City of London Economic Research

Coming Together: The importance of face-to-face contact for business relationships in the City

 

Mikaela Belcher and Hugo Le Ridou, Reed Smith Trainee Solicitors

 

The City’s best resource is its people. Although we are now able to work from anywhere, anytime, businesses remain willing to invest heavily in offices in the City due to the rich interconnections and expertise available within the Square Mile.

As incoming trainee solicitors at Reed Smith LLP, a Global 20 law firm, we partnered with the City of London Corporation to find out how face-to-face interactions contribute to the City’s competitive edge on a global scale.

 We conducted twelve interviews with professionals working within financial, legal, and professional services in the City; our findings are outlined below.

 

• The importance of the Square Mile for sharing knowledge and accessing global talent.

Participants all stressed the importance of having a ‘City location’ to attract talent, host partners, and meet clients. The client-focused nature and complexities inherent to financial and professional services made networking events and informal encounters valuable for city businesses. Face-to-face contact in the Square Mile allows for a “freer exchange of ideas” and making complex and nuanced points that might be lost on paper.

 Interviewees were overwhelmingly positive about the City’s network, feeling that there was always a trusted advisor moments away. This connectivity fosters strong inter-firm knowledge sharing and was also seen to be a catalyst for career development in the City: many interviewees had found jobs through their City networks and more senior workers had built a ‘City Career’ thanks to this.

• Business opportunities are still created through proximity and face-to-face contact

These formal and informal face-to-face interactions in the City generate new business opportunities. Not only does a City location lend a certain prestige and credibility to a business, interviewees were more likely to interact with firms, professional networks, and clients that hosted events in direct proximity.

Events and meetings hosted in the City, were seen as more convenient and therefore were more likely to attract participants than events outside the Square Mile. At such events, “new business relationships can arise just from people meeting you for a short period of time, for example very often people get in touch after attending a talk or presentation where you were presenting. It’s not about the knowledge necessarily … but about the person themselves.”

• Face-to-face contact helps build trust in the business relationship

Face-to-face contact with business partners was always interviewees’ preferred way of understanding a client’s needs, deepening the relationship, and understanding complex ideas. As one interviewee put it, “you never know what somebody actually wants until you sit face-to-face with them with an example of what you’re going to produce.” Regular face-to-face contact brings a personal element and a deeper understanding of business needs into client services, which gave participants “a much better working relationship”. 

Face-to-face relationship management was also seen - across different industries - as the principal way for firms to differentiate themselves from their competitors, who on paper might offer similar services: “The key differentiators are who you trust, and who you think can pull a deal through.”

 The City’s best resource is its people. This ecosystem relies on the network of related businesses and industries that operate here. The City of London Corporation is currently undertaking an extensive programme of interviews, polling and research to deepen the understanding of the specific and distinct business advantages of locating in London – and more broadly in the UK – and the reasons why clients choose to use the world-leading FPS & tech services based here. This programme of work will highlight how the City is continuing as the global hub for financial and professional services.

 

Professional services in the City - focus on legal, accounting & auditing and management consultancy

 

By Katharina Ehrhart, Research Officer at the City of London Corporation

 

Professional services are key to the City’s unique business ecosystem as employers, as clients and as business partners. While financial services include different forms of banking, insurance or asset management, the professional services sector refers to a wide variety of activities from architecture via real estate activities to photographic activities.

Almost one in five workers in the City are employed in just three industry subsectors of professional services which are particularly closely related to financial activities - sometimes referred to as ‘related professional services’. Together, accounting & auditing, legal services and management consultancy employ 90,000 jobs in the City across a total of 6,505 firms.

Looking in more detail at the City, legal services employ the biggest share of people, followed by management consultancy and accounting & auditing. Legal services also have the highest number of firms in the City, followed by auditing & accounting firms, while the number of management consultancy firms is much smaller.

 

 

 

The City’s legal sector is highly competitive and world leading in key areas including litigation, arbitration and dispute resolution. The City alone hosts 25,000 solicitors, and 3,000 barristers – that’s around 40% of solicitors and barristers in London. The combined number of legal services in the City is higher than in any other local authority in the country.

The City’s management consultancy sector employs 29,000 professionals. They provide firms with strategic advance on a range of issues, with 28% of fee income derived from Digital and Technology Consulting (MCA).

With 17,000 accounting and auditing professionals, the City employs the 2^nd highest share of accountants and auditors in the country.[1] Many of them work for the Big Four which have their head offices in the City, Southwark and Canary Wharf. The high-quality financial reporting the sector provides underpins business management and can help investors identify profitable investment opportunities (ICAEW).

These professional services are based in the City because they support financial services firms in providing legal and management advice as well as producing financial records, aiding the smooth running of operations.

This is reflected in the significant share of demand for services from professional services firms which comes from financial services firms: Financial services firms account for 17% of the total demand for legal services, 24% of the total demand for accounting services, and over 20% of demand for management consultancy (estimated). The data is from ONS input-output tables.

 

You can more about financial services’ demand for services from other sectors in Fiona Morrill’s blog on the “Chain Reaction”.

Professional services play a key role in the City’s ecosystem; they provide services which are key to each other as well as financial services operations and make up a substantial share of employment in the City. Firms and individuals come to the City because they can get not only access to financial services but also all the related advice in the same place.

 

Sources: BRES 2016 data, UK Business Counts 2017 data, ONS, Input-Output-Tables

[1] After Southwark (SIC 69201).

Mainstreaming Green Finance at the Green Finance Summit

 

By Katharina Ehrhart, Research Officer at City of London Corporation

 

On 17 July, the City of London’s Green Finance Initiative is hosting the 2^nd  Green Finance Summit at the historic Guildhall.  This year’s summit is dedicated to “Mainstreaming Green Finance”.

Green finance means the investment in climate-friendly technology and infrastructure which will support the transition to a low-carbon economy. This is a global challenge, estimated to be worth trillions of dollars. In Mark Carney’s (Governor of the Bank of England) words, “Investment on this scale cannot be financed in niche markets. It must be mainstream and global.”

The UK and specifically the City of London is recognised to be a global hub for green finance. Thanks to the quality and depth of its green finance offer, London ranks 1st in Z Yen’s Global Green Finance Index 2018.

In 2015, the London Stock Exchange (LSE) launched a range of dedicated ‘green bond’ segments. There are strict admission criteria for those green bonds, based on the ICMA’s Green Bonds Principles.

Currently there are 78 green bonds listed on the London Stock Exchange. These are popular with investors from across the globe. The LSE issued the world’s 1^st certified green bonds and green covered bonds from China, India and the UAE, while Fiji has just launched a sovereign green bond. Since the 2017 Green Finance Summit, the amount raised in green bonds on the London Stock Exchange has doubled from $10.5bn to $24.5bn, demonstrating investors’ commitment to green finance. In the preceding year from 2016 and 2017, green bond issuance grew by 78% worldwide to $155.5 billion (Reuters). Green bonds are generally over-subscribed which means that demand for them outstrips supply and there is a large potential for growth (ClimateBonds.net).

Current challenges in green finance are questions regarding green loans and securitisation, targeted support for green infrastructure as well as give investors greater transparency to measure climate risk. The Task Force on Climate-related Financial Disclosures (TCFD) has developed recommendations for improving investor transparency which already been endorsed on a voluntary basis by 275 companies have a combined market capitalization of over $7.1 trillion (May 2018 data)

The UK Government have already responded to one of the recommendations the Green Finance Task Force made in its March 2018 report. In his Mansion House speech on 21 June, Chancellor of the Exchequer Philip Hammond announced the establishment of a new Green Finance Institute in London, jointly funded by government and the City of London. The objective is that “firms from across the world can access our one-stop-shop for world-leading climate science, and for capital.”

Drawing on the theme of Mainstreaming Green Finance, the 2^nd Green Finance Summit will bring together high-level speakers to present on policy and regulatory developments in the sector. Over 900 delegates are expected to attend the summit which is supported by Amundi Asset Management, Carbon Delta and Green Investment Group.

How does financial services support the wider economy?

 

By Fiona Morrill, Financial Services Research Officer in the Economic Development Office

 

Recently the House of Commons debated the future of financial services, and the role it plays in supporting the UK economy, and we’ve been informing the debate by looking at the contribution financial services makes to other sectors. This contribution comes not only from investing in and financing their activities, but more widely by purchasing their goods and services.

In 2015, financial services spent £138bn on goods and services from other sectors – equivalent to 7% of total demand for those goods and services, and up from £136bn in 2014. This is a key part of its contribution to the wider economy, alongside the £72.1bn it generated in tax receipts for the UK government in 2016/17.

The contribution FS makes is particularly strong in highly productive sectors like tech services and related professional services, buying around a quarter of total outputs in many of those activities. FS accounts for 22% of the total demand for computer programming, 26% of demand for telecoms, and 20% of demand for information services, while it buys 24% of total accounting and tax services, and 18% of legal services. This illustrates the links between FS and other knowledge-intensive, innovative and productive sectors.

The infographic below looks at the contribution made by financial services in buying these goods and services, supporting jobs and growth in other sectors, alongside the role of related professional services (accounting, legal services and management consultancy) in doing the same.

While we might not be able to predict the future of financial services, facts like these are crucial to the debate around how the sector boosts jobs and growth in its own right, alongside playing a key role boosting innovation and productivity right across the UK economy.

 

Source: ONS, Input-output supply and use tables, 2017

 

Business’ view on London’s housing affordability

 

By Katharina Ehrhart, Researcher in the City of London Research Team

 

Much is written about London’s housing crisis. Academics, politicians and businesses agree one of London’s key, and enduring, challenges is the cost of housing. Globally, London is among the top 5 least affordable cities with ramifications on who can afford to live and work here.

Remarkably, only the top quarter of earners in the capital can afford even London’s cheapest homes (bottom 10% of house prices).[1]

 

 

This is despite a small decline of 0.5% in London house prices in 2017, as recorded by Nationwide. Chartered surveyors who participated in the RICS survey from February expect prices in London to fall further over the next month and the next quarter. But none of this will likely have a decisive impact on housing affordability. The graph above uses January 2018 figures, but the findings are virtually unchanged from three years ago.

High housing costs have a negative impact on businesses who are struggling to attract or retain staff. Business groups such as LCCI, London First, the Federation of Small Businesses and the CBI have all highlighted London’s unaffordable housing as one of their member’s top priorities. Campaigns such as “Fifty Thousand Homes” were set up as response to the impact of housing costs on staff recruitment and retainment.

Not only do high housing costs put pressure on employers to raise wages to compensate for higher living costs but long commutes and suboptimal living conditions can also impact on the productivity of staff at work.

The Resolution Foundation’s latest research also highlights that housing costs put off potential workers from moving to London for work, despite increasing their average pay by 18 % in real terms. House prices at more than twice the national average are discouraging potential workers from moving to the Capital.

High housing costs challenge London’s businesses ability to hire the people they need. As the LCCI highlight, “As housing costs rise further, London risks losing the skilled workers who are critical to the city's future competitiveness” (LCCI).

Accordingly, some key FRPS employers are taking innovative steps to support their staff with the cost of housing. For example, Grant Thornton, Morgan Stanley, Schroders have all signed up to the Fifty Thousand Homes pledge – a business-led campaign with the objective of a yearly 50,000 homes being built in London by end of 2020.

• Many employers also offer flexible working options, travel loans as well as interest-free loans for housing. A prominent example for the latter is KPMG who help employees obtain preferential mortgages rates with Clydesdale & Yorkshire Bank.
• Deloitte have gone a step further and directly provide housing for employees on graduate programmes. The accommodation is free from credit checks or rental fees and comes with two weeks of rent paid for.

The initiatives taken by FRPS employers show both how critical the issue of housing affordability is, and which solutions employers can make available. But ultimately, more needs to be done on all levels to make more affordable homes available to Londoners so that businesses in the Capital can continue to attract the best and brightest of the workforce.

 

[1] Assuming a mortgage of 4 times annual salary. Data is from Land Registry, “Prices Paid”, January 2018; ASHE, “Annual Pay – gross”, 2017.

The role of large financial services firms in UK employment

 

By Dr Laura Davison, Head of Research at the Economic Development Office, City of London Corporation

 

My previous blog (28/09/2017) highlighted how important a role the UK’s large financial services (FS) firms play in generating turnover – with the 115 FS firms with more than £1 billion turnover generating 88% of the sector’s turnover.[1] This week, I’m looking at how important a role large firms play in employment, using new data from the Office for National Statistics (ONS), which lets us look at really large businesses – those employing many thousands of people.

To put financial services in context using the new Business Register and Employment Survey data (BRES)[2], there were 1.06 million financial services jobs in Great Britain in 2016 – 3.5% of employment. Nearly two thirds of these – 663K (63%) were based outside of London. Financial services grew by 26.5K jobs in the year to 9^th September 2016 – 2.6% growth, compared with 1.6% growth across all sectors; this represented 5.5% of the net jobs growth across Great Britain.

So, financial services plays a significant role in the UK’s economy. What part do the very largest firms play within this? Most forms of reporting define large firms as those employing 250 or more people. A new ONS dataset lets us look at much bigger firms – those who employ over 15K people, and those who employ between 3K and 14,999 people. [3]

Across the UK, 130 firms[4] employed more than 15,000 people in 2016; 10 of these were financial services firms (0.02% of all financial services firms). These 10 firms collectively employed 32% of the UK’s financial services roles, providing 328K jobs.

Although this represents a very high concentration of jobs in large firms, two other sectors are even more concentrated in their very largest (15K+ employees) firms – retail (48%), and public administration and defence (40%). For other sectors, this concentration is a lot lower – and in areas such as professional services, construction, property, and arts, there are no such firms listed.[5]

 Looking at the next level of businesses – those employing between 3K and 14,999 employees, there were a further 40 FS firms with between, collectively accounting for 21% of FS jobs. As the chart below shows, then, collectively 50 FS firms account for over half of the UK’s FS employees – some 539K jobs.

 It’s worth noting that the largest FS firms in the UK are bigger even than these categories would suggest – with banks such as HSBC and Barclays employing between 40K to 50K people in the UK.

 

[1] http://colresearch.typepad.com/colresearch/2017/09/the-importance-of-very-large-financial-services-firms-to-the-uk-economy-turnover-analysis.html  

[2] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/

businessregisterandemploymentsurveybresprovisionalresults/provisionalresults2016revisedresults2015

[3] https://www.ons.gov.uk/businessindustryandtrade/business/activitysizeandlocation/adhocs/007466analysisofenterprisesintheukbyspecifiedemplo

eesizebandanduksic2007broadindustrygroup2016

[4] NB ONS counts are rounded to the nearest five.

[5] Though as counts are rounded to the nearest five, there may be one or two in practice.

The importance of very large financial services firms to the UK economy: turnover analysis

 

By Dr Laura Davison, Head of Research at the Economic Development Office, City of London Corporation

 

Across the UK economy, there were 5.5 million private sector firms in 2016 - 0.1% were large firms (employing 250 people or more), jointly accounting for 40% of employment and 53% of turnover.[1] My recent blog highlighted how particularly important these large firms were in financial services (FS), with the 355 large FS firms (0.4%) accounting for 72% of the sector’s jobs.[2]

New data from the Office for National Statistics (ONS) now lets us look at the turnover[3] and employment profile of really large firms - data not usually available - so in this week’s blog, I’ve analysed the impact of the largest FS firms on the UK economy in terms of turnover; next week’s blog will cover employment.

Although relatively small in number - 2% of the UK’s 2.55 million VAT / PAYE-registered firms - financial services firms accounted for a disproportionately high proportion of UK turnover - 24%. Alongside this, FS had the largest number of firms in the highest turnover band – those with annual turnover of more than £1billion; there are 455 such firms in the UK – 115 of these are FS firms.

 

These 115 FS firms with very high turnover played a huge role in generating the sector’s total turnover – although only 0.2% of FS firms by number, they generated 88% of the FS sector’s turnover. Not only is this highly significant in terms of the role this small number of firms play, it also reflects that financial services turnover is much more significantly generated by very large firms than in other sectors. You can see this difference in the following chart - for UK data excluding financial services, the equivalent figure is 38% of turnover generated by firms with £1 billion plus turnover.  

 

 In fact, as the next two charts show, if you look at the 99.8% of FS firms with less than £1 billion turnover, their profile is broadly proportionate in the UK context – 2% by number and 6% of turnover.

 

 

 Whereas the small group of £1 billion plus FS firms are much more significant – 25% by number and 42% by turnover.

In fact, even looking at these 115 firms in the wider context of the UK economy – where they constitute 0.005% of the UK’s VAT-registered firms - they accounted for 21% of the total turnover. This gives you an idea for just how sizeable these large FS firms are and how large a role they play, both within the financial services sector and across the UK economy as a whole – and next week, we’ll be looking at whether the same holds true in the employment patterns.

 

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/559219/bpe_2016_statistical_release.pdf

[2] http://colresearch.typepad.com/colresearch/2017/04/in-this-article-ive-analysed-data-on-the-distribution-and-location-of-uk-firms-and-jobs-in-financial-services-highlighti.html

[3] https://www.ons.gov.uk/businessindustryandtrade/business/activitysizeandlocation/adhocs/007502analysisofenterprisesintheukbyuksic2007broadindustrygroupandspecifiedturnoversizebands2016

 

 

 

 

The chain reaction: How the financial service sector’s demand for goods and services supports the wider economy

 

By Fiona Morrill, Financial Services Research Officer in the Economic Development Office

 

The financial and related professional services sector plays a key, direct role in enabling other firms to grow; through financing investment in capital; supporting the day to day running of their businesses through managing cash flow; providing insurance to protect against risks; and advising firms on strategy, tax and legal issues. But what role does the sector play in terms of supply chain links and demanding services from other industries, indirectly supporting their growth and jobs? This blog looks at the current links between FS and other sectors, with a particular focus on technology services, and how these linkages have changed over time.

 

The current relationship between financial services and the wider economy

This week (31/07/17), I’ve been looking at the ONS’ Input-Output tables[1], which enable us to look at industries’ use of products based on industry classifications at the UK level. The data gives an idea  of the current links between the financial services sector and other industries, and how these connections have developed and evolved over the past few years. This is particularly apparent looking at the ties between the financial services sector (FS, including finance, insurance and their related activities) and emerging and growing industries like computer programming, telecoms and information services. This is partly driven by increasing efficiencies in existing business, be that secure trading platforms, sophisticated risk management systems, data analysis or cyber security, and the finance sector increasingly leads on the adoption and adaptation of new technology in areas like FinTech, InsurTech and RegTech[2].

The infographic below shows the kinds of inputs used by the FS sector. Alongside sectors we might expect to have strong linkages with FS - such as asset management, pension funding and insurance and re-insurance, and related activities  - we can also see the links between sectors like management consultancy and head office activities (8.6% of FS sector inputs), computer programming (7.6%), and telecommunications services (5.9%).

 

Inputs used in producing financial services – sector share of total (2014)

Source: ONS, Input-Output tables, 2016

NB. ‘Other’ refers to industries with a lower than 2.5% share of FS inputs.

As well as looking at what inputs are demanded by the FS sector, we can look at how much of total demand for those sectors the FS sector accounts for, to get a sense of the role FS plays in supporting growth and demand in other industries. The table below shows the products purchased by the FS sector and the percentage of total demand the FS sector accounts for (with sectors where FS makes up less than 5% of demand excluded), colour coded from red (weaker linkages) to green (stronger linkages).

 

What does the FS sector purchase and what percentage of demand does it account for? (2014)

 

  Source: ONS, Input-Output tables, 2016 (sectors where FS makes up less than 10% of demand not shown)

 

While FS accounted for 3% of jobs across the UK[3] in 2014, the sector made a disproportionately high contribution in terms of supporting demand in other sectors. Altogether, finance and its related services account for £136 billion, or 9%, of UK total intermediate demand for all products and services, and if we exclude financial services demand for all types of FS products, this equates to 7% of total demand.

The FS industry plays a key role in generating demand for related professional services, including head office and management consultancy (30%), accountancy and tax (24%), and 17% of legal services. The sector accounted for over a quarter (26%) of total demand for telecommunications, and a fifth of demand for computer programming and information services (22% and 20% respectively), demonstrating the close linkages between financial services and the growing tech sector.

 

How has the relationship between financial services and technology changed over time?

Financial services and technology have always been closely interlinked, given the development of innovations in FS like credit cards, ATMs, electronic stock trading and online banking. At the City of London level, the changing nature of jobs and work has meant that financial services and technology are more interlinked than ever before, with the development of activities like FinTech, and the clustering of these firms on the City’s fringes reflecting the importance of these industries’ physical proximity to each other. At the UK level, after head office services and management consultancy, computer programming was the second largest category of input (i.e. goods and services demanded) by the FS sector reflecting the technology intensive nature of financial services today.

The chart below shows the development of the links between FS and technology over time. Between 2004 to 2014, the use of computer programming in the FS sector has increased from £5.9 billion in to £10.3 billion, an increase of 76%, with FS’ share of computer programming services rising from 18% to 22%. Likewise, the sector’s use of telecommunications services has risen from £5.5 billion in 2004, to £8.0 billion in 2014, an increase of 45%, while FS’ share of telecommunications services rose from 23% to 26%.

 
Source: ONS, Input-Output tables, 2016

 

The ties between FS and tech have evolved from the use of technology in providing retail banking and exchange-based trading and broking, to mobile wallets, payment apps, biometrics, robo-advisors and blockchain technologies emerging today. The industry has evolved from small scale start-ups and innovation within existing large FS firms, to new and emergent industries like FinTech, InsurTech and RegTech becoming important sectors in their own right.

Taking FinTech as an example, over the 2008 to 2013 period, the UK and Ireland saw the fastest growth in FinTech investment globally, at an annualised rate of 74 percent from 2008, compared with 27 percent globally and 13 percent in Silicon Valley. During the same period, the value of FinTech investment in the UK and Ireland increased nearly eightfold to $265 million in 2013. The annualised growth rate (51 percent) was nearly twice the global average (26 percent) and more than twice that of Silicon Valley (23 percent), with London emerging as a key European and global FinTech hub[4]. This cluster of activity continues to make a significant contribution to the UK economy, generating an estimated £20 billion of revenue in 2015, and providing 61,000 jobs across the UK, with 44,000 of these based in London[5]. This demonstrates just one of the potential avenues whereby FS and tech working together can make a significant contribution to jobs and growth in the UK.

 

How might this change in the future, and what does this mean for the economy?

Looking ahead, the links between financial services and technology look set to continue to deepen, with technology facilitating and transforming the FS offer across a range of areas like banking, payment and settlement, investment management and insurance.

According to Deloitte, who named London as a top global FinTech hub, the next 12 months will see the industry forging greater global FinTech connections to continue to support the developed ecosystem in the UK, and realise their global ambitions[6], and the potential for continued innovation exists across all financial services subsectors.

As well as improving access to financial services for both individuals and SMEs at the customer level, the links between financial services and technology will continue to benefit the wider economy, creating jobs and growth through supply chain linkages.  

 

[1] ONS, Input-Output tables, available here: https://www.ons.gov.uk/economy/nationalaccounts/supplyandusetables/datasets/inputoutputsupplyandusetables

[2] City of London Corporation, Tech X the City, available here: https://www.cityoflondon.gov.uk/business/economic-research-and-information/research-publications/Pages/Tech-x-the-city.aspx

[3] ONS, Workforce Jobs by industry (2014 average), available here: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/workforcejobsbyregionandindustryjobs05

[4] Accenture analysis of CB Insights data, available here: https://newsroom.accenture.com/subjects/research-surveys/london-is-benefitting-from-fintech-investment-boom-according-to-accenture-study.htm

[5] EY, UK FinTech on the Cutting Edge, available here: http://www.ey.com/Publication/vwLUAssets/EY-UK-FinTech-On-the-cutting-edge/%24FILE/EY-UK-FinTech-On-the-cutting-edge.pdf

[6] Deloitte, A tale of 44 cities: Connecting Global FinTech,  https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/Innovation/deloitte-uk-connecting-global-FinTech-hub-federation-innotribe-innovate-finance.pdf

 

Shared workspaces in major global cities: what’s next for London?

 

By Hui Chai and Adar Schneider, Urban Economic Development, The Bartlett Development Planning Unit, University College London

 

The previous blog of this two-part piece looked at the value of shared workspaces to businesses; this week’s post will focus on the support provided by other major cities to develop shared workspaces, and the lessons London could learn from these practices. 

Support given to shared workspaces in other cities

> Shared workspaces are being incorporated into economic development strategies. Singapore, Shanghai and Hong Kong all use innovation strategies that include creating and supporting incubators. Paris and New York have affordable shared workspace at the heart of their entrepreneurship development strategies.

> Shared workspaces can fill previously unproductive spaces such as alleys, rooftops and historic buildings. Sometimes this is to lower costs, sometimes it is to bring new footfall to an area and other times it is to add aesthetic or placemaking value.

> Makerspaces are entering the shared workspace arena, especially in cities that are branding locally-made products. New York, San Francisco Hong Kong and Paris are supporting artist studios and other makers, such as woodworking, jewellery, fashion design, and commercial kitchens.

> Coworking spaces have the potential to support community initiatives. By opening up their space to public events, hosting non-profits in their space, and cross-supporting local businesses, coworking spaces have a potential to make a positive impact on their communities.

> City governments are setting up incubators in industries related to “smart cities”. Singapore and Hong Kong are examples of cities which have directly established incubators in high tech, financial tech, and green tech to address urban problems.

> City governments are also supporting public-interest incubators. In Paris and New York, for example, spaces and incubators that are tailored to women entrepreneurs, innovation in public service delivery and community development receive subsidies.

> City governments are organising and sponsoring conferences that are centred around networking. For example, the 2012 Coworking Europe Conference in Paris. The Shanghai government invites representatives from the most influential incubators to give speeches in some global conferences and forums to build their reputation and influence.

The chart below demonstrates that city governments are playing an active role in shaping the competitiveness of shared workspaces. Several policy instruments are frequently used in practice, including space provision, finance and business support.

  

Source: Authors

What’s next for London?

 London is already participating in the shared workspace market in several important ways. As a global city that has always been a centre for finance, culture, history and business, it is unsurprising that small businesses want to start here. We believe London has the ability to achieve many of its development goals by using shared workspaces. We recommend considering the following policy tools.

> Attract new business and increase employment by investing in incubators directly with startup grants to support early stage SMEs and increasing the London Co-Investment Fund to gain equity in accelerators.

> Support international exposure by hosting global conferences and sending speakers to conferences related to flexible work.

> Make it easy for business to operate flexibly by increasing freely available internet connectivity through city-wide wifi.

> Support disadvantaged entrepreneurs by investing in incubators that target underrepresented groups such as women or POC entrepreneurs.

> Support community development by encouraging coworking spaces to host community events or donate space for volunteer opportunities.

> Improve public service provision by supporting technology incubators which innovate to meet “smart city” goals.

> Attract creative entrepreneurs and maintain affordable workspace by continuing friendly planning regulations to allow coworking spaces in “meanwhile” spaces and in historic buildings to lower the cost.

> Support light manufacturing and demand for London-made products by encouraging affordable shared makerspaces and increasing the branding of “Made in London” and cultural identity.

> Allow micro businesses, the self-employed and artists to benefit from shared workspace by keeping rents stable in specified zones.

Cities that are active in promoting incubators and other shared workspaces are benefitting from creative ideas that have transformative effects on the economy and the city as a whole.  Shared workspaces have the potential to increase value capture for the city, spur innovation, and protect the vibrant culture and creativity that makes the city such an important place. Our full report is accessible online, and we welcome any questions about our research.

Contact: Hui Chai [email protected] or Adar Schneider [email protected]

 

Special thanks to:

Dr Margarethe Theseira UCL                                    

Dr Laura Davison, Mr Saif Ullah and their team at the City of London Corporation.

 

 

 

The UK’s productivity puzzle: regional and sectoral differences

Maxine Kennedy, Research Officer in the Economic Development Office

This week’s blog looks at the new data on productivity in the UK.

What is productivity and why is it important?

Productivity, measured as output per worker, per job and per hour, tells us how efficient resources are being used and is a key indicator of how well the economy is performing.

Long term global data has shown that productivity accounts for the majority contribution towards Gross Domestic Product (GDP), and as such is a key determinant of economic performance, and an indicator of a country’s living standards.

What is the long-term trend in UK productivity?

Often termed the ‘productivity puzzle’, UK productivity has been relatively stagnant over the past decade or so. Following the economic downturn in 2007/08 productivity fell, and despite a strong labour market, it has not yet returned to the pre-crisis trend.

UK, seasonally adjusted, quarter 1 (Jan to Mar) 1994 to quarter 4 (Oct to Dec) 2016[1]

Source: ONS. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/articles/ukproductivityintroduction/octtodec2016

There are several hypotheses for this: first, that the financial crisis led to decreased lending and investment in potentially productive firms; that a lack of investment in equipment and machinery has meant that employees are not working with the most efficient technology available; that there are slowing rates of innovation, or that employees are not making the most of their skills at work. Others have also proposed that how we calculate productivity doesn’t capture the rising importance of the digital economy.[2]

It is also interesting to note that there are sectoral differences affecting productivity. For instance, it has been noted that increased compliance and regulation in the financial services sector following the crisis may have had a negative effect on productivity in that sector, though this may be only be for the short term while the sector adjusts.[3]

However, economists believe that none of these reasons on their own can explain the trend, hence it being coined a ‘puzzle’.

What does the latest UK productivity data show?

The latest data was released by the ONS earlier this month and shows a positive upswing in productivity. Productivity in Q4 2016 was 0.3% higher than Q3 2016, and 1.1% higher than in Q1 2008, immediately prior to the recent economic downturn.[4]

However, the 0.4% quarterly growth remains below the 1994 to 2007 average, and even the ONS warn that the recent positive trend doesn’t indicate an end to the UK’s productivity puzzle.[5]

Regional and sectoral differences in the UK’s productivity?

Andrew Haldane, Chief Economist at the Bank of England, recently analysed UK productivity by looking at firm level data, showing the differences and similarities between firms through a regional, sectoral and export status lens.

We might suspect that productivity varies considerably across the UK’s regions. Looking at data compiled by the ONS and the Bank of England, we can see that overall, London’s productivity is the highest of any region in the UK; it is 75% higher than the region with the lowest productivity, which is the North East.[6]

However, looking at data on productivity at the firm level, we can see that high productivity firms consistently feature in every region in the UK. The distribution does vary from region to region, but the same pattern is seen throughout: a smaller pool of highly productive firms, compared to a majority number of lesser productive firms.

The graph below shows that London has a tighter distribution of highly productive firms (i.e. there are more highly productive firms and fewer low productive firms in London as opposed to the North East, where the pattern is reversed).

Firm level productivity distribution, by region

 

Source: ONS, ONS Research Database, BvD and Bank of England calculations. See: http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf

Looking at the firm level data across different industries, we see a similar trend. There are overall differences between sectors, for instance the information and communication and the professional, scientific and technical activities are the most productive (this might not be so surprising since we would expect to see innovation particularly in these sectors), and manufacturing tends to be more productive than construction. It’s important to remember that each sector also faces unique circumstances that affect productivity.[7]

Yet, again, we see a similar pattern: within each sector there is a similar distribution, will all sectors having a smaller number of highly productive firms, who are innovating and leading the way, and a larger number of less productive firms.

Firm level productivity distribution, by sector

Another key finding is the difference between firms who export as compared to those who don’t. The graph below shows that those firms which do export, and so are faced with global competition, tend to be highly productive. This suggests that openness to global trade is a key contributor to long term economic growth.

Firm level productivity distribution, by export status

Source: ONS, ONS Research Database, BvD and Bank of England calculations. See: http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech968.pdf

Quite clearly, productivity is crucially important to the future of the economy, and consequently we’re seeing more focus on the topic by the Government and other stakeholders. In 2015, the Government launched its Productivity Plan – the latest update to its implementation is here: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbeis/931/931.pdf

[1] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016

[2] See: https://www.publications.parliament.uk/pa/cm201617/cmselect/cmbis/87/87.pdf

[3] http://pwc.blogs.com/press_room/2015/06/financial-services-firms-want-government-to-reduce-cost-of-regulatory-compliance-cbipwc.html

[4] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016

[5] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/octtodec2016

[6] Latest data available for the regional level. See: http://www.lse.ac.uk/Events/2017/03/20170320t1830vOT/The-Productivity-Puzzle

[7] http://www.cbi.org.uk/better-off-britain/Productivity.html