You don’t need to be an economist to know that businesses tend to cluster together in cities.
14th century Ghent was famous for woollen cloth, 15th century Florence for its fine arts and by the 16th century, Bordeaux was already a wine city. 17th century Delft was know for its pottery. 18th century Venice specialised in fun – opera, carnivals, fine food and ‘courtesans’ – and 19th century Manchester in cotton mills. In the 20th century, Los Angeles became the centre of the US film business, just as Detroit did for the car industry. As understanding of the economics of urban agglomeration has spread, so city leaders and their economic advisers have come to see their job at least in part as preserving their city’s edge in one ‘cluster’ or another, or incubating new clusters.
This is a helpful way of thinking, but in the case of a global city like London it also has its limits. London is a teaming cluster of clusters. Yes, the city has particular strengths in the creative industries, financial and business services, tourism and higher education, among others. Each of these has its own particular set of opportunities and issues which demand particular attention from city leaders and policy makers. But there are so many of these clusters in London and they are so interconnected that it’s hard to make this a way of organising economic strategy.
Last week Centre for London published a report that offers a different and perhaps more useful way of thinking about the capital’s economic specialism. The research looks at the role that headquarters play in the London economy. There are good reasons, after all, for cities to want to grow, attract and retain head offices. Headquarters create highly paid jobs, raise tax revenue, and feed valuable professional and business service clusters. They attract a lot of business visitors. Bosses are less likely to move a headquarters to another city than they are a ‘second tier’ function. Headquarters are ‘sticky’. And headquarter functions, like strategy, governance, human resources, communications and public affairs, are less vulnerable to automation than other business functions.
Moreover, London’s HQ economy has boomed. Between 2003 and 2018, London was the top ranked destination globally for foreign direct investment into head offices, measured by number of projects. The big multinationals have overwhelming chosen London as their European headquarters. Employment in head office functions has grown even more quickly than fast growing and valuable sectors like accountancy and consultancy. Indeed, if London has a leading sector, it isn’t the financial sector or the creative industries. It is headquarters. Headquarters are to London’s economy what steelmaking was to Victorian Sheffield, or digital technology is to Silicon Valley.
But research also suggests that the single most important factor explaining the rise of London as an headquarter city has been its ability to attract talent at every level of headquarter business – much of it from the EU. In centuries past, businesses clustered together in cities because the goods needed in manufacturing were cheaper in cities, and cities provided an accessible market for finished products. But the modern service industries which London and other global cities specialise in don’t depend on raw goods or access to customers in the same way; the internet allows them to sell their services around the world. What businesses are looking for in an headquarter city is a good pool of highly skilled workers. As one property broker we spoke to put it:
“Headquarter decisions are probably 90 per cent about people.”
PFinding a location that appeals to a modern, skilled, and ultimately mobile workforce is therefore essential. Both the Conservative government and Jeremy Corbyn’s Labour party have prioritised preserving the free flow of goods in their approach to Brexit – in part because they are rightly worried about the damaging effect that barriers to trade in goods would have in the UK’s poorer industrial heartlands. But if we want to maintain London’s invaluable role as the world’s leading capital for headquarters, we need to preserve the flow of talent as well.
This blog was originally published by City Metric.