London’s pre-eminence in the world economy is matched only by a handful of cities. Research on the phenomenon of ‘global cities’ has consistently placed London in their front rank. This chapter reviews the characteristics and components of London’s global reach – enabling the city to draw in companies, and migrants rich and poor – and how these global functions impact on London.

London’s success as a global city

London’s influence today draws on the city’s longstanding status as a centre of international power, first as a trading centre then as an imperial capital. London’s population has long reflected the city’s international character, and was augmented by waves of political and economic refugees – by 1901 around five per cent of the population was born overseas.[1]

London was characterised as a global city even as it was going through a period of economic and population decline after World War II. British urbanist Peter Hall characterised London in the 1960s as one of the few ‘world cities’, with growing dominance over trade, information handling and innovation[2] – despite the unravelling of the British Empire and government attempts to rebalance the economy away from the capital.

Research has since explored further the growth of London’s global city functions, focusing first on the role played by corporations. Sociologist Saskia Sassen explored how advanced service firms concentrated their executive offices in New York, London and Tokyo from the 1980s onwards – giving these cities a heavier weight in the global economy. Financial and professional service firms are seen as an essential component of London’s global reach (even though they only employ circa 15 per cent of London’s workforce), because their structure is heavily skewed towards London and a few other cities; London’s stock market is not the world’s biggest, but it is the most international in character.

This concentration of decision-making functions has been confirmed by an extensive analysis of the branch structure of 175 top professional services corporations by scholars at the University of Loughborough[3], and by recent surveys suggesting that 40 per cent of the 250 top global companies chose London for their global or regional headquarters.[4]

Global city success factors

Agglomeration effects

The tendency for high value services (professional, creative, financial)[5] to cluster in a few global cities over the long term is quite remarkable. Many industries that used to dominate London’s economy – and have contributed to its wealth – have left the capital for places where tasks can be completed more cheaply. Yet advanced services and generally knowledge-intensive sectors seem to group in the capital, despite higher costs.

Economic geographers identify a strong force – the “agglomeration effect” – enticing firms with employees performing knowledge-intensive work to locate near similar or closely related supplier firms.[6] The agglomeration of skilled workers increases their productivity: they are more likely to learn new skills from others and find a job that fits their qualifications and interests, and all benefit from the same urban infrastructure. Publishing and finance may not directly affect each other, but their employees, clients and suppliers use the same airports, transport systems, restaurants and theatres. Furthermore, the co-location of leading financial and creative sectors together with tech start-ups incubated in London’s multitude of co-working spaces creates opportunities for innovation and disruption, as in the growth of ‘fintech’. Post-industrial, service and knowledge sectors relying on non-routine tasks that require education and face-to-face interaction gain most from theses forces, creating a strong incentive for them to stick together.[7] [8]

The productivity benefits that these sectors derive from locating their knowledge-intensive functions in global cities like London enables them to offer a wage premium and learning opportunities, attracting and retaining skilled workers in the capital.[9] The productivity of London’s service industries has boosted their exports, which have doubled in value since 2003.[10]

Institutions and legislation

London’s economic advantage also relies on institutional factors that include the UK’s tax and legislative framework, and the performance of the various tiers of government. London generally fares well on ‘ease of doing business’ indicators[11] and the national tax system is deemed attractive for corporations to invest – with lower corporation tax rates than the OECD average and the ability for foreign shareholders to receive their dividends tax-free.[12] Recent analysis also highlights the global focus of London’s third sector, which has developed out of its links with government, business and legal services. The UK legal protection framework granted to charities in 1601 has encouraged organisations with an international charitable focus to operate from London, and gave London’s civil society an internationalist agenda early on.[13]

Many would argue that the UK’s membership of the EU has also conferred significant institutional advantage for London, including through embedding its financial and legal services as leading European sectors. The UK, for its part, has had significant influence within the EU, promoting the concept of the Single Market, and both the Greater London Authority and the City of London have offices in Brussels, intended to ensure that London’s interests are represented in policymaking and regulation.

Culture, openness and ‘soft power’

But London’s global city character is not just a matter of business services specialisation, agglomeration and institutions. Peter Hall had noted in 1966 that London’s economic and cultural strength were fuelled by the city’s ability to attract and retain workers.

Higher education also forms an important element of this, as well as an export sector in its own right: UCL and Imperial College London regularly feature in the top ten universities globally, and London has more than 100,000 overseas students.[14] Academics and students from around the world come to London to research, teach and study. In doing so, they create global networks of connection with the city.

The capital’s amenities have also participated to its magnetic appeal over people from across the UK, Europe and the world. Urban economist Ed Glaeser has shown that workers increasingly value urban amenities such as diversity and openness, cultural offer, built environment and infrastructure quality.[15] Indeed, with 37 per cent of residents born abroad[16] and a lower level of self-reported racial prejudice than in the rest of the country,[17] London’s cosmopolitan population itself has attracted rich and poor country migrants.

From Commonwealth to global population: London’s residents by country of birth [18]

Source: ONS, Census 1991 and 2011. Figures may not add to 100 per cent due to rounding.

These softer aspects of global attractiveness are often cited as London’s strengths in city rankings and have gained recognition in recent years. London edged over New York in several of these indices, thanks to the high weightings given to measures of ‘cultural experience’ and soft power, which London topped. 

Weight given to quality of life and soft power indicators in global city rankings (2015/2016)

Global city growing pains

The capital is also facing the strains common to global cities – a high cost of living, congestion, unequal access to amenity and opportunity, and growing inequality.

London has become one of the most expensive cities in the world, particularly in terms of housing and transport costs, and frequently tops global unaffordability league tables.[21]

Wages have not caught up with rising costs: London is the only region in the UK where median income after housing costs has decreased since 2007.[22] Low and middle earners and private renters have been the most affected, because they spend a larger (and increasing) share of their income on housing – hindering their ability to save up and build assets.[23]

Rapid growth in demand is taking much of the city’s infrastructure over capacity,[24] and this is felt strongly on public and surface transport. Quality of life in the capital is also affected by air pollution: longer delays on inner London roads since 2012 have prevented the improvements in air quality expected from the decline in car use.

The benefits of London’s growth are also shared too narrowly – both within the capital and with other regions. 37 per cent of London’s children grow up in poverty (the UK average is 26 per cent), showing no improvement since 2000.[25] A steady increase in number of jobs has helped raise employment rates since the downturn, but the unemployment rate is higher than any other English region, and there are barriers to employment specific to the capital. One of these is the cost of childcare, which is keeping London’s maternal employment rate much below that of the rest of the country.[26]

There are also high rates of young people Not in Education, Employment and Training (NEET) in poorer parts of the city. This suggests that education and training in London is not equipping young people for London’s workforce (even though its schools are the best-performing in the UK). It may also reflect higher-skilled workers in London ‘trading down’ to take jobs previously held by people with lower qualifications, while developing their skills or seeking new opportunities.

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Footnotes

[1] The Proceedings of Old Bailey, London’s Central Criminal Court, 1674-1913. See https://www.oldbaileyonline.org/static/Population-history-of-london.jsp

[2] Hall, P. (1966). The world cities. London: Weidenfeld and Nicolson.

[3] Taylor, P. J., Derudder, B., Faulconbridge, J., Hoyler, M., Ni, P. (2014). Advanced Producer Service Firms as Strategic Networks, Global Cities as Strategic Places. Economic Geography, 90: 267–291. See also: Beaverstock, J. V., Smith, R. G., Taylor, P. J. (1999). A roster of world cities. Cities, 16(6), 445-458.

[4] Deloitte, London Futures: London crowned business capital of Europe, 2014

[5] Often termed ‘advanced producer services’: See Taylor, P. J. (2011). Advanced producer service centres in the world economy. Global urban analysis: A survey of cities in globalization, 22-39.

[6] Storper, M., Kemeny, T., Makarem, N., Osman, T. (2015). The Rise and Fall of Urban Economies: Lessons from San Francisco and Los Angeles. Stanford University Press, p23

[7]Graham, D. J. (2007). Agglomeration, productivity and transport investment. Journal of transport economics and policy (JTEP), 41(3), 317-343.

[8] Cheshire, P. C., Nathan, M., Overman, H. G. (2014). Urban economics and urban policy: Challenging conventional policy wisdom. Edward Elgar Publishing.

[9] See Gordon, I., Champion, T., Coombes, M. (2015). Urban escalators and interregional elevators: the difference that location, mobility, and sectoral specialisation make to occupational progression. Environment and Planning A, 47(3), 588-606.

[10] Keijonen, M. (2015). An analysis of London’s exports, GLA Economics, Working Paper 69.

[11] PricewaterhouseCoopers (2016). Cities of opportunity 7.

[12] Oxford University Centre for Business Taxation (2015). Business Taxation under the Coalition Government. Edited by Giorgia Maffini.

[13] Sriskandarajah D. (2015). Global civil society: London’s role. London Essays, Soft Power. Centre for London

[14] See QS World University Rankings 2016-2017.

[15] Glaeser, E. L., Kolko, J., Saiz, A. (2001). Consumer city. Journal of economic geography, 1(1), 27-50.

[16] ONS, Annual Population Survey 2015.

[17] British social values survey, Self-reported racial prejudice.

[18] It is worth noting that in 2011, a third of London residents born abroad were British citizens.

[19] includes Cyprus and Malta but excludes Turkey

[20]includes all Caribbean countries

[21] PricewaterhouseCoopers 2016.

[22] Corlett A., Finch D., Whittaker M. (2016). Living Standards 2016. The experiences of low to middle income households in downturn and recovery. Resolution Foundation

[23] Clark S., Corlett A., Judge L. (2016) The Housing Headwind. Resolution Foundation

[24] GLA Economics (2016). Economic Evidence Base for London 2016. Water supply and drainage, p295-296

[25] Aldridge et al. (2015). London’s Poverty Profile. New Policy Institute, Trust for London, Figure 3.3, p24

[26] ONS, Labour Force Survey 2015.