Why London - 12 Oct 12

Page | 2

Why London?

Page | 1

Why London? Foreword

Foreword

London is one of the best cities in the world. It is a magnet for

talent, a centre for innovation, and a leading city across a wide-

range of sectors.

London has always thrived on its openness to the world, and

ensuring that London continues to attract businesses, visitors and

students is a key factor in its future success.

The success of world cities like London has inspired others to

seek growing international participation. A better connected

world has also enabled less global cities to become more

accessible.

In light of these future trends, London will only continue to

attract sizeable overseas investment if it can offer significant

returns compared to its main city competitors.

This report commissioned by London & Partners looks at

the drivers of business location decisions and how London fares

among its peers. This research initiative will help guide us and

businesses in making better investment decisions.

Page | 2

Why London? Contents

Contents

Introduction …………………………………………………………………...3

Executive Summary ………………………………………..………........5

Travel Trade …………………………………………………………..........10

Business Tourism …………………………………………………………..27

FDI …………………………………………………………………..….…………43

Creative Industries ………………………………….…….....45

Life Science ……………………………………………….……..…50

Financial Services ………………………………………..….….58

Business services ………………………………………….…...63

Technology ……………………………………………………...…69

Insights and recommendations …………………….…....74

Appendix ………………………………………………………………….…...76

Page | 3

Why London? Introduction

Introduction

London & Partners have commissioned Volterra to carry out an analysis of

what drives returns in travel trade, business tourism, and foreign direct

investment (FDI) in five industries, as well as how London compares against

a selection of comparator cities. The research touches on the important

issues that London needs to address in order to further enhance its

position as a location for tourism, business events and FDI.

London faces a number of key challenges in the years ahead and London’s

global position will be determined by its ability to adapt to these challenges

and re-invent itself. These challenges include:

Low growth and continued stagnation in London’s largest markets in Europe will affect growth rates in the travel trade and business events markets as well as direct investment from these markets. London needs to maintain its attractiveness as a destination in its mature markets but also adapt its offering to be more attractive to customers and investors from emerging markets

London faces greater competition from global cities such as Singapore as the world centre of gravity shifts gradually eastward.

The purpose of this report is to understand the factors that influence city

location decisions, and to identify the drivers of returns that can be

Page | 4

Why London? Introduction

achieved in a city, together with their relative importance determining overall return.

For the travel trade and business tourism sections of this report, two separate surveys were carried out of experts in the travel trade

and the business events industries. The surveys asked respondents to rate London and five comparator cities on factors identified as

drivers of return for these industries. Using the responses received, an ROI barometer was created for each area which weighted the

strength of each city by the importance of each factor.

The FDI section of this report combined interviews with industry leaders in five industries (financial services, business services, life

sciences, creative industries and technology) with bespoke data analysis. Historic Return on Investment (ROI) figures were then

compared to a future 2020 scenario for London and a selection of comparator cities.

We would like to thank our global industry panel for advising us on the FDI research. They include:

Mr. Johan Gott - Director of the A.T. Kearney Global Business Policy Council Mr. Ranjan Chakravarti – Senior Vice President Global Strategy, Ranbaxy Laboratories Mr. Robert Schukai - Global Head of Mobile Technology, Thomson Reuters Mr. Michael Del Nin - Senior Vice President of Corporate Strategy, Time Warner We would also like to thank the other companies that contributed to the FDI research, including: Shionogi Pharmaceuticals, Yammer,

Banco do Brasil, Beacon UK, and Salesforce.com.

Finally, a big thanks to the members of our academic panel, who reviewed and commented on the methodology and findings of this

report. These included:

Sir Peter Hall - Professor of Planning and Regeneration, University College London Mr Carl Weisbrod – Clinical Professor and Academic Chair of Global Development, New York University Schack Institute of Real Estate Professor Mike Batty CBE – Founder of Centre for Advanced Spatial Analysis, University College London Mrs Diane Coyle, OBE – Member of the UK Competition Commission and Vice Chairman of the BBC Trust.

Page | 5

Why London? Executive Summary

Executive Summary Our research confirmed the popularity of London for travel trade, business

tourism and FDI, with London’s main strengths including:

• Its diversity and dynamism – it is a centre where people can exchange

ideas and develop creative new possibilities

• Rich entertainment and retail offering – creating a place where people

want to visit and live

• It is well recognised for the quality of its human capital – covering the

broader service offering available in the city

• Its geographical location puts it at the centre of the world and allows it to

attract and serve the globe like no other city

• Its openness and cultural diversity appeals to people from all over the

world.

London is expected to become even more attractive for business over the next decade, however, a number of weaknesses may deter some of the interest in the city including:

• Immigration restrictions and bureaucracy is an issue, as well as income tax,

both are a threat to maintaining London on top as an attractive place to live, and are deterring people from visiting the city

• Increasing uncertainty about potential changes to the tax regime and about

the likely changes to the financial regulatory environment are deterring expats and FS businesses

Congested Heathrow and the lack of progress in increasing London’s airports capacity are deterring visitors and investors.

Page | 6


Travel Trade

Over 70% of trade travel industry experts ranked London as one of the top 3 most popular city breaks in terms of volume of sales

The ROI barometer ranked Paris as the city with potentially the highest return. However on this measure Paris is followed closely by London and New York, and then further behind are Istanbul, Singapore and Rio de Janeiro. The bottom 3 cities are viewed in a league below the top 3

The practicalities of Accommodation and Transport were rated as the most important factors rather than any ‘City Specific’ factors in attracting tourists to cities

London’s accessibility is viewed as a big strength. On the measure of direct flight connections it ranks as the best city in Europe. However the city can also be seen as expensive to travel around and some concerns were raised over whether its airports will have the capacity to remain accessible in the future. Ensuring it remains accessible in the future will be important to retaining its position as a leading city to visit

London ranks as the best city for Heritage and Retail and jointly with New York on Entertainment

London is considered a very welcoming, open, and culturally diverse city, factors that will help it to continue to attract tourists from all around the globe

The variety of offers available in London for different types of people, different budgets and first time / repeat visitors is very appealing

Asian respondents rank London as the best city to visit, which is positive as the world economy shifts in that direction and we expect a larger proportion of tourists to be from those emerging markets in the future.

Business Events The ROI barometer ranked London the highest followed by Paris, Barcelona, Singapore, Chicago and Vienna

London, Paris and Barcelona were consistently rated in the top three destinations except for North America where respondents rated Singapore above Barcelona. Asian respondents rated London as a much stronger location than in other regions. All regions rated London as the number one location for return on holding business events

As with travel trade, the popularity of London with Asian respondents is a positive finding for future competitiveness of the city as the world economy will continue to shift towards emerging markets and we would therefore expect a larger number of business events to be coming from those parts of the world in the future

The practicalities of Travel Accessibility and the Quality & Availability of Facilities are rated as the most important factors

Page | 7


Why London?

London is ranked as the best city on all factors except Quality & Availability of Facilities, where it rates 2nd to Singapore

Paris is ranked as the 2nd best city on nearly all measures

The lack of language barrier is a benefit for many attendees as well as investors

The main challenges facing London are seen as the lack of large accommodation packages for large events and the length of time to get a visa was given as a specific deterrent for visitors from India

Both business and leisure respondents stated that the ability to combine business and pleasure was a key attraction of the city

As with travel trade, the city is considered open, welcoming and culturally diverse. The leisure activities that the city has to offer are also seen as a bonus for business event attendees

London was identified as a leading global city, with access to experts across many fields including scientists, academics, finance, technology and creative industries. This was cited as a huge positive for holding events in the city. However some respondents suggested the industry could make more of this by better engaging with these experts. This would also be relevant to attracting FDI to the city.

FDI

Competitor Cities

Future threats to London’s position are perceived to be coming primarily from Singapore, given that growth is expected to come from Asia and the city offers strong government support and very good infrastructure

China, and Shanghai as the closest competitor to London within China, has significant barriers to entry in place for many industries. Many investments there are currently not ROI driven but seek to build gradual presence and enhance the company’s global brand

New York shares many similarities with London but tends to focus more on its vast local (American) market and is therefore less internationally focused than London. Its city leadership is perceived as very focused on its economic development and on fostering an enabling entrepreneurial environment

European cities represent less credible threat to London than New York or Singapore. The ease of using English as the business language, large pool of talent, and more onerous employment laws in many potential European locations than in London, make London a preferable location for European Headquarters.

Page | 8


Creative Industries

A key factor that drives return on investment in creative industries is access to talent and companies will often locate in higher

cost locations where the key creative personnel are based. Other important factors identified include: market size and growth

potential, ownership rules and intellectual property protection

Cities were benchmarked on their return on investment based on scores derived from a range of key indicators. London was

found to have the highest return followed by New York, Berlin, Singapore and Shanghai. Based on a future scenario for the

industry, Shanghai is predicted to overtake Singapore while the ranking of the other cities would remain the same in 2020

Life Sciences

The analysis focussed on R&D investment in the life sciences. Given the revenue stream of R&D investment, an alternative

measure of return was used which looks at return on objectives. Some key factors identified as driving return on objectives in

the life sciences were: quality and availability of human capital, intellectual property protection, the potential for R&D

collaboration with research institutions and the existence of industry clusters, as well as the size of the market and the potential

for market growth

Cities were benchmarked on their return on objectives based on scores derived from a range of key indicators. Our

benchmarking analysis put New York as the location with the most favourable factors followed by London, Munich, Singapore

and Shanghai. Based on a future scenario for R&D investment in the industry, the attractiveness of Shanghai as an investment

location is predicted to increase significantly as the R&D environment improves and intellectual property protection laws are

further enhanced.

Financial Services

A number of key investment location decision factors for the financial services industry were identified including: the size of the

market, the existence of a financial services industry cluster, the regulatory environment, tax, the availability of qualified staff

and the office rent and wage costs in a city. These factors were tested using econometric analysis to determine the drivers of ROI

in the industry

Page | 9


Market size, wage costs, office rental costs and tax were found to be good predictors of ROI in the financial services industry.

Based on 2010 return on investment values, Singapore was found to have the highest return on investment followed by

Frankfurt, London, Shanghai and New York. A future scenario for the industry in 2020 predicted that returns across many cities

would decline with London overtaking Singapore as number one ranking as it benefits from connections to both Asia and the US

while costs rise more modestly during the period.

Business Services

A number of key investment location decision factors for the business services industry were identified including: the size of the

market, access to a wide talent pool, office rent and wage cost, tax, as well as a friendly and a stable business environment.

These factors were tested using econometric analysis to determine the drivers of ROI in the industry

The analysis found that the size of a city’s equity market, economic growth, level of corporate taxation and interest rates were

together good predictors of ROI in the business services industry. Based on average actual returns from 2006 to 2010, Singapore

was found to have the highest returns followed by New York, London, Shanghai and Munich. A gradual return to growth in the

UK and US should see returns in London heading the group in 2020, followed closely by New York and Singapore.

Technology

Technology is becoming an increasingly important industry for global cities and often coincides with emerging centres for

creative industries. Some key location decision factors identified for technology companies investing in cities include: the size of

the addressable market, quality and accessibility of ICT infrastructure, access to top talent, ease of doing business, as well as the

size of the local technology cluster

Average actual ROI values from 2003 to 2010 place New York highest in terms of ROI followed closely by London and Berlin,

while Singapore and Shanghai in fourth and fifth place had significantly lower returns. Using our ROI model for the technology

industry indicates returns are expected to increase in all cities in 2020, with London overtaking New York slightly while the

difference in cities’ performance remain largely unchanged.

Page | 10

Why London? Travel Trade

Travel Trade Introduction The aim of this research was to compare and contrast London with other relevant city destinations for travel trade and to arrive at a potential measure of ROI for the industry. In doing this analysis we surveyed a range of people across the travel trade industry, from tour operators and travel agents to coach operators and airlines. We asked these respondents what they view as the key attributes in attracting visitors to cities and how strong they think different cities are in each of these factors. We utilised these responses to arrive at a measure of the potential ROI for the industry. Considering what the future might hold for types of tourist and the world economy we arrived at recommendations for how popularity across different cities might change in the future and how London will be best placed to position itself to continue to be one of the most successful city destinations.

Diversity of City Experiences City destinations are crucial for the development of a strong travel and tourism portfolio because of the dynamic experience that they offer. Cities offer a wide range of types of trip. From short, day or weekend, breaks, to long trips; from first time one-off visitors to those who return regularly; and those coming from nearby and further afield. The types of things that tourists do on these vacations also vary hugely, from shopping, sight-seeing and entertainment (sports, theatre) to one-off events like the Olympics.

Comparator Cities Through literature review and discussions we have chosen to compare London with Istanbul, New York, Paris, Rio de Janeiro and Singapore. New York and Paris were chosen as they have been popular city destinations for a long time and are still viewed as the main competitors to London; Singapore is seen as a fast growing city in terms of popularity; and Istanbul and Rio de Janeiro are viewed as potential growth cities for the future.

London’s iconic architecture and rich history attracts visitors from around the globe

Page | 11


Popularity of Cities

There are many different measures of the popularity of cities. The table on the right reports statistics from Euromonitor International on the number of international visitors. These show that London has been performing consistently well in attracting international visitors. In 2006 London occupied the top position with over 15.5 million arrivals. By 2010 however, London had fallen to third position, registering approximately 14.7 million arrivals and having been overtaken by Hong Kong and Singapore which attracted 20 million and 18.3 million international visitors respectively. This same trend can be seen for Paris but more markedly, with the city falling from 3rd most visited city to 9th over the same period. Istanbul and Singapore have both seen an almost doubling of arrivals between 2006 and 2010 with both cities moving several places up the rankings. Singapore has surpassed London on this measure and Istanbul is now very closely behind Paris. The statistics for New York and Rio de Janeiro are more difficult to interpret, with both showing growth in visitors from 2006 to 2008 but falls from 2008 to 2010.

Top Ten City Destinations Top Ten City Destinations

2010 2006

Rank City Arrivals

City Arrivals

‘000 ‘000

1 Hong Kong 19,973 London 15,640

2 Singapore 18,297 Bangkok 10,350

3 London 14,706 Paris 9,700

4 Macau 13,098 Singapore 9,502

5 Bangkok 10,984 Hong Kong 8,139

6 Antalya 10,641 New York 6,219

7 Kuala Lumpur 10,351 Dubai 6,120

8 New York 8,961 Rome 6,033

9 Paris 8,176 Seoul 4,920

10 Istanbul 8,124 Barcelona 4,695

11 Dubai 7,752 Dublin 4,469

12 Mecca 6,122 Bahrain 4,418

13 Miami 6,003 Shanghai 4,315

14 Rome 5,620 Toronto 4,160

15 Shanghai 5,397 Kuala Lumpur 4,125 2006 4 1 6 3 16 35 2008 4 1 2 6 10 40 2010 2 3 8 9 10 63

Rank of City

Source: Euromonitor International

Page | 12

Why London? Travel Trade Why London?

We asked our survey respondents to indicate their view of the top 3 most popular city breaks (in terms of volume of sales). London was the most popular city ranked within the respondents’ top 3 cities – of 97 respondents, 46 ranked it as the best city, 18 as the 2nd best city and 12 as the 3rd best city, meaning that 79% of respondents ranked it within their top 3 cities by volume of sales.

The chart shows the responses to this question for our six chosen cities. London was clearly rated the most popular city by our respondents and Paris and New York followed, rated within the top 3 destinations by 46% and 19% of respondents respectively. Singapore and Istanbul were occasionally mentioned, each being ranked within the top 3 destinations by 4% of respondents. Rio de Janeiro was not ranked within the top 3 destinations by any respondents.

When we consider the responses to this question made only by those respondents who market each city destination, the proportion who rank each city in the top 3 rises for most cities. On this measure 14% of respondents who market Singapore view it as a top 3 destination and 10% of those who sell Istanbul.

City % of times in top 3

% of times in top 3 by respondents who sell the city

London 79% 72%

Paris 46% 57%

New York 19% 37% Singapore 4% 14%

Istanbul 4% 10% Rio de Janeiro 0% 0%

0 10 20 30 40 50 60 70 80

Rio de Janeiro

Istanbul

Singapore

New York

Paris

London

Number of times ranked Top City 2nd City 3rd City

Source: Volterra

Source: Volterra

Page | 13


Spotlight on London London is renowned as one of the best and most diverse cities to visit. Our survey research supported this with comments on the city reflecting the diversity both in terms of types of things on offer as well as the attraction to a wide range of tourists.

Despite the growth in visitors to Singapore and Hong Kong, London remains the only European capital city in the top five city destinations worldwide, recording almost double the number of international visitors than Paris and Istanbul in 2010. In Europe, London has showed consistent demand for tourism compared to its city competitors. Even during the economic slowdown and recovery years, London performed steadily. European Cities Marketing showed that, in 2009 and 2010, the number of bednights generated by international tourists in London was approximately 35 million. Comparatively, Paris registered approximately 23 million bednights in 20101.

1 ‘European City Tourism is on the Up Again’ (2011), European Cities Marketing

“Variety – something for everyone”

“A very good range of accommodation to suit all budgets”

“London has so much to offer the first time tourist or the repeat visitor”

Top 10 European Cities Total Number of Bednights by International Tourists

Page | 14


London had the highest occupancy rate of all European cities in 2010 (see chart on the right) and forecasts by PwC suggest that the hotels in London will remain the busiest in Europe as the occupancy rate continues to rise, to the highest rate since the 1970s . Compared to a 73% occupancy average for the cities reviewed in the study, London is estimated to see an occupancy rate of approximately 85%. During its peak months, London will operate very close to its full capacity. The forecasts developed by PwC also show that London is the fourth most expensive city, when considering ADR (Average Daily Rate) in tourist accommodation, after Geneva, Paris and Zurich. High occupancy and high ADR levels show that demand for tourism in London is resilient to higher prices when compared to other European cities. This is also true for Paris, which has a high occupancy (77%) and is

forecast to have the second highest ADR in 2012 (higher than London).

London also maintains a diversity of source markets interested in visiting the city. Whereas most of its tourist demand is still largely based in Europe, London benefits from considerable international interest. In 2010, it registered over 1.7 million arrivals from the US, with considerable interest also from Australia and Canada. This shows that the travel and tourism sector in London benefits from a stable demand from the European market as well as international demand, in particular from North America.

This popularity with visitors from across the globe was supported by our survey respondents who identified both

Average Daily Room Rate and Occupancy Rate 2010

London Arrivals by Main Source Markets

Source: Roland Berger 2012

Source: Volterra analysis of TourMIS (2010)

Page | 15


specific characteristics of the city and also its welcoming atmosphere and culture as the reason for its success in attracting a wide range of people from different places.

Measuring City Success

In a recent study of European capital city tourism, Roland Berger identified a number of recognised indicators that allow the industry to compare city performances2. These are shown in the box to the right. On these measures London scores highest on accessibility (as the chart on direct flight connections on the next page shows) and very high in internationality (the share of European and non-European tourists) but has seen relatively low growth in overnight stays and bed capacity.

Academic research into destination attractiveness showed that tourist attractiveness is a very heterogeneous concept, as it can easily encompass a large number of variables which differ significantly from one another. For example it ranges from natural tourist resources, to cultural and historical heritage, to climate, services and facilities as well as tourist infrastructure. In this context, an Index of Destination Attractiveness was

2 ‘European Capital City Tourism’ (2012), Roland Berger

Key Tourism Performance Indicators for City

Destinations

• Growth in Overnight Stays

• Number of Overnight Stays/Inhabitants

• Growth in Bed Capacity

• Value Creation

• Internationality

• Accessibility

• Congresses

Source: Roland Berger (2012)

“For most US tourists, the fact that most people speak English fluently and

[have] a traditionally favourable opinion of Americans helps.”

“[London is] compatible to the Indian taste”

“London has so much to offer the first time tourist or the repeat visitor”

Page | 16


Number of direct flight connections [schedule for summer 2011]

put forward as a composite indicator, on which to then base an assessment of the overall destination attractiveness and weight of each factor. The factors and variables that could describe them are summarised in the table below:

Source: Index of Destination Attractiveness as a Tool For Destination Attractiveness Assessment (2011), Tourism, 59(4).

FACTORS VARIABLES

Accommodation and

catering facilities

Quality and variety of restaurants, quality of

accommodation, friendliness

Activities in destination Sports and recreational opportunities,

entertainment opportunities, shopping

opportunities

Natural features Accessibility, climate, scenic beauty

Destination aesthetics Urban and architectural harmony of the place,

presentation of cultural heritage, quality of

information in destination

Environmental

preservation

Tidiness of the place, environment

Destination marketing Image of the country, feeling of personal safety,

quality of country’s promotion

Source: Roland Berger (2012)

Page | 17


Potential ROI Barometer

Bearing in mind the factors that had been identified by the research as important in determining city attractiveness and success, we designed our survey to ask the relative importance placed on these factors by the travel trade industry in determining how easy they find it to market a destination. We then asked them to rate the relative strengths of each of our chosen cities on each factor.

The average results for the importance of these nine factors are shown in the chart on the next page. This shows that the practicalities of Accommodation and Transport were rated as the most important factors, rather than any ‘City Specific’ factors. This is consistent with the literature review that concluded on the importance of accessibility and availability and price of beds.

After the practicalities, the travel trade industry rated the ‘Educational’ factors more highly than the factors that could be viewed as more ‘Recreational’. They rated Culture, City brand and Heritage more highly than Entertainment, Retail and Restaurants. The least important factor rated by the travel trade industry was ability to attract large volumes of visitors.

Generally the factors are placed quite close together in terms of importance, most likely reflecting the diversity of types of city breaks offered, marketed and sold across the travel trade industry.

We asked the travel trade industry experts:

“Please indicate the relative importance of the following factors in selling a city

break (from 1 to 10, where 1 equals not important and 10 equals very important)”

• City brand recognition

• Variety and quality of retail offering

• Entertainment offering (e.g. nightlife, theatre, major sport and music events)

• Quality and range of restaurant offering

• Transport connections

• Ability to attract large volume of visitors

• Cultural offering (e.g. museums, galleries)

• Heritage offering (e.g. landmarks)

• Variety and quality of accommodation

• Other (please specify)

Question from Volterra survey of travel trade industry (2012)

Page | 18


After ranking the relative importance of these ten factors we then asked the respondents to rate the strength of each of the comparator cities that they sell on each of those factors. The results of this question about strength across cities are presented on the next page, showing that London ranked highest on Heritage and Retail and joint highest with New York on Entertainment. Paris ranked as the strongest city on all other factors and it ranked significantly above other cities on the Quality and Range of Restaurants factor.

Paris, London and New York were scored by our respondents in a noticeably different league to Singapore, Istanbul and Rio de Janeiro. The exception to this was for Variety and Quality of Accommodation where Singapore scored particularly well. Istanbul scored well on Culture and Heritage but fell down on the more ‘Recreational’ factors, where it scored lowest in terms of Entertainment, Retail and Restaurants.

Source: Volterra

Page | 19


Source: Volterra

Page | 20


Using our survey responses we created a potential ROI Barometer by weighting the strength of each city by the importance of each factor and collating it into a single score for each city. The results are shown in the chart below. Paris is ranked as the top city on this measure, London is only 1.7 points below Paris and only 0.3 points separate London and New York. So the top three cities are very close together.

There is then a very noticeable drop to the next tier of cities with Istanbul and Singapore 9 points further below and Rio de Janeiro a further 5 points below.

Different regions different views

The travel trade survey was responded to by 111 travel trade experts, of which around a third were tour operators, a further third were travel agents, 9% were group organisers, 6% were wholesalers and 15% were made up of coach operators, airlines, trade associations, train operators, travel consultants, tourist offices, and attractions.

We segregated the results by organisation type and found no significant differences between the scores or rankings of the cities. The only factor that resulted in slightly different results was when scores were split depending on where the head office of the respondent was based. These results should be viewed as illustrative only as some of the scores are based on fewer than 10 responses.

Source: Volterra

Page | 21


Over half of respondents’ headquarters were in Europe, a further 18% in North America and 12% each in Asia and South America. The remaining 4% were in Australia, New Zealand, South Africa and Turkey (see chart above). The chart on the right shows the ROI barometer when split out by scores given by respondents headquartered in these different places.

European respondents rank very closely to the average but they rank Singapore above Istanbul by 2 points.

North American respondents rank New York slightly higher than Paris and London and rank the other three cities lower than the average scores. Asian respondents ranked London as the best city, 1 point above Paris which is 2 points above

Asia12%

Europe (incl. UK)54%

North America18%

South America

12%

Other4%

Location of Respondent’s Headquarters Respondent’s Organisation Type

Source: Volterra Source: Volterra

Source: Volterra

Page | 22


Singapore in 3rd place and New York and Rio de Janeiro are 3 points further below in joint 4th place. Istanbul is the lowest ranked city by Asian respondents. South American respondents generally gave higher scores than all other respondents but they ranked the cities in the same order as the average, but with Paris 3 points above London and New York, and Istanbul much more highly ranked than either Singapore or Rio de Janeiro.

London’s strengths and weaknesses

THE STRENGTHS

Multiple strengths were identified for London. Typically several respondents mentioned every strength listed below and the quotes are simply representative of the positive responses we received.

• London’s accessibility is a big strength. On the measure of direct flight connections it ranks as the best city in Europe, followed closely by Paris and our respondents rated its transport connections as strong, only marginally behind Paris.

• London benefits from a huge and diverse selection of destination aesthetics, with an amazing history, cultural heritage and urban

and architectural harmony.

“Ease of access by Eurostar” “Flight connections are another big draw”

“The American fascination with Royalty is also a draw for Americans choosing

London!”

“Victorian architecture and world famous West End entertainment as well as

the city’s music, writing and film heritage”

“Icons like London Buses, Telephone Boxes, London Taxis”

Page | 23


• London is also renowned for its openness and cultural diversity, making it appeal to people from all over the world. The lack of language barriers to most of the world is also a huge strength of the city.

• The ability to combine business and pleasure is also seen as a huge benefit for the city.

THE WEAKNESSES

In general very few weaknesses were identified for London and the comments were overwhelmingly positive. In this section we summarise all weaknesses that we have found any evidence for although most were only raised by one or two respondents.

• Accommodation and transport can be seen as expensive. Budget accommodation can be seen as poor quality.

“London accepts all races, creeds and colours.”

“[For the Asian market] there is no language issue, no vegetarian food issue.”

“Can also visit people from the educational field like Professors, Universities and

Research Scholars.”

“The hotel prices have been increasing quite a lot over the last seasons.”

“Ease of access to transportation, although expensive”

“The poor quality of the 2* and 3* hotels in London, compared to other destinations.”

Page | 24


• The city is not seen as the most positive for making deals and promotions with the travel trade industry.

• Visas can be difficult and time consuming to get.

• The city can be difficult for coaches.

“We notice a strong tendency of trying to sell the rooms directly instead of offering

capacity to overseas tour operators, who make publicity for the destination.”

“Maybe offer more promotions to grow tourism”

“It could have been even more popular had not it been for a very long time we need

to issue a visa” (comment from Russian respondent)

“London (as with Paris) is a very difficult city to navigate and is not the most Coach

Friendly city in the UK” (comment from coach operator)

Page | 25


Future trends

London has been a very popular city for many years and continues to attract large numbers of tourists. Over the last four years Singapore and Hong Kong have doubled their numbers of visitors and overtaken London as the most visited cities. As the world economic stage continues to change and more demand starts to come from emerging economies we expect that London will continue to see competition from these cities. However London benefits from some intrinsic attractions that will not change in the future – the culture and heritage of the city are some of its most attractive features and will continue to be so. London is very popular among Asian visitors, which is positive as the world economy shifts in that direction and we expect a larger proportion of tourists to be from those emerging markets in the future. London is renowned for being open, welcoming and culturally diverse, factors that will help it to continue to attract tourists from all around the globe.

The competitive growth of the Asian-Pacific tourist market is evident. London may see increasing competition in terms of room rates and promotions and the time taken for some tourists to acquire the right visas is also an issue. Whilst accessibility is one of the city’s key strengths, it can also be seen as expensive to travel around. In addition to this if Heathrow continues to be constrained the number of flights to the growing tourist markets may not keep pace with demand and may result in higher prices and less reliable journeys. Both of these factors could constrain future growth of the travel trade industry.

Page | 6


Insights and recommendations

Whilst London is seen as the ‘father of all cities’, fathers grow old and children become the new leaders of the family. London is the leading city on many rankings, but there is also evidence that other cities are growing and expanding into the travel trade market. In order to remain a competitive and top ranking city destination London needs to:

• Remain competitive in terms of quality and availability of accommodation to suit all budgets and travellers

• Continue to be one of the most accessible locations to travellers from all across the globe, but especially growth economies. This may require further investment in transport infrastructure that is already at full capacity (e.g. Heathrow for international travel and continued reinvestment in the underground network for local travel)

• Continue to invest in its public realm to ensure that it remains a city seen as safe and easy to visit, as well as being seen to take good care of its cultural assets

• Continue to invest in its entertainment and restaurant offers and support its retail locations

• Consider offering more promotions to attract visitors

“London is a father of all cities.”

• In so far as it can have any influence upon visas, ensure that the city remains easy for tourists from all across the world to visit

• Asian respondents rank London as the best city to visit, which is a positive finding that the

city should continue to nurture as the world economy shifts in that direction and we expect a larger proportion of tourists to be from those emerging markets in the future.

Page | 27

Why London? Business Tourism

Business Tourism Introduction

The aim of this research was to compare and contrast London with other relevant city destinations for business tourism and to arrive at a potential measure of ROI for the business events industry. In doing this analysis we surveyed a range of people across the business tourism industry, from associations and conference companies to incentive event organisers and intermediaries as well as companies’ in house event organisation teams. We asked these respondents the relative importance of different factors in the success of their events in cities and how strongly they think different cities are in each of these factors. We utilised these responses to arrive at a measure of the potential ROI for the industry. Considering where the growth in demand will come from for business events in the future we arrive at recommendations for how popularity of different cities might change in the future and how London will be best placed to position itself to continue to be one of the most successful cities for business events.

Importance of Business Tourism

Business travel and tourism is one of the major high yield sectors of the tourism industry. It is estimated that a business visitor spends £131 per day on average in Britain. This is approximately 72% more than the amount spent by leisure tourists in Britain on a daily basis3. It is standard to segment the market into Meetings, Incentives, Conferences and Congresses, and Exhibitions (MICE). Meetings are held by corporate organisations and include management meetings, product launches, training courses and annual general meetings. Incentives are a tool used by companies to stimulate and reward staff. Research has shown that travel is the most effective motivator. Conferences and congresses are

3 ‘Britain for Events. (2010).

Value of Britain’s Events Sector

Conferences and Meetings

£18.8 billion

Exhibitions and Travel Shows

£9.3 billion

Incentive Travel

£1.2 billion

Corporate Hospitality

£1 billion

Cultural, Music and Sport Events

£5.8 billion

Source: Britain for Events (2010)

The ExCel –London’s international Convention centre – in located in the heart of the Royal Docks

Page | 28

Why London? Business Tourism Why London?

meetings of individuals for the purposes of discussing something of common interest. Exhibitions are professionally organised events that facilitate the meeting of buyers and sellers in a given market. Although it is relatively difficult to give a clear indication of the value and volume of the total MICE market, the sector was estimated to bring £36 billion per annum to the British economy.

Popularity of London and the UK

Our city comparators for travel trade and business tourism were chosen through literature review and discussions with experts. Within both areas, we chose some existing competitors and some cities that are seen as potential growth cities in the future. For business tourism we chose to compare London with Barcelona, Chicago, Paris, Singapore and Vienna. With the exception of Chicago, these cities are all in the top ten cities for association meetings.

Worldwide rankings for the Association Meetings Market show that the UK is among the top five destinations by the number of meetings held annually per country. In 2011, London moved into the top ten cities hosting the largest number of association meetings, occupying the 7th position. This is a great leap for London, which was ranked the sixteenth top destination by number of association meetings worldwide in 2009.

Measuring ROI in business tourism

Most studies that have tried to measure return on investment within business tourism focus on the return to the individual attendees or the return to the company holding the event. In this section we talk a little about the factors that determine these returns. However it is important to note that the aim of our study was to consider the return on investment to the event organisers, not to the attendees or companies.

Top Five Countries by Total Number of Association Meetings

2011

Top Five Cities by Total Number of Association Meetings

2011

Country # Meetings City # Meetings

U.S.A. 759 Vienna 181

Germany 577 Paris 174

Spain 463 Barcelona 150

UK 434 Berlin 147

France 428 Singapore 142

Italy 363 Madrid 130

Brazil 304 London 115

China 302 Amsterdam 114

Netherlands 291 Istanbul 113

Austria 267 Beijing 111

Source: The International Associations Meetings Market (2011), ICCA

Page | 29


For years, suppliers of meetings were quantifying the value of events exclusively in budgetary terms – i.e. delegates spend – nowadays the focus has moved to the long-term benefits of networking and knowledge transfers4. Businesses and investors have now shifted towards more comprehensive measurements of return on investment and return on objectives (ROO) to widen their consideration from just financial objectives to also include information regarding increased employee satisfaction, increased employee loyalty and increased customer satisfaction (post programme). A recent study of ROI and ROO of the motivational events industry highlighted in the table on the left showed that “providers and users of such programs must clearly communicate to management not only the expected return from motivational expenditures but also how the

returns will be measured”5. The Site Index survey considered the measurement of ROI and ROO in the motivational events industry. At a time when every expense needs to be justified, they found that the measurement of ROI/ROO is gaining more focus. The survey asked respondents about ways in which these return metrics could be measured. The survey found that hard measures such as increased sales, profitability and growth of market share are still considered more important but that soft measures such as commitment, loyalty and trust are seen as increasingly important although measurement of these factors remains difficult.

Because businesses pay increasing attention to composite ROI and ROO measurements, including post-programme quality indicators, investors in the business tourism sector have to pay growing attention to these intrinsic organisational measurements in order to

4 C. Ipalawatte (2004) Business Visitors, Tourism Research Report.

5 The Annual Analysis and Forecast for the Motivational Events Industry: Focus on Measurement (2010), Site International Foundation.

Source: Site Index

Page | 28


evaluate the return on their investment. This is particularly relevant as research confirms that “if a business or event visitor leaves with a positive impression, up to 40% of them will return at a later date with a holiday, often bringing family with them”6.

A recent survey on destination selection for motivational marketing programmes showed that ‘the cultural and exotic appeal’ of the destination is perceived as the defining feature for programme selection, both by planners/providers and users/consumers. However, the recent recession has had a restricting effect on budgets, so meeting professionals expect higher ROI once a meeting is booked. It is perceived that the focus will shift from standard measurements of adherence to budgets and attendee satisfaction to the ability to negotiate ‘extras’ like free transportation as well as competitive offers such as formal dinners and entertainment. Overall, “it is expected that the market will increasingly turn into a buyers’ market, where planners can negotiate more generous concessions, incentives, rates and other contract provisions”7.

Despite the movement towards considering measures outside of pure financial gains in order to consider the success of an event, recent research found that budgetary value and overall quality of service are still the two most important factors in determining the choice of destination for business events.

Potential ROI Barometer

Bearing in mind the range of factors that had been identified by the research as important in determining city attractiveness for business events and their success, we designed our survey to ask the relative importance placed on these factors by the business events industry in determining how easy they find it to attract events to a destination. We then asked them to rate the relative strengths of each of our chosen cities on each factor.

6 Business Visits & Events Partnership.

7 Long Haul Tourism: The EU Market for MICE (2009) CBI.

Page | 31


The average results for the importance of these factors are shown in the chart below. This shows that, as with the travel trade industry, the practicalities of Travel Accessibility and Quality and Availability of Facilities were rated as the most important factors.

The least important were Ability to Attract High Calibre Speakers or Ability to Attract Sponsors.

Also important are City Brand, Access to Local Knowledge and Expertise, Variety & Quality of Retail, Cultural & Entertainment Offering and Networking Opportunities.

These findings reinforce the findings of our literature review. Interestingly the difference in importance placed on various factors was more significant in the business survey responses that the travel trade ones. Travel and Facilities were rated as 1.5 to 1.2 points respectively (out of a total of 10 points) more important than the next most important factor (City Brand). City Brand in turn was rated 1.8 points higher than the least important factor (Attracting Sponsors) meaning the difference between most important (Travel) and least important (Attracting Sponsors) factor was 3.3 in the business survey. In comparison the difference between most important and least important factor in the travel trade survey was only 1.4 points. This reflects the extent of importance placed on facilities and travel by the business tourism industry, which is reflected by the literature review that shows that despite increased interest in other cost factors, accessibility and facilities are still the most important factors in determining where to have business events.

We asked business tourism experts:

“Please indicate the relative importance of the following factors in the success of

your event”

• City brand / city recognition

• Travel accessibility

• Access to local knowledge and expertise

• Ability to attract high-calibre speakers

• Networking opportunities

• Variety and quality of retail, cultural and entertainment offering

• Ability to attract sponsors

• Quality and availability of facilities

• Other (please specify)

Question from Volterra survey of business tourism industry (2012)

Page | 32


After ranking the relative importance of these eight factors we then asked the respondents to rate the strength of each of the comparator cities that they market events in on each of those factors. The results of this question about strength across cities are presented on the next page, showing that London was ranked as the best city on all factors except Quality and Availability of Facilities, where it rated 2nd to Singapore. Paris ranked as 2nd best city on all factors except Quality and Availability of Facilities (Singapore 1st, London 2nd) and Attracting Sponsors (where Chicago ranked marginally 2nd, followed closely by Paris and Barcelona in joint 3rd). Vienna ranked as the lowest city on all factors except Access to Knowledge & Expertise (where Chicago ranked lower) and Retail, Cultural & Entertainment Offering (where Chicago & Singapore ranked joint lowest).

Source: Volterra

Page | 33


Source: Volterra

Page | 34


Using our survey responses we created a potential ROI Barometer by weighting the strength of each city by the importance of each factor and collating it into a single score for each city. The results are shown in the chart below. London is ranked as the top city on this measure, followed closely by Paris 2 points below.

Barcelona and Singapore are very closely ranked in 3rd and 4th positions, a further 3-4 points below Paris. Chicago ranked marginally higher than Vienna but both are a further 3 points below Barcelona and Singapore.

The cities were ranked in three noticeably distinct sets of 2 cities as highlighted in the chart on this page.

Source: Volterra

Page | 35


Different respondents different views

The survey was responded to by 164 business tourism experts, of which around a quarter were intermediaries, a further fifth were incentives event organisers, 13% were in-house company organisers, 10% were associations, 8% were conference companies and 25% were made up of other types of organisations including events departments, travel agencies, exhibition organisers, charities, consultancies and tour operators (see chart below). We segmented the results by organisation type and found that Incentives Event Organisers reliably ranked all cities more strongly on all factors but there was no actual difference in the rankings of the cities.

We asked our survey respondents the average number of attendees to their events, as shown in the chart to the right.

Around 40% of our respondents typically organised events for 50-100 attendees and a similar number for 100-500 attendees. The remaining 20% of respondents were split almost equally between those who organised either smaller events (less than 50 attendees) or larger events (more than 500 attendees). Some respondents who focussed on larger events commented that the availability of hotels that accommodate large numbers of visitors was poor in London, although this was not reflected in the overall scoring of cities and there was no significant difference between the scores given by respondents who organised different sized events.

As with the travel trade survey, the only factor that resulted in significantly different results was when responses were split depending on where the head office of the respondent was based. These results should be viewed as illustrative only as some of the scores are based on fewer than 10 responses.

As shown in the chart on the left, over 40% of respondents’ headquarters were in the UK, and a further 20% elsewhere in Europe. Almost a quarter were in North America and 6% in Asia. The remaining 7% were in Australia, Argentina, Russia, Israel and South Africa. The chart below shows the ROI barometer when split out by scores given by respondents headquartered in these different places.

Location of respondents’ headquarters Organisation type of respondents

Respondents’ average number of attendees to events

<50 attendees12%

50-100 attendees

41%

100-500 attendees

37%

500+ attendees

10%

Asia6%

North America24%

Europe20%

UK43%

Other7%

Location of respondents' headquarters

Respondents’ average number of

attendees to events

Location of respondents’ headquarters

Source: Volterra

Source: Volterra

Source: Volterra

Page | 36


UK based respondents rated generally in line with average responses, although they rated Chicago in 4th place above Singapore. European respondents (excluding UK) ranked London above Paris by slightly more than other respondents (3.5 points) and rated Vienna in 5th position above Chicago.

North American respondents ranked London and Paris much more closely (only 0.7 points apart) and rated Singapore in 3rd position, followed by Chicago in 4th which was rated narrowly ahead of Barcelona. Vienna remained in 6th position for North Americans.

Asian respondents ranked London as the best city, 9 points above Barcelona which was ranked closely with Paris in 2nd and 3rd positions. Vienna was scored most positively by Asian based respondents with Chicago and Singapore scored lowest.

Spotlight on London

Respondents were overwhelmingly positive about the attributes that make London a very popular city for business events. The main issues that were raised as negatives for the city were around expense, in terms of travel, accommodation and activities. However our research did not entirely support this. The 2012 Global Corporate Travel Forecast and Hotel Negotiability Index (below) showed that London is highly competitive in offering European Average Ticket Prices for Air Fares, but it performed slightly less well on Average Daily Rates for Hotels. According to these indicators, London maintained its attractiveness to corporate travel, offering considerable reduction (39%) on advance purchase savings for long-haul air fares. However, average daily rates for hotel bookings increased by 2%, ranking relatively low among the European cities with competitive hotel negotiability.

40 50 60 70

Asia

NorthAmerica

European(excl.UK)

UK

Overall

ROI Barometer by location of respondent

Vienna

Chicago

Singapore

Barcelona

Paris

London

Source: Volterra

Page | 37


London’s strengths across a variety of industries were identified as important attributes in attracting business events to the city, although some respondents questioned whether the city was making the most of these attributes.

Source: Global Corporate Travel Forecast

and Hotel Negotiability Index (2012),

Egencia.

“London has become a leading global city

with strengths in arts, education, commerce,

finance, fashion, and media”

“London has world class financial institutions

and international markets”

“London has access to cutting-edge

technology”

Page | 38


London’s strengths and weaknesses

THE STRENGTHS

Multiple strengths were identified for London. Typically several respondents mentioned each strength listed below and the quotes are simply representative of the positive responses we received.

• London is seen as an excellent centre for business and networking which adds to its attraction for hosting business events there.

• London is seen as a very welcoming and open city.

• The diversity of the city both in terms of level of budget and types of activity were seen as a huge positive for London.

“Many companies have a working relationship with London based businesses”

“London is a good centre for networking and completing other business”

“London appears friendlier than Paris”

“Multicultural”

“Very cosmopolitan”

“There is always something for everyone and for every budget!”

Page | 39


• As with the travel trade, the ability to combine business and pleasure is also seen as a huge benefit for the city.

• The lack of language barrier was mentioned by many respondents and is seen as a huge inherent advantage for the city over other European destinations.

• Another natural benefit for the city that was repeatedly identified was its geographical location, which coupled with its connectivity make it a very accessible city.

THE WEAKNESSES

More weaknesses were identified for business tourism than by the travel trade industry. In this section we summarise the main weaknesses that we found evidence for and most quotes are representative of several comments made by respondents.

• Expense was identified as the largest deterrent from hosting events in London.

“London is well positioned to combine professional purpose with pleasure”

“Main differentiator is that communication is much easier because English is a second language [for many attendees]”

“Probably the 'best' global hub for business and cultural events, halfway between Asia and The Americas”

“The biggest problem with London is the high rates.” “Airline cost and local transportation fees”

Page | 40


• Although the fact that London has leading experts across many fields was identified as a strength for the city, some respondents also suggested that the city could make more of this by engaging with those experts and integrating them better into the business event offer.

• Similar to travel trade, the difficulty for some visitors to obtain visas was identified as a weakness for the city.

• Whilst accessibility was identified as a huge strength of the city, the constraints of Heathrow were also identified as a disadvantage and could be seen as a threat to continued future growth.

• Lack of availability of large conference centres was also raised by some respondents who focus on larger events.

“Has London really sought to engage its leading scientists and academics and integrate the content offer?”

“The biggest challenge with… London is that it takes [so long] to get a visa to the UK. Indian travellers therefore [have] to plan well in advance. On the contrary, a visa to France, Spain, or Singapore can be got within a week”

“Heathrow is subscale, slow (due to security and transport) and needs to have a plan for an early major upgrade and/or a major new London area airport”

“For an event organiser the lack of large conference centres and large hotels with large conference facilities [in London] compared to the other cities is not as good”

Page | 41


• As with travel trade, the lack of packages available was seen as a deterrent for business tourism.

Insights and recommendations

London is a very popular city for business tourism. Organisers like the fact that the city offers more than just a business event and attendees want to come to see everything else that the city also has to offer. However some negatives were repeatedly raised about the city – most notably expense, potential future constraints on accessibility, and visa problems. London was rated particularly highly by our Asian respondents which is a very positive finding for the future as the world economy continues to shift more to the emerging economies. London was seen to possess many strengths that it perhaps does not make the most of – better engaging with its industry experts and academics to create a more attractive business tourism offer, for example. The accommodation market was also not seen to offer the most competitive packages. As the future becomes more competitive London must play to its strengths and ensure that it continues to attract a large share of the business tourism market.

“If London and the hotels could have more attractive delegates’ packages I think the numbers would rise”

“As the capital of the UK, London is an Alpha ++ city (along with New York), a cultural epicentre and must-see European destination, the whole world in a single metropolis. Our clients from Japan and mainland Asia rarely pass up the chance to visit this most enchanting city during European sojourns”

Page | 42


In order to remain a competitive and top ranking city for business tourism London needs to:

• Remain competitive in terms of quality and availability of accommodation to suit all budgets and travellers

• Continue to be one of the most accessible locations to travellers from all across the globe, but especially growth economies. This may require further investment in transport infrastructure that is already at full capacity (e.g. Heathrow for international travel and continued reinvestment in the underground network for local travel)

• Continue to invest in its cultural, entertainment and restaurant offer and support its retail locations as these are factors that attract attendees to come to events in London

• Consider offering more promotions to attract visitors

• In so far as it can have any influence upon visas, ensure that the city remains easy for tourists from all across the world to visit

• Consider the opportunity to better engage with industry experts and academics to use them as a means of attracting more business tourism to the city

• The popularity of London with Asian respondents is a positive finding for future competitiveness of the city as the world economy will continue to shift towards emerging markets and we would therefore expect a larger number of business events to be coming from those parts of the world in the future. The city needs to ensure this popularity is retained.

Three of London’s popular conference and convention venues: Olympia, Central Hall and the British Museum

Page | 43

Why London? FDI

FDI

This section of the report looks at the different factors affecting FDI decisions, as well as the drivers of return on investment (ROI) in different industries. It then compares London with other competitor cities in terms of the level of return that can be achieved.

The analysis in this section combines industry feedback, as obtained by interviews with senior management in selected companies in each industry with quantitative analysis, in order to compare industry perception of return drivers and cities’ performance with a more objective, albeit high level, measure of return.

The report focuses on five industries:

• Creative Industries • Life Sciences • Financial Services • Business Services • Technology

A panel of five cities was used to compare current and future ROI for each industry, with a representative city sought for each region. Cities were selected based on discussions with industry leaders, as well as data on historic FDI flows (see figure above for historic FDI data as captured by fDi Intelligence). As with Business Travel and Travel Trade, effort was made for consistency reasons to select the same cities across the five industries. This was maintained with the exception of German cities which, given the disperse nature of its business landscape it was decided to opt for different cities for each industry.

Using these criteria the selected cities for this research were:

• London, Singapore, Shanghai, and New York for all five industries • Berlin for Creative Industries and Technology, Frankfurt for Financial Services, and Munich Business Services and Life Sciences

Capital Investment by industry, 2003 - 2011

Source: fDi Intelligence

Page | 44

Why London? FDI

Measuring Return on Investment

The first part of the analysis involved a number of interviews with industry leaders responsible for investment decisions in each industry to understand what motivates their decisions to invest. Leaders were asked to describe the factors that are most important for their business when choosing a city to invest and also to compare each competitor city on these factors.

The second part of the analysis involved a quantitative approach for measuring the return on investment by sector in each city. Following an extensive literature review, and incorporating the responses of industry leaders, potential drivers of ROI were identified for each sector. The most relevant of these drivers were then isolated using econometric analysis and their predictive relationship with ROI identified. Due to the unavailability of historic ROI data for Creative Industries and the nature of the investment cycle in Life Sciences, a benchmarking approach was used for these two industries, whereby key indicators of ROI were identified and evaluated using weightings identified through interviews with industry leaders.

A forecast scenario for 2020 was then created and used to estimate how returns in each city could change in these industries given a set of assumptions which are described in more detail in the Appendix.

Page | 45

Why London? Creative Industries

FDI | Creative Industries

Creative industries encompass the film and print media, advertising as well as the design industry. The sector varies in the degree of its focus outside its home markets, with exports often the first stage before FDI is considered. In the United Kingdom and the United States, the film and TV industries are heavily export oriented. For example, in the UK these industries accounted for 4.3% of total UK services exports in 2010.

When choosing where to invest, companies will often select a country where they want to be present and then decide on the city they want to operate from.

The decision to invest

Most importantly companies have to go where the talent is. Human capital is a key factor in the location strategy, in particular in media business, where success often depends on hiring the most talented people and retaining those people. Our consultations with industry executives have revealed the importance of locating in cities where the talent is located. In some sectors such as film and television, there is little choice but to locate activities in certain cities where the key creative personnel are based. This can often diminish the importance of city costs in the decision making process. The attractiveness of a city as a place to live helps to retain top talent and is important as a pull factor when re-locating executives. The overall market size and market growth potential are also key factors in deciding on investment location. However, it is not just the local market that is of interest, potential markets that can be reached through a location are also taken into account. These will be influenced by cultural ties that an investment location has with other markets, as well as language links.

A film crew

shoots a scene

from the film

London

Boulevard

Page | 46


Factors surrounding the local legal environment are important in forming the location decision and include:

• Ownership regulation - restrictions on foreign

ownership is a major barrier to investment in some emerging economies. While market size and growth may be attractive, companies may encounter investment barriers such as equity caps and joint venture obligations that deter them from entering the market

• Intellectual property protection - the threat of wide-spread infringement to intellectual property rights can make a market far less attractive

• Rule of law – the overall reliability of the legal system is also seen as important. Companies need to know that if they enter into litigation with a supplier or client, the legal system can be reliable. In addition, concerns with high levels of corruption may influence location decisions.

Other location factors include: • Infrastructure - accessibility to transport hubs is viewed as important, given the international nature of the industry. This includes

the route availability and connectivity at airports, and travel time to and from the cities’ airports • Taxation - personal tax rates were seen as a particularly important factor, given their impact on re-locating executives

A catwalk from

London Fashion

Week

Page | 47


• Costs - the degree to which costs are a factor in the location decision

process depends on the type of operation that is being set up. In some areas, talent would usually pay for higher costs, with some cities having more established creative industries irrespective of the costs of the city. Our consultations with industry executives reveal that the high cost of some locations are generally offset by higher productivity from a more creative workforce. The creative industry has a unique skills requirement which means that sometimes there is no choice but to locate in a city where the most talented individuals are located. The scope for relocating functions to lower cost locations may therefore be more limited in this industry.

There are certain cities where multinational companies in the industry need to be in, either as part of supporting their brand, or in order to maintain good linkages to important clusters.

Cities comparison

China was viewed as a difficult market to enter in some of the areas, given issues around regulation and the barriers to local business

ownership. This made Shanghai a less attractive location beyond a representative office.

Hong Kong was seen as a more attractive location to Singapore by some of the companies in the sector, and a potential hub for Asian

operations.

Cities such as London and New York had the advantage of English language as their main language, which made it easier for

companies to communicate with their operations there, and easier to transfer people to those locations given the smoother transition for expats.

Page | 48


Maximising return on investment

The return on investment for creative industry companies will be influenced by a number of factors discussed above. Lack of historical data to cover return on investment for the industry meant that we were unable to perform regression analysis to determine the drivers of return for this industry. Instead, we used comparative metrics to look at how these factors vary between different cities and, given the importance of each factor derived from our desk research and industry interviews, how potential return on investment could fluctuate between the cities. We then looked at how performance could evolve in the future8.

An important pool of talent, and favourable conditions to attract talent put London at the lead among the selected cities that were benchmarked. New York closely followed thanks to its large home market. The gap between the two top cities and the remaining three is relatively large, with Singapore and Shanghai closely together. Singapore benefits from a strong legal environment but has a relatively small market that it addresses directly, while costs in Shanghai are low but the legal environment is seen as lagging behind. Berlin’s performance is somewhat better than the two Asian cities that we analysed thanks to a strong legal environment and better human capital.

Looking at the future, we would expect to see London maintaining its lead by 2020 and the overall benchmark remaining unchanged with the exception of Shanghai overtaking Singapore thanks to improvements in IP protection in China (see table on next page for more detail).

8 See Appendix for a full discussion of our methodology.

Some of the

film crew from

the new James

Bond Feature

‘Skyfall’

Page | 49


Return on investment benchmark9

9 Higher score represents more attractive location, therefore higher score for human capital, market size and legal environment represent a better environment, while higher score for costs

represents lower costs.

Actual Weighting London New York Berlin Singapore Shanghai

Human capital 40% 100 87 62 56 51

Market size 30% 86 100 17 1 16

Legal environment 20% 93 86 93 100 57

Costs 10% 27 32 45 45 100

Current score 87 85 53 47 46

Rank 1 2 3 4 5

Future Scenario Weighting London New York Berlin Singapore Shanghai

Human capital 40% 100 85 62 56 51

Market size 30% 86 100 16 1 23

Legal environment 20% 93 86 93 100 72

Costs 10% 48 59 74 68 100

Future scenario score 89 87 56 49 52

Rank 1 2 3 5 4

Page | 12

Why London? Life Sciences

FDI | Life Sciences The life sciences cover a wide variety of areas, including sectors such as pharmaceuticals and biotechnology. The industry is relatively globalised, with key activities ranging from research & development (R&D) to manufacturing and sales.

Source: European Commission

The R&D intensity in the pharmaceuticals and biotechnology sectors (as measured by R&D expenditure as % of net sales) is the highest of all industry groups, with 15.3% in 2010, as highlighted in the figure below.

Geographical presence

In the US and Western Europe, a significant proportion of investment is in R&D related facilities, particularly within pharmaceuticals and biotechnology. In 2010, the sector made R&D investments of €37.7bn in the US and €27.8bn in Europe10.

Clinical trials represent the majority of R&D expenditure. In 2012, 57.6% of R&D expenditure in the US went towards clinical trials with 24.8% spent on pre-clinical research. The high cost of drug trials in the West has led to a trend towards increasing investment in clinical research in developing countries.

North America and Europe remain the largest pharmaceutical markets, representing just over 41% and 26% respectively of global pharmaceutical sales in 2011 (see figure overleaf).

10

EFPIA, PhRMA

Page | 51

Why London? Life Science

Source: IMS Midas


When looking to invest, companies will often first identify the country that they would wish to invest in and then select which city to locate in.

The key factors that are central to the decision on investment location for life sciences companies will vary significantly depending on the type of activity they are looking to locate.

Looking at R&D investment, the following factors have been found to be of particular importance when making investment decisions:

• Quality and availability of human capital - availability of qualified staff is a key consideration for R&D facilities. Top quality universities attract the best students who may continue to reside and work in that city

• The potential for R&D

collaboration with research institutions - the collaboration

between universities and companies in the development of new products is becoming increasingly important

• Intellectual property protection - a transparent and fair judicial system, which respects intellectual property rights, is a prerequisite for many life sciences companies. The nature of R&D activities means the ability to protect innovations from patent

infringements is often a key consideration.

Another factor in location decisions for life sciences companies is the location of industry clusters, comprising in addition to the concentration of research institutions and qualified staff a range of ancillary companies to service the industry.

The market size and market growth potential that can be accessed from an investment location are two factors relevant for certain activities in life sciences. As a relatively global industry, manufacturing of drugs can be done from most places, while clinical trials are increasingly also being carried out in a wider spread of locations. However, maintaining a presence in the largest pharmaceutical markets is still seen as essential. Despite the market potential of Asia, the majority of pharmaceutical sales are in the North American and European markets, as depicted in the chart to the left and the chart on the next page.

Page | 52


Of particular importance in emerging markets, where individual national markets tend to be smaller, is the selection of a location which will allow access to a large set of neighbouring countries, providing a wide regional access to markets. Market growth potential could be linked to high economic growth, demographics or disease profile in each country, or to other factors such as improving trade relations between the country and its neighbours.

Other factors influencing location decisions include:

Costs which can be an important consideration factor in deciding on a

geographical location, particularly for a manufacturing facility. The cost of clinical Source: EFPIA, PhARMA

trials, as highlighted in the chart below left, can be significantly reduced by locating stages of the trial in a lower cost location

Good transport facilities are essential, including proximity to efficient ports

facilities, when transportation of goods is an important part of the operations.

In addition, regulatory barriers to market access can often make it

essential to invest in certain facilities in order to gain access to that market. For example, a manufacturing facility in a country can sometimes be a prerequisite for getting regulatory approval or being able to market a product in that geography.

Source: Kinapse 2007, MISG Clinical Research Working Group

Page | 53


More generally, we found the following factors relevant to life sciences companies in common with other sectors:

• Political stability and positive attitude to foreign investment • Ability to repatriate funds

• Taxes on profit repatriation

• Attractiveness for expat staff

Geographical comparison

The UK’s share of global patient recruitment in clinical trials dropped from 6% in 2000 to 2% in 2006, while the share of Latin America and SE Asia & W Pacific rose to 7% each from 3% and 2% respectively in 200011. North America retained the largest share of patient enrolment at 39% in 2006 compared to 14% for the EU, which represented a large drop from its 21% global share in 2000. The UK has some of the largest life science clusters in the world and is a major location for pre-clinical and clinical research, and manufacturing, as well as hosts the global headquarters of several major pharmaceutical companies. However, in recent years the UK has suffered from barriers to health research, with a recent review by the Academy of Medical Sciences finding that UK health research activities are being undermined by an overly complex regulatory and governance environment. It takes an average of 621 days from a decision to support studies through to the first patient entering a trial in the UK, compared to Canada’s 30 to 60 day process12. Despite these recent difficulties, the UK and London remain excellent locations for Life Sciences investment with some of the top universities in the world and a talented and productive workforce.

11

Commercial Clinical Research in the UK, Kinapse, November 2008 12

A New Pathway for the Regulation and Governance of Health Research, Academy of Medical Sciences, January 2011

Source: IMS World Review 2012

Page | 54

Why London? Life Science

Why London?

London is seen as strong on human capital. It is easier to transfer staff to London compared to other European locations, and it has good supply of quality people with science background. London also benefits from having English as its main language, as well as from good international transport links, and good professional services, such as accountants and lawyers that can support the industry. Despite its small market size, Singapore has become a major destination for life science investment in Asia. Singapore is already strong in contract clinical research and pharmaceutical manufacturing, as well as biotechnology, and is now growing its pre-clinical pharmaceutical research capabilities. The government has strongly supported this effort and has funded the development of several purpose built business parks which now house some of the major pharmaceutical and contract research firms. To provide the relevant workforce for the industry, the Singaporean government has invested heavily in universities and research institutions and promotes university/ industry collaboration. The life science industry in China has seen exceptional growth in recent years. With a large and fast-growing market, China has attracted capital investment of $11.6bn in the life science industry since 200313, second only to the United States. However, China remains an emerging market that has some catching up to do in terms of the quality of its academic institutions and staff, as well as IP protection. China’s cost advantage has been reduced in recent years.

13

fDi Markets

Page | 55


Maximising return on objectives

We focus our benchmarking analysis on R&D in life sciences. As investment in R&D takes many years to produce a revenue stream, which can then be generated from different geographies, it is not easy to assign a return to a single location. An alternative way to measure return is by analysing the ease by which R&D objectives can be met. This can be done by benchmarking the performance of different cities in key factors affecting the success of R&D operations.

We grouped these factors into three categories:

• R&D environment;

• IP protection; and

• Market size.

Each factor was assigned a weight based on our findings from the academic literature and company interviews14.

Among the cities we compared for this study, our benchmarking analysis put New York as the location with most favourable factors for R&D investment, followed by London (see table on next page). Munich comes in third place followed by Singapore and Shanghai. Our analysis shows that London, Munich and Singapore currently rank closely together, with a strong R&D environment in London being somewhat offset by weaker IP protection and a relatively smaller national market.

New York benefits from strong IP protection, as well as direct access to the largest market for life sciences in the world, together with good access to

14

See Appendix for a full discussion of our methodology.

world-class research staff and overall positive R&D environment.

Singapore is surpassed by Munich and London as these locations have direct access to larger domestic markets and have higher levels of health expenditure per capita.

Looking at how the picture could evolve by 2020, we developed a future scenario for the factors affecting R&D in life sciences that incorporates the drive in London, and the UK as a whole, to nurture the life sciences industry. This could see increased investment in university research and greater collaboration with industry, as well as higher IP protection for the industry. This will see the gap between New York and London almost halve.

Page | 56


Continued rapid growth in health expenditure in China should see the market size for life sciences in Shanghai increase significantly

over the next decade which, together with a more favourable R&D environment and some improvements in IP protection, should

narrow the gap between Shanghai and Singapore.

Return on objectives benchmark

Current scenario Weighting New York London Munich Singapore Shanghai

R&D environment 70% 100 89 84 86 59

IP protection 10% 100 82 92 93 66

Market size 20% 100 19 26 9 18

Current score 100 74 73 72 51

Rank 1 2 3 4 5

Future scenario 2020 Weighting New York London Munich Singapore Shanghai

R&D environment 70% 100 100 85 88 77

IP protection 10% 100 98 92 93 82

Market size 20% 100 23 27 9 34

Future scenario score 100 85 74 73 69

Rank 1 2 3 4 5

Page | 57


Case Study

Shionogi

Shionogi is a Japanese pharmaceutical

company headquartered in Osaka. The

company, which had sales of £2,090m in

2011, has developed some well-known

drugs such as anti-cholesterol drug Crestor

(marketed by Astra Zeneca) and Doribax, a

broad spectrum antibiotic. Founded in

1878, Shionogi started as a drug wholesaler

in Osaka but quickly moved into developing

and producing its own pharmaceuticals,

veterinary drugs and agrochemicals. In

2000, the company made the decision to

concentrate its business entirely on

pharmaceutical development and

production by divesting of its animal health,

industrial chemicals and clinical testing

businesses. The company focuses its R&D

activities on three key therapeutic areas:

obesity/diabetes, viral infection and pain

relief.

Overseas expansion Shionogi opened

its first office abroad in 1935 in Taipei,

Taiwan. The company has since established

operations in New Jersey, Shanghai and

Hong Kong. As part of their first five year

business plan drawn up in 2000, the

company made the decision to expand into

Europe.

Journey so far Shionogi opened its

European headquarters in London in July

2012. The company has initially hired 15

people and has plans to rapidly increase its

staff in the next year. Focussing on R&D, it

manages outside agents and companies

from its London offices.

Why London? The company carried out

an extensive review of potential locations in

Europe and the UK for its European

headquarters. They eventually shortlisted

two cities; London and Zurich. The reasons

why Shionogi chose London include:

Strength of medical research in the

UK

Large pool of experienced and well-

trained research staff

Excellent transport links to the rest

of the continent and the world

Excellent business infrastructure

Shionogi is positive about the direction that

the UK government is taking in supporting

the industry. The move to London fits well

with the company’s strategy to develop an

early-phase research network and it intends

to set up collaboration agreements with

several top universities in the UK. A related

factor for locating in London was the

company’s decision to geographically

diversify its clinical trial activities. The

strategy of the company is to conduct

clinical trials more efficiently by selecting

the best location around the world based

on the trial phase and regulatory approval

requirements. The UK’s medical regulatory

system, which has high standards on safety

and quality was an attraction for the

company, since it is seen as leading the way

in terms of the direction of regulatory

standards in other countries.

Page | 58

Why London? Financial Services

FDI | Financial Services

The financial crisis of 2008 sent shockwaves through the financial services sector and the industry is bracing itself for further troubles and tighter regulatory supervision. Financial services FDI represented 6% of global FDI investment by value in 2011. However, this represented a 52% decrease compared to the pre-crisis average, the biggest reduction of any industry15.


Drivers of return on investment, as well as the reasons behind investment decisions, vary between different areas of the financial services industry given the diverse nature of businesses in this sector. However, there are a number of themes that encompass the majority of the sector:

• Market size – the number of potential clients that can be reached from a new location is a crucial factor affecting investment location decisions. For example, some companies will look to follow their home clients and set up local presence where they can serve them internationally, others will be looking to tap into the growing number of middle and higher income population in emerging economies

15

UNCTAD, World Investment report 2012

Page | 59


• Industry cluster – a few locations,

such as London and New York, are seen as crucial centres where companies are required to have presence. Locating there also benefits companies by being surrounded by a critical mass that facilitates the exchange of ideas and provides a strong supply of auxiliary services

• Regulatory environment – restrictions limiting the scope of companies’ operations in a country, as well as the overall level of regulatory burden are important. Increasingly, however, it is the level of uncertainty and lack of stability in the regulatory environment that are seen as deterring investment most, in particular when changes to

regulations could apply retrospectively16

• Taxation – both corporate and personal tax are important in making investment decisions. Corporate tax will have a direct impact on return but personal tax is seen as increasingly important through its impact on companies’ ability to attract and relocate talented staff

• Human capital – the availability of

talented and productive staff, either that can be hired locally or brought as expats is important. The importance of high quality human capital is extended beyond the company’s operations and covers staff at support services such as lawyers,

16

Ipsos MORI, May 2011

accountants and consultants that are required for the smooth operation of the business. Certain factors are seen as important in attracting staff to a location, such as personal tax and opportunities presented by a global financial cluster. Others include immigration restrictions, and the administrative burden associated with dealing with the immigration authorities, as well as the quality of life a location can offer

• Costs – operating costs, such as staff

wages and office rental costs, appear to have less influence on location decisions but can still make an important impact on the overall return on investment.

Page | 59


Cities comparison

London was cited as the most global city, partially thanks to its location, which

allows it to bridge between the US and Asia, but also thanks to its outward

outlook. London’s strength as a major cluster in financial services is also an

important factor in its success, with the multicultural nature of London

attracting foreign talent to the city.

New York was also seen as a major global cluster in finance and as a culturally

diverse city, although where business is much more focused on its home

market.

Singapore benefits from proximity to the fast growing Asian market, as well as

low taxation, low regulatory burden and good infrastructure. It is seen by some

industry participants as the strongest candidate to challenge London’s

international dominance in financial services. However, Chinese markets are

increasingly serviced from Shanghai and Beijing.

London was seen as the only significant financial centre in Europe, with

Frankfurt’s language barriers and more limited cultural offering making it a

much less attractive location than London.


As part of our quantitative analysis, we looked at the potential drivers or predictors of return on investment in the financial services using econometric

Page | 61


modelling, which identified the relationship between historic return on investment and key variables.

Our analysis found the following variables good at predicting return on investment in the financial services sector:

• size of the equity market;

• wage costs;

• office rental costs; and

• tax.

The econometric analysis shows that a larger equity market will have a positive effect on return on investment, while higher wages, rental costs and tax have significant negative effects on return on investment in the financial services sector, with wage costs having the largest negative impact followed by taxation and office rental costs. The econometric model was then used to estimate returns in five cities by 2020 based on a forecast scenario, and compared those to actual returns observed in 201017. Remnants of the financial crisis were still putting some downward pressure on returns in both New York and London in 2010. Looking forwards, a relatively subdued economic environment is expected to see lower returns in many financial centres in 2020. London should benefit from its geographical position, which will allow it to benefit from a recovering US market and a rising Asian deal flow, while maintaining relatively modest increases to its cost base. A weaker Eurozone is likely to negatively impact Frankfurt through lower deal flow and potentially higher fiscal pressures, while higher wages are expected to dampen down return in Singapore (see table below).

Return on investment %

17

Observed ROI values for 2010 were used rather than an average of a number of recent years as used in the Business Services and Technology sections, as ROI trend is expected to have changed significantly post the financial crisis in 2008 – 2009.

Singapore Frankfurt London Shanghai New York

As observed in 2010 9.4 9.0 6.1 0.3 0.2

Future scenario 2020 3.8 3.3 3.9 2.8 3.5

Page | 62


Why London?

Case Study

Banco do Brasil

Headquartered in Brasilia, Banco do Brasil is Latin America’s largest bank with assets of more than US$519bn as at 31 December 2011, and the largest

Brazilian bank in the retail market. Banco do Brasil was founded in 1808 and has played many key roles in Brazil’s financial history, including, until 1964, the issuing of the country’s currency. The Bank remains majority owned by the federal government, which has a 51.78% equity share.

Overseas expansion The Bank set up its first international branch in Paraguay in 1941, expanding rapidly outside Brazil with branches in the major global

financial centres by the end of the 1970s. The Bank has since consolidated its international presence and now has 49 units in 24 countries. In recent years, the existence of large Brazilian communities in many different countries, internationalisation of Brazilian companies, and leverage of Brazil’s foreign trade, has increased the importance for Banco do Brasil to expand globally, in order to fulfil the Bank’s mission to support the country’s development, its corporate sector and Brazilian nationals living abroad. This increasing focus on foreign expansion has seen the contribution of international operations to the group rise substantially, representing 7% of the Bank’s total revenues by the end of the first half of 2012. Each international office location is centred around a business strategy tailored to suit the business climate in that location, with operations in each country varying depending on the opportunities there.

Journey so far Banco do Brasil has had operations in London since 1971. It currently has approximately 50 employees and is the second largest foreign

branch of Banco do Brasil in assets terms. Its London operations focus on commercial loans for clients in a variety of international locations, including Brazil, Europe, Middle East and Africa. Banco do Brasil has navigated the financial crisis cautiously and has seen new opportunities in the commercial loans market in London in its aftermath, with its portfolio of loans growing substantially in the past 3 years.

Why London? London remains a crucial component in the international operations’ strategy of the Bank. Some of the key benefits that a London location

provides include: global access to revenue opportunities - the London office has access to opportunities across all continents; and strong provision of business services – the London office can count on high calibre lawyers, accountants, and consultants for support.

Brazil has close relations with the United States and United Kingdom and therefore English is a second language for many Brazilians. This gives London an advantage over other major European cities when it comes to choosing a city to engage in business. Falling spreads in the Brazilian domestic market have driven the Bank to focus on maximum efficiency throughout its operations. This emphasis has been present in the London office, which remains vigilant on all aspects of costs in its operations. However, operating in London means competing with investment banks for the top talent and this can be expensive. Wage costs are significantly higher in London than would be the case for a comparable operation in Brazil, although this is largely compensated for by the high level of skills available in the London market.

Page | 63

Why London? Business Services

FDI | Business Services

Business services form an important sector for many global cities. However, the diversity of businesses in this area often makes it less prominent in cities’ focus. Some professional services, such as accountancy and law, can find it harder to expand overseas given the need to understand the local laws and accounting standards (and often have locally recognised professional qualifications). Other businesses, such as marketing, rely on deep understanding of local tastes and tend to operate best at a local level. Nevertheless, business service companies are becoming increasingly more global, with growth strategies involving more than in many other industries a horizontal approach, where the same activity is being carried out in each location.


There is significant variation in the importance of drivers of return on investment in the business services industry as well as the reasons why companies invest, with the following factors relevant however for the majority of the industry:

• Market size – For most business services, market size is judged by the volume of business that can be accessed from a given location, which is often a function of the number of companies in that market and their propensity to spend on the related services. Given the diversity in the industry, the importance of having an office in the same city location as a client varies between areas. However, across all areas what is important is the ability to access clients and this accessibility defines the market size

Page | 64


• Access to talent– Finding the right talent is important in the business services industry. Some companies locate in cities where there is good supply of graduates, as well as a large pool of well educated, resourceful and experienced staff. Other companies rely on moving expats to new locations at least until they are able to train enough local staff. In general, companies will locate in cities with the right mix of education, language and IT skills that can service the target market and allow for expansion in those locations

• Costs – The degree to which operating costs such as wage costs and office rent are important depends on the type of business. Companies with predominantly client-facing activities are relatively less sensitive to operating costs as these companies often need to be located near their clients and are mostly market-driven investments.

The location decision for shared services and support operations is normally cost-driven balanced with the quality of staff at the investment location. In all cases, companies make their investment decisions based on a balance of cost sensitivity, quality of staff and market size, and this will depend on their area and type of operation

• Taxation – Corporate tax can be an important consideration for business services companies which are not location-dependent, as well as for regional headquarters. For operations that need to be in a particular city, tax is taken into account but will not normally deter an investment. In general, higher taxes will always affect the bottom line and all else being equal, will reduce returns

Page | 65


• Business environment – A stable business environment is most important for vertical investments such as shared services operations

• Political instability, an ineffective legal system and inflexible labour laws are all factors that can reduce or deter potential investments and expansions. Immigration restrictions make re-location of expats cumbersome and are seen as an indirect factor in deciding on a location to invest when evaluating a shortlist of potential cities.

Page | 66


Cities comparison

London was cited as being the entry point to the large UK

market, a global city and one of the major business centres

in Europe, representing a location where many business

services companies feel they have to have a presence.

London is seen as a melting pot of global talent and the

quality of staff from world class universities was cited as a

major attraction for London. The quality of life in London is

regarded as being an advantage for relocating and attracting

staff. The cost of staff and office accommodation was seen

as a disadvantage but not a deterrent to entering the

market, given the other factors. Good international

transport links are important to the industry and a congested

Heathrow was cited in particular as a hindrance to doing

business from London.

Similar to London, New York is seen as a major business centre for the US and a centre for talent. It is a global business hub where it is

easy to meet people as you pass by. The quality of life in New York is also high for those who enjoy living in urban centres, while the

relatively high costs of operating and living in the city are seen as a disadvantage but would not deter entering the market as New York

is seen as a city where an office is critical.

Singapore is viewed as a city that is easy to operate in and that has an excellent business environment. Singapore can service the whole

of Asia and has the potential for becoming a regional hub. Its quality of life is seen as better than in London and in many other cities.

Page | 67


Shanghai is a commercial centre of China and is the gateway to the large and rapidly growing Chinese market. However, Shanghai was seen to be a more complicated city to operate in. Having good local staff with the right skills was seen as an absolute necessity to operating there. Yet Shanghai was also viewed as being a city where the top talent is harder to find despite its size. Regulations restricting doing business in China was also cited as a disadvantage, as well as business environment being less international than in other major cities.

Germany has several major important cities of similar size. Munich was cited as being an important business centre in Germany given its proximity to the strong local industry in Bavaria. It also offered good quality of life and a central location to reach Europe. In general, labour laws on hiring are regarded as being more restrictive in Germany and therefore a disadvantage compared to the UK and the US.


For business services, the same quantitative analysis approach was followed as for financial services. A number of potential drivers were tested, which were identified through the research.

The analysis found the following variables were effective at predicting return on investment in the business services sector:

• size of the equity market;

• GDP growth;

• corporate taxation; and

• interest rates.

A larger market, as proxied by a large equity market, and a fast growing economy will have a positive effect on return on investment. Higher levels

P

Page | 14 Page |68


of taxation have significant negative effects on return on investment, while higher interest rates also impact negatively on returns. Corresponding with our discussions with industry leaders, wages and office rent costs were not found to be major drivers of return on investment.

The business services econometric model was then used to estimate returns in five cities by 2020 based on a future scenario, and results were compared to the average of actual returns observed between 2006 and 2010 in the table below. The future scenario assumed economic growth will return to pre-recession levels in the UK and US with growth in China and Singapore slightly tempering off, while growth in Germany remaining suppressed by continued problems in the Eurozone. A gradual rise in interest rates was also assumed during the period18. Based on this scenario, returns are expected to fall slightly in Singapore, Munich and New York and to modestly rise in Shanghai and London.

Return on investment %

18

See Appendix for a fuller discussion of our analysis.

Singapore New York London Shanghai Munich

Average as observed

in 2006 - 2010 13.5 8.7 8.4 5.9 2.9

Future scenario 2020 8.4 8.5 8.8 6.3 2.5

Page | 69

Why London? Technology

FDI | Technology The technology industry is becoming more central to global cities, with new technology clusters emerging in established cities, often coinciding with emerging centres for creative industries, and with a drive for greater entrepreneurial activities in the city.


The decision to invest will be influenced by a number of factors including:

Market size – The potential size of the market is an important factor

in the decision process. The type of products and services offered will determine the maximum optimal distance from the client base and hence the market size that can be addressed from different locations

ICT infrastructure – A quality ICT infrastructure with high-speed internet connectivity is a prerequisite for many ICT companies yet is

not a given in all cities. Poor levels of broadband accessibility hinder access to web-based products and therefore restrict the size of the potential market. High speed data connections with other countries are essential for companies offering web and data services in a broader regional market using data centres in one country

Access to talent – The technology industry has high skills requirements. For many companies, talent is the essential ingredient that

makes their business work. For this reason, companies tend to congregate in locations where staff with the right skills are sufficiently available. Proximity to good universities and technical institutes can facilitate the availability of staff. Being able to access new markets often means having staff that are able to communicate in the local language of that market. Companies we have spoken to say the

availability of international staff is an important factor when choosing where to locate. Quality of life has been highlighted by

companies as being an important factor in attracting and retaining talent, as well as in helping to encourage staff to re-locate

‘Silicon Roundabout’

Old Street and the

surrounding area has

become a hub for

technology start-ups

Page | 70


Ease of doing business – Business culture commonalities as well as a shared language should not be overlooked as factors in

attracting investment. Companies investing abroad in the technology industry are attracted to cities where they can seamlessly set up operations and they understand the ways of operating in that market. This is a particularly strong factor for small companies that do not have large administrative resources. Strong legal structure and less onerous employment laws are seen as particularly important in a sector where staff needs can change relatively quickly and IP protection is vital

Cluster size – The presence of other technology companies in the same location, as well as companies in related fields such as design,

plays an important role in fostering a high level of technical expertise and an environment of innovation

Costs – The cost of hiring talented staff in the technology industry is often offset by the quality and productivity of the people. In

general, companies do consider costs but will balance their choice of investment location with the quality of staff in the investment location as well as the market size and innovation environment of that location.

Other location factors include good transport infrastructure and the presence of private equity investors.

City Comparison

London is regarded as being on a roll at the moment with the tech cluster at the Old

Street roundabout. London is expected to attract more and more investment in this industry as the ‘snowball effect’ of the tech cluster continues to grow. London was seen as having an excellent pool of talented and innovative people although due to the influx of new companies to the city, the market for qualified staff is getting more and more competitive. Immigration policy remains an issue for relocating staff from outside the EU and retaining talent in the UK once they graduate from local universities. The cost of office accommodation is regarded as being high but at a similar level to competitor cities such as New York. London was regarded as the best city location for technology companies to invest in Europe.

New York is seen as the most similar city to London in our list of comparator cities.

The city has been supportive of the burgeoning tech cluster and is seeing similar levels of activity to London. Central New York is viewed as having higher office rental costs

Google’s offices

in London

P Page | 14 Page |71


Why London?

and wage costs than London but many tech companies are locating further from the centre in Brooklyn where office costs are lower. Tax rates in New York were seen as being higher than in other locations and a disincentive for companies investing there. New York’s main advantages are its proximity to Silicon Valley, its ample access to potential investors and its Mayor’s strong commitment to making New York an entrepreneurial city through his emphasis on the city’s economic development.

Singapore is viewed as a city that is easy to do business, and has low corporate and income tax rates. The government has a positive

attitude towards supporting and promoting the technology industry in Singapore. Its biggest advantage was its ICT infrastructure which is seen as world class with excellent connectivity to the rest of Asia allowing companies to service these markets from Singapore. Negative aspects include a smaller pool of talent and a more narrow entrepreneurial community than in London and New York.

Shanghai is seen as a more difficult city to set up operations and therefore less suitable for smaller companies. However, it is

recognised that in order to service the increasingly large Chinese market it is often necessary to have a local presence. Costs are lower and the city has excellent infrastructure but these factors are often outweighed by the difficulty of doing business in China. Restrictions on company ownership mean a local partner or joint venture structure must be set up. Intellectual property protection is also weaker than in other locations.

Of the German cities, Berlin was viewed as the most direct competitor to London in the technology industry, with its high

concentration of programmers and start-ups. Munich was also seen as an important centre, however, due to its proximity to a large potential customer base for some of the technology companies. A major advantage of Berlin is its creative and highly skilled workforce. It also has lower labour and office rent costs which help in the formation of start-up businesses. Berlin is seen as having the potential to attract a lot more investment in the future as its tech cluster continues to expand but it has not yet reached critical mass nor attracted a sizable number of larger technology companies, which are often seen as a catalyst for the further development of smaller tech firms. A downside of operating in Berlin is more restrictive labour laws which become effective once start-ups reach a certain size, which may partially explain the less mature profile of tech businesses in the city.

Page | 72



Historic ROI data was used to compare the historic ROI in a number of cities with expected future ROI19. A number of potential ROI drivers were tested for the computer services sector, and the following factors were found effective at predicting ROI in the computer services sector:

The density of broadband internet subscribers

Interest rates

A higher level of broadband penetration indicates a more technologically advanced society, and a potentially better IT infrastructure. These should have positive impacts on the availability of skilled staff, market demand for technology services, as well as the ease to operate in that market. Higher interest rates have a negative impact on returns as they make financing more costly.

We used our computer services econometric model to estimate returns in five cities in 2020 based on a future scenario20, and compared those to the average of estimated returns between 2003 and 2010. The future scenario used in this analysis assumed the number of broadband users will increase in all locations but at a faster pace in China. A gradual rise in interest rates during the period was also assumed. Based on that scenario, returns are expected to increase in all cities in 2020 with the difference in cities’ performance largely unchanged.

19

The historic data available for the econometric analysis covered the computer services sector rather that the ICT industry as a whole, and included software development, web-based services and information services. 20

See Appendix for a fuller discussion of our modelling and scenario projections.

New York London Berlin Singapore Shanghai

Average 2003 - 2010 15.2 15.0 14.9 7.8 5.2

Future scenario 2020 20.0 20.3 19.7 10.8 8.3

Page | 73


Case Study

Yammer Founded in 2008 in the United States, Yammer is an "enterprise social network" that provides a secure way for employees to communicate, collaborate, and share information internally but also cooperate more efficiently with external stakeholders, i.e. customers or partners. The company has a number of offices in its home market and is headquartered in San Francisco. Its EMEA HQ in London manages all aspects of Yammer’s business across the region. It also has an office in Australia overseeing the Asia Pacific market. Yammer was acquired by Microsoft in June 2012. This acquisition will enable Yammer to access additional technologies and resources which will allow the company to scale and continue to innovate.

Overseas expansion Yammer’s expansion abroad was primarily driven by the need to be nearer to its customer base and to have better access to its overseas markets. Yammer didn’t consider other locations other than London for its European Headquarters.

Journey so far Yammer’s London office was the company’s first office outside of the United States. Yammer opened its EMEA HQ in London with 3 staff in March 2011 and it now totals 85 employees and still growing. Business generation and growth in the EMEA market have accelerated as a result of a London base. Yammer has been able to access the wider European talent pool from London and has hired across all functions including talented software engineers from across Europe.

Why London? Yammer chose London for a number of key reasons:

Diverse range of companies - London ideally matches Yammer’s customer base which is not industry specific. From their London office, Yammer can access the entire EMEA market.

Excellent location for talent - A key part of their business is finding talented people including programmers and software engineers. Yammer researched the availability of talent prior to making their investment decision and found that London had the best concentration of skills to fit their needs including an international and diverse workforce that allows the company to engage with their customers in their own language.

Another major attraction for Yammer was the tech cluster (London Tech City) developing in East London. A key benefit of such a cluster is the potential for partnerships between fellow tech start-ups and major tech companies.

Business environment – The overall ease of doing business in London has helped Yammer to establish itself quickly. Employment regulations in London are more business friendly and easier for a startup company to operate with than in many other European locations.

Common language and similar culture to the US headquarters also made London an easier location to operate from, while the presence of a transport hub with good international flight links also featured as a factor.

Page | 74

Why London? FDI Insights and recommendations

FDI | Insights and recommendations Feedback from industry leaders and the analysis of future return prospects in different cities bode generally well for London, however

a few issues were apparent across most industries that could see London lose some of its advantage. These included:

Unfavourable immigration policy for workers from non-EU member countries; and

Concerns about the lack of progress in increasing London’s airports capacity

More specifically, looking at individual industries, the following issues have been particularly highlighted:

Creative Industries

London is the leading location for creative industry investment and has a number of significant advantages which will keep the return

that can be achieved from investing in London ahead of its rivals. However, there are threats to this position from cities such as Hong

Kong and New York. Human capital is the key ingredient behind the success of creative industries and in order to remain competitive

and the top location in terms of return on investment, London needs to exert influence on immigration policy to ensure that it is easier

for the world’s top talent to qualify for visas to work in London.

Life Sciences

In the past decade, the UK has lost some ground in its ability to attract R&D investment in the life science industry. Investment has

diverted from Europe to fast growing markets in Asia which is a trend that is expected to continue. The UK government has now got

behind measures to improve competitiveness and this is starting to show results in attracting investment to London. London continues

to have many advantages in the life sciences industry which are often overlooked. These include excellent universities, a large

workforce of highly trained R&D staff and a large market on its doorstep. London has already made strides in improving the R&D

environment to attract investment but this needs to continue. In order to remain competitive and improve return on investment for

R&D FDI, London needs to act to further enhance the R&D environment by supporting collaboration agreements between industry and

academia. In addition, in so far as it is feasible, policies are required to reduce the cost and time taken to carry out clinical research.


Why London? FDI Insights and recommendations

Financial Services

London has one of the largest financial services industries of any city in the world. Financial services companies have enjoyed high

returns on their investments in London in recent years. One advantage that London benefits from is its geographical location and its

unrivalled access to global financial markets. However, the financial crisis has precipitated a restructuring of the industry which is

expected to permanently lower the potential return on investment in all locations. Global financial services FDI has slowed since the

crisis. The gain that London has over other cities in the financial services industry can be easily lost if the business and regulatory

environment becomes less favourable for financial services companies. Clarity and consistency of the regulatory environment is seen

as especially important by current and potential investors.

Business Services

London is one of the main business centres in Europe and attracts significant investment due to the large client base located in London

and the South East region. More than in other industries, business services growth depends on the UK economy and Europe’s

prosperity. The prospects for the industry remain bright provided we see a sustained recovery in the UK economy in the medium term.

Technology

London’s tech cluster is a major success story and should be continuously supported. London has a talented and creative technology

workforce. However, a challenge for London and the UK more generally is the constrained supply of qualified staff. Companies are

already reporting difficulties finding the right staff for some roles. Part of this is a constrained supply of engineering and computer

science graduates. Another aspect of this is restrictions on non-EU graduates remaining in London to work in the technology industry.

In so far as it is feasible to affect change in these areas, London should act to improve the supply of qualified staff to this industry. Tech

start-up companies report that they have encountered some difficulty in securing office leases in London compared to other cities

mainly due to landlords’ request for evidence of trading history. Broadband provisions and mobile connectivity in London were seen as

behind other major tech centres, and below the levels expected from a city like London.

Page | 76

Why London? Appendix

Appendix FDI modelling methodology

The aim of our analysis was to compare the return on investment in London and some of its competitor cities in five key industries, and to provide insights as to how

investment returns could change in the future.

We chose competitor cities for FDI based on three criteria:

Cities highlighted during interviews with industry panel members and case study participants

The geographical distribution of cities

Top destination cities for capital investment in each sector between 2003 - 2011 (sourced from fDi Intelligence).

Data

The Return on Investment (ROI) measure we used was the profitability of accumulated foreign investments in each industry by country. ROI was measured as the ratio of

the current year income of investment to the FDI position of that same year. The investment position measure includes mergers, acquisitions, greenfield investments,

expansions and reinvested profits. FDI position statistics are substantially different to data collected on investment commitments such as those collected by fDi markets, as

these data record announced investments which may not cover all investment in a country such as profit reinvestment and unannounced investments. FDI investment

income statistics consist of earnings on equity investment plus net income on debt between investor and company where investment has been made. Earnings reinvested

in the company form part of the FDI income measure.

Our ROI data came from three sources: the UK Office for National Statistics, Eurostat, and the Department of Statistics Singapore. These agencies follow the IMF Balance of

Payments Manual, 5th edition methodology in the collection of the data.

Econometric analysis

We performed an econometric analysis to determine the drivers of return on investment in three sectors; Business Services, Financial Services and Technology. We used

data on return on investment for UK companies in business services and financial services and data for German companies in technology. We used a fixed effects panel

regression econometric model which included up to twenty countries to discover common drivers across countries. The fixed effects panel regression approach accounts

for time-invariant country specific attributes of individual countries. The size of each panel depended on the availability of data for each sector. Care was taken not to

include countries in the panel which act as conduits for direct investment to other countries but where a small proportion of actual investment is made.

We performed a variety of tests to validate the model. These included tests for heteroskedasticity, colinearity, autocorrelation, Hausman specification test for fixed effects

and a test for cross sectional dependence.



Future 2020 scenario – Business Services, Financial Services and Technology

We used a future scenario to estimate return on investment in each country by sector in 2020. The scenario for each industry was based on the following:

A gradual rise in interest rates in each country

GDP growth returning to pre-recession levels in the UK and the US. German growth remaining relatively subdued. China and Singapore growing at a somewhat

slower pace

Slow growth in financial and business sector wages and office rents over the period in the New York, London, Singapore and Frankfurt. Continued higher growth

rates in wages and office rents in Shanghai

Financial markets expanding faster in Shanghai than in the other cities.

FDI benchmarking methodology

We used an alternative methodology for the life science and creative industries which involved scoring each city by a number of key indicators that reflect the locations’

attractiveness for investment. Data reflecting key components of return were gathered for each sector and scored from 0 to 100 with the highest scoring location being the

best location for that indicator. Each component score was amalgamated to form a group score. Group scores were weighted based on the importance of these factors

identified from our consultations with industry executives and a comprehensive literature review. Finally, we ranked the composite scores with the highest score indicating

the best location.

Future 2020 scenario – Life Sciences and Creative Industries

We created a 2020 scenario for the life science sector where we see a consistent improvement in the R&D environment in the UK relative to Germany, Singapore and the

United States, in part thanks to the increased government focus on the industry. We allow these national healthcare markets to continue growing at current rates up to

2020. The scenario allows for a large increase in the healthcare market in China and a continued improvement in Shanghai’s R&D environment up to 2020. We also allow

for an improvement in IP protection in China.



Why London?

Life science indicators

For creative industries, we created a scenario that allows for slowly rising office and wage costs in New York, London, Berlin and Singapore and a much larger increase in

Shanghai. We also allowed for a modest rise in US personal tax rates and a slight decline in Germany. Finally, we allowed for improvements to IP protection, rule of law and

corruption in China.

Creative industry indicators

Group Indicator

IP Protection IP protection

Market Size Total health expenditure

Total health expenditure per capita

R&D Environment

Number of top 100 life sciences universities in each city (medicine, biological sciences, pharmacy and pharmacology)

Earned doctoral degrees in physical and biological sciences

Quality of scientific research institutions

Extent of university/industry collaboration

R&D expenditure as % of GDP

R&D researchers per million population

Group Indicator

Market Size Advertising expenditure

Human Capital Number of top universities in media and communication sectors in each city

Personal tax

Legal Environment

IP protection

Rule of law

Control of corruption

Costs Labour costs

Office rental costs

Page | 79

Why London? Disclaimer

This analysis has been prepared by Volterra Partners LLP (“Volterra”) for London & Partners (“London & Partners ”) under the terms of London & Partners’ contract with Volterra dated 2 July 2012 (the “Contract”) and its contents are strictly confidential. This analysis contains information obtained or derived from a variety of sources. Volterra has not sought to establish the reliability of those sources or verified the information so provided. Accordingly, no representation or warranty of any kind (whether express or implied) is given by Volterra to any person (except to London & Partners under the relevant terms of the Contract) as to the accuracy or completeness of the analysis. Moreover, the analysis is not intended to form the basis of any investment decisions and does not absolve any third party from conducting its own due diligence in order to verify its contents. Volterra accepts no duty of care to any person (except to London & Partners under the relevant terms of the Contract) for the preparation of the analysis. Accordingly, regardless of the form of action, whether in contract, tort, or otherwise, and to the extent permitted by applicable law, Volterra accepts no liability of any kind and disclaims all responsibility for the consequences of any person (other than London & Partners on the above basis) acting or refraining to act in reliance on the analysis or for any decisions made which are based upon this analysis. © 2012 Volterra. All rights reserved. “Volterra” refers to Volterra Partners LLP (a limited liability partnership in the United Kingdom). This report uses images from 'London on View'.

Documents

Why London - 12 Oct 12