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March 19, 2012

The UK’s Silicon Valley Could Boost Technology Sector

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In an effort to make London one of the world's major technology cities, the UK government has focused on the entrepreneurial East End area, known as Tech City. Through new infrastructure and financing, it is hoped Tech City will attract the world's major tech firms as well as small start-up businesses, boosting jobs and bringing hi-tech innovation to the UK. However, unlike the USA's Silicon Valley, Tech City is state-driven and could harm conditions for local businesses and consumers.

 

 

Capital Investment in Telecommunications in Selected Western European Countries: 2006-2011

Pic1

Source: Euromonitor International from International Telecommunications Union/national statistics

  • London's East End has traditionally been a hub for creative IT businesses and dot-com companies. In November 2010, the UK's Prime Minister, David Cameron, unveiled plans to develop the area into Tech City, a Silicon Valley-style technology campus. The government pledged £200 million of equity finance and £200 million for new technology and innovation centres. The UK's total capital investment in telecommunications dropped by 49.1% in real terms over 2006-2011;
  • According to a November 2011 government report, the number of tech firms in the area tripled to 600 over a year earlier. The Tech City initiative is expected to increase jobs in the sector and enhance the environment for tech businesses, while attracting foreign direct investment inflows and driving the UK's global tech presence, with consumers benefitting through innovative products and services. However, the presence of large multinationals could force property rents upwards in the area, squeezing out smaller companies and residents, while public-sector led commercialisation could stunt creativity.

Implications

If Tech City is to avoid over-commercialisation, it could become a springboard for tech start-ups and human capital, enhancing the range of telecom services for consumers:

  • Businesses are set to benefit from state-backed tax breaks that accompany the Tech City initiative. These include a 225% rise in the research and development tax credit for small and medium-sized companies, and a doubling of capital gains tax relief to £10.0 million for start-up owners from April 2012. This is expected to boost UK-based start-ups and ease conditions for market entry and research;
  • Additionally, in April 2011, the UK initiated an “entrepreneur” visa that allows entry and fast-track residence for foreign investors looking to start a business in the country. The government has promised to review UK copyright laws, in line with the demands of the Internet age. These measures are appealing to foreign corporations and investors looking to set up in the UK, which placed seventh worldwide in the World Bank's 2011 Ease of Doing Business rankings;
  • Although the UK remained the dominant communications market in Western Europe in 2011 by total telecoms revenues, both the country's real capital investment in telecoms and exports of telecommunications plummeted by 49.1% and 77.4% respectively over 2006-2011. The Tech City development may boost foreign direct investment and sector exports going forward;

UK Consumer Expenditure on Communications and Telecoms Exports: 2006-2011

Pic2

 

Source: United Nations, UN Trade Statistics, National statistical offices/OECD/Eurostat/ Euromonitor International

  • Google, Facebook, Intel and Cisco are among the companies expected to invest in the East End in 2012. While the presence of major multinationals is likely to create more jobs in the area, offer consumers a greater range of telecom services and enhance the IT and Internet infrastructure for businesses, observers point out that property rents could increase as a result of high commercial presence, pushing out smaller businesses and residents;
  • Another potential issue is over-commercialisation. Public sector backing and the involvement of large corporations could stunt innovation in London`s bohemian East End environment, which has bloomed naturally due to cheap rent and creative talent. With consumer communications expenditure falling by 8.0% in real terms in the UK over 2006-2011, the sector needs to regain its appeal.

Prospects

  • Ventures such as Tech City could help boost communications spending in the UK by delivering homemade telecom goods and services. London's most dynamic tech sectors are social networking, app and software development. The UK`s consumer communications expenditure is expected to rise by 22.3% in real terms over 2012-2020; Tweet this!
  • The UK government is looking to cut red tape further and is seeking active cooperation with technology businesses and investors in the development of Tech City. Nonetheless, imitating the unique conditions of Silicon Valley will be challenging, with artistic talent and drive more difficult to recreate than its bureaucratic elements;
  • Nonetheless, London's East End is enticing the world's largest tech companies. Google has promised to create an innovation hub, while Intel and Cisco are developing research laboratories in the area. However, the extent of the sovereign Eurozone debt crisis will likely determine the level of further development. The UK is expected to see a 0.5% contraction of real annual GDP in 2012. 

 


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