Why do businesses continue to cluster in London?

London! City of dreams! Image: Getty.

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. In the 17th Century, Delft was known for its pottery, while 18th Century Venice specialised in fun – opera, carnivals, fine food and ‘courtesans’ – and 19thcentury Manchester in cotton mills. In the 20th century, L.A. became the centre of the US film business, just as Detroit did for the car industry. 

As the 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 creative industries, financial and business services, tourism and higher education, among other things. Each of these has its own particular set of opportunities and issues, and which demand particular attention from city leaders and policy makers.  But there are so many of these clusters in London, and they are so inter-connected, 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 any city to want to grow, attract and retain head offices. Headquarters create highly paid jobs and 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, HR, comms and public affairs, are less vulnerable to automation than other business functions. 


Moreover, London’s headquarter 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 multi-nationals have overwhelming chosen London as their European head offices. Employment in head office functions has grown faster than even fast growing and valuable sectors like accountancy and consultancy. Indeed, if London has a leading sector, it’s not financial, business or creative industries. It is headquarters. Headquarters are to London’s economy what steel-making was to Victorian Sheffield, or digital technology is to Silicon Valley. 

But the single most important factor in explaining the rise and rise of London as a headquarter city has been its ability to attract talent at every level of business – much of it from the EU.  In centuries past, businesses clustered together in cities because the goods needed in manufacture were cheaper in cities, and cities provided an accessible market for finished products. 

But the modern service industries in which London and other global cities specialise in don’t depend on raw goods or access to customers in the same way. They don’t rely heavily on raw goods and internet allows them to sell their services around the world.  What businesses are looking for in a head office destination is a good pool of highly skilled workers. As one property broker we spoke to put it, “Head office decisions are probably 90 per cent about people.” Finding 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 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 head office capital, we need to preserve the flow of talent as well.

Ben Rogers is director of the Centre for London.

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