, the digital economy draws strength from the broader economy. Over 78 per cent of London’s digital firms provide digital content rather than new digital hardware or software: many have emerged out of the capital’s existing advertising, media and design sectors as they adopted digital and online platforms during the 2000s. 4www.techcityuk.com/wp-content/uploads/2015/02/Tech%20Nation%202015.pdf But we are also seeing the emergence of new hybrid sectors. Fintech – financial technology services – is perhaps the most important of these. Fintech includes peer-to-peer lending, investing platforms, online payments and money transfer, and big data-driven market research. The capital is strongly positioned, with the City of London literally next door to the tech cluster of ‘Silicon Roundabout’ (at the junction of Old Street and City Road), and many founders emerging from the city’s big banks and management consultancies. London-based firms account for 32 places in one recent fintech top fifty survey. 5www.kpmg.com/au/en/issuesandinsights/articlespublications/pages/50-best-fintech-innovators-report.aspx Two of the biggest venture capital investments so far in 2015 have been in London-based fin tech businesses: WorldRemit and Transferwise (now valued at nearly US$1 billion). 6http://techcitynews.com/2014/02/06/peer-to-peer-lending-hots-up-as-lending-works-raises-3-5m (accessed 18 February 2014); http://techcitynews.com/2015/04/02/record-quarter-for-london-vc-investment/ (accessed 13 May 2015).
Online retail, particularly fashion, is also growing fast. Britons are the biggest users of online shopping in Europe: London has an extensive fashion ecosystem, and the capital already hosts important online players such as Net-a-Porter, Lyst and Farfetch. 7Centre for Retail Research (2015): Online Retailing: Britain, Europe, US and Canada 2015, Nottingham, CRR, available at www.retailresearch.org/onlineretailing.php. The capital’s product and hardware community has also expanded rapidly in recent months: well-known hubs like Makerversity will soon by joined by the huge new spaces at Here East, in the Olympic Park. We could also see growth in smart city products and services – more of which below.
High-skill knowledge economy roles have a local multiplier of one to four: each ‘digital job’ supports four others – via supply chain relationships, or through that worker’s local spending power
As these digital industries evolve, so their spatial footprint is growing. With rents rising, the hot core of activity around Old Street is expanding North into Hackney and East into Bethnal Green, and is now part of a ribbon of creative digital firms that runs back into Soho and the West End. Small fintech clusters have sprouted in the City/Shoreditch borders, Canary Wharf, London Bridge, Mayfair/Saint James’s and Islington.
All in all digital firms now employ over half a million people in the capital – and these jobs are likely to support others in the city. Leading US economist Enrico Moretti suggests that high-skill knowledge economy roles have a local multiplier of one to four: that is, each ‘digital job’ supports four others – via supply chain relationships, or through that worker’s local spending power. 8Moretti E (2012) The New Geography of Jobs, Boston: Houghton Mifflin Harcourt. Of course most new businesses will fail, but if policymakers can identify and support the best-performing firms, they can increase the sector’s added value.
But what can policy do to support that growth? Here, there are two basic schools of thought. Policy minimalists argue that digital ecosystems are self-organising, and government should get out of the way. Others – notably economist Mariana Mazzucato – contend that state support lies behind many tech success stories (such as Google) and that government has an important role to play. 9Mazzucato M (2013) The Entrepreneurial State: Debunking Public vs. Private Sector Myths, London: Anthem.
In practice, most governments have looked for a middle way – funding basic research, encouraging R&D, de-risking early stage finance via tax breaks for investors, and, in some cases, developing active sector support strategies which bring these elements together, as in the UK’s 2013 Industrial Strategy. Tackling visible constraints on tech firms – linked to skills, finance, workspace and infrastructure – will help. Opening up public data – as the Greater London Authority’s (GLA) London Datastore has done – is also generating new products and services (powering apps such as Next Bus and Citymapper). But there are also fundamental constraints on growth. As clusters grow, so does competition for staff, space and market share. All of these are evident in today’s London.
The challenges facing London’s digital businesses are well known. A recent Tech London Advocates (TLA) report highlighted four: a lack of skilled workers (cited by 46 per cent of respondents as the biggest constraint to growth), difficulties in securing finance, poor broadband, and lack of office space and high rents. 10Tech London Advocates (2015): Joining the Dots: Building the infrastructure for London tech, London: TLA. These issues turn up in most small business surveys but are especially acute in tech.
Tech firms everywhere struggle with a shortage of skilled specialists, but the shortage appears particularly acute in the UK. Local skills provision is starting to step up: wearedotdotdot runs an online platform listing over 60 digital learning providers working with young Londoners and linking them to the business community. But while businesses can and do recruit from other European countries, they complain both about the need for UK schools and colleges to improve computer skills teaching and about the difficulty of recruiting outside the EU. The much-trumpeted Exceptional Tech Talent Visa has only produced a trickle of applicants so far. 11www.techworld.com/news/ start-ups/exclusive-worlds-best-technologists-locked-out-of-uk-by-visa-scheme-3608283/
The story is more positive on finance. Government tax breaks have made seed and early stage funding much more attractive, with nine out of ten angel investors using the SEIS or EIS schemes. 12Wright M, Hart M, Fu K (2015):Nation of Angels, London: Centre for Entrepreneurs. Total venture capital funding for London start-ups was £890m in 2014, double the 2013 figure, and twenty times larger than in 2010. 13Davies S (2014) Venture capital funding of London tech start-ups doubles, Financial Times, 30 December, available at www.ft.com/cms/s/0/0ff8687c-8f52-11e4-b080-00144feabdc0.html Larger funds such as Google Ventures and 83North have also been arriving, which should help local firms scale more quickly. That influx of VC should raise the city’s stock of elder wisdom too, as experienced investors join a growing group of local serial entrepreneurs.
Crucially, these cleanweb firms focus on making existing infrastructure work better, rather than designing for some smart city yet to be built
Broadband has emerged as a major issue. The capital’s broadband speeds are thirty-eighth out of forty-five major UK cities. 14http://explorer.netindex.com/maps Connections are – ironically – especially bad in Shoreditch. On top of this, connection times for new lines average an astonishing three months: local planning rules, physical access and slow providers all get the blame. The government’s attempts to directly provide superfast broadband have fallen foul of EU state aid rules: so cities such as York and Peterborough, which have found other ways to build faster networks, may point the way forward for London. Local firm Optimity’s innovative rooftop networks offer an alternative solution.
The workspace challenge is complex. On the one hand, London’s gravitational pull is strong. In TLA’s survey 71 per cent of firms expected rents to keep on rising, and 44 per cent expected the supply of workspace to not keep up with demand: even so, 65 per cent said they had never considered leaving the city. On the other hand, big rent hikes, especially in East London, risk uprooting parts of the ecosystem. Prime rents in Clerkenwell and Shoreditch rose by 62 per cent in the last seven years, from £32.50 per square foot in December 2008 to £52.50 in September 2014, according to Cushman and Wakefield. Rents are now pushing £60, more or less the same as in Holborn and some of the West End.
Co-working space has emerged as one response, helping start-ups access cheap-ish space on flexible terms. A 2014 GLA report counted 132 incubators, accelerators and co-working spaces in the capital, of which half had been set up since 2012. 15Greater London Authority (2014) Supporting Places of Work: incubators, accelerators and co-working spaces, London: GLA. Big players such as Tech Hub, the Trampery and Central Working are now expanding across London, and this should go some way towards meeting need for the smallest firms. Those that up-scale, however, will continue to find it hard to get the right space in the right place. London government can mitigate some of this through zoning – extending the Central Activity Zone, for example – and by encouraging provision of workspace.
Beyond these immediate challenges lies a deeper question. Can London’s tech sector play a role in tackling some of the long-term challenges facing the city? The capital’s environmental challenges – tackling congestion and pollution, dealing with overloaded public transport systems, and improving energy-inefficient housing stock – are one obvious example. On these issues, the city’s tech sector could well be able to help – but it will need the right support from London government.
In the past few years a fascinating ‘cleanweb’ community has been emerging in London. Rather than making electric cars, cleanweb firms are using some of the London scene’s existing collective strengths – web platforms and services, apps and big data – to develop some interesting fixes for energy efficiency, environmental performance data and low-carbon travel (like car-sharing). These companies are mostly very small and very young. The biggest is Amee, based in London and San Francisco, which offers environmental information, carbon/energy audits and data/tech management consultancy services for business. Others offer online platforms (Carbon Culture, GnERGY), green transport marketplaces (Voyage Control, Loco2), or augmenting hardware (Fairphone, Mastodon C). Crucially, these firms focus on making existing infrastructure work better, rather than designing for some smart city yet to be built. And they could yet be joined by new, physical product businesses – conventional ‘cleantech’ – based in spaces like Here East.
All of this activity has obvious relevance for London: the capital’s leaders have an interest in seeing London’s green digital sectors grow. But they will need to take an active part if this is to happen. London’s digital communities have largely emerged organically, without the large anchor institutions – universities, big employers – that have galvanised cluster growth elsewhere. But cleanweb technologies will find it harder to emerge without a supportive policy environment. This goes beyond funding basic research: it involves legislation and other measures to help create and grow new markets. Much of the action will need to be national. But large cities such as London could also play a part, particularly as national government seems to be stepping back from support on renewable energy and other climate technologies.
London can already set its own environmental standards. And public procurement offers further potential here. When product development is risky, what matters is the existence of large ‘lead users’ and user–producer interaction – both to give producers certainty and for users (in this case, city leaders) to help shape future products and services that they might need to use. Canary Wharf Group’s Cognicity initiative is an intriguing case study in how a large organisation might support cleanweb innovations: an accelerator space hosts companies who then pitch ideas to the Group’s estate and infrastructure managers.
London’s public sector – led by the GLA, working with the boroughs – could use its huge purchasing power to encourage and support innovative tech-powered environmental services. This would represent a form of public sector ‘prototyping’. 16Thanks to Dan Hill for developing this idea. Small-scale programmes and projects would emerge out of producer clusters like Silicon Roundabout or Here East; through procurement, city government would be able to test, co-opt and scale the strongest of these.
With luck, the right policy mix could help develop something truly unique
Adopting this approach would entail a substantial change in public sector procurement cultures, away from a small number of large-scale commissions, the most ‘efficient’ process in the short term, towards an ‘experimental state’ model involving the public sector funding multiple private sector firms in developing and trialling ideas. Such an approach would steer away from trying to pick individual winners: rather, it would be operating across whole sectors, and with real customers at the other end. Public competitions and prizes – used successfully in other areas of science and tech – should help in attracting the widest pools of ideas.
All of which makes a bigger point. To date, London’s digital industries have evolved under their own steam to form the leading high-tech ecosystem in Europe. To keep growing, and to play a bigger role in improving the city, those businesses and entrepreneurs will probably need help from London government. With luck, the right policy mix could help develop something truly unique. It won’t be the next Silicon Valley: neither will it be a cloned Shoreditch. But it will be something dynamic, home-grown, successful, and which feeds good ideas back to the city that helped nurture them.
Notes [ + ]
|1.||↑||This work includes analysis based on data from the Business Structure Database, produced by the Office for National Statistics (ONS) and supplied by the Secure Data Service at the UK Data Archive. The data is Crown copyright and reproduced with the permission of the controller of HMSO and Queen’s Printer for Scotland. The use of the ONS statistical data in this work does not imply the endorsement of the ONS or the Secure Data Service at the UK Data Archive in relation to the interpretation or analysis of the data. This work uses research datasets that may not exactly reproduce National Statistics aggregates. All the outputs have been granted final clearance by the staff of the SDS-UKDA.|
|2.||↑||BSD data excludes sole traders and firms who either do not have staff on PAYE, do not pay VAT or both.|
|3.||↑||Tech City UK (2015): Tech Nation, London: TCUK. These figures also need be treated with a bit of caution, since not all companies registered in the capital will trade here – but they largely chime with what observers see on the ground.|
|6.||↑||http://techcitynews.com/2014/02/06/peer-to-peer-lending-hots-up-as-lending-works-raises-3-5m (accessed 18 February 2014); http://techcitynews.com/2015/04/02/record-quarter-for-london-vc-investment/ (accessed 13 May 2015).|
|7.||↑||Centre for Retail Research (2015): Online Retailing: Britain, Europe, US and Canada 2015, Nottingham, CRR, available at www.retailresearch.org/onlineretailing.php.|
|8.||↑||Moretti E (2012) The New Geography of Jobs, Boston: Houghton Mifflin Harcourt.|
|9.||↑||Mazzucato M (2013) The Entrepreneurial State: Debunking Public vs. Private Sector Myths, London: Anthem.|
|10.||↑||Tech London Advocates (2015): Joining the Dots: Building the infrastructure for London tech, London: TLA.|
|12.||↑||Wright M, Hart M, Fu K (2015):Nation of Angels, London: Centre for Entrepreneurs.|
|13.||↑||Davies S (2014) Venture capital funding of London tech start-ups doubles, Financial Times, 30 December, available at www.ft.com/cms/s/0/0ff8687c-8f52-11e4-b080-00144feabdc0.html|
|15.||↑||Greater London Authority (2014) Supporting Places of Work: incubators, accelerators and co-working spaces, London: GLA.|
|16.||↑||Thanks to Dan Hill for developing this idea.|