Is London losing its global hub status?

Britain goes Brexit! But you don’t want to exit?,” read the bright blue box that until recently popped up when you clicked on the website of Invest Bavaria, the promotion agency for the industrious region of Germany, home to Munich.

“We are doing the same we always did, we are playing to our strengths but now the scales are tipping a little in our direction,” said Wolfgang Hubschule, head of the agency, who was in London recently for a Brexit and growth summit the organisation was part-sponsoring. Munich has, for a long time, competed with London in areas such as digitisation and ICT but London’s status as an English-language gateway to Europe, and its access to a massive international talent pool has given it a clear edge.

“The U.K. has done a tremendously good job of attracting FDI from the U.S., Canada, Australia and India, but now two strong arguments for the U.K. are now disappearing,” said Hubschule, whose organisation has an office in Bengaluru, and is looking at opportunities to grow its presence in India.

Battle begins

While Britain and Europe continue to engage in heated discussions on the contours of Brexit — and to what extent Britain is willing to sacrifice its tariff-free relationship with the single market in order to gain control of its borders — the slow motion battle for the business that might exit, or would have otherwise gone to Britain, has begun, with capitals and regions across the continent vying for investment.

Since the Brexit vote, anecdotal evidence suggests that regions across Belgium, France, Germany and other countries have begun to engage more actively with India, looking at increasing their presence in the country says FICCI’s U.K. director Pratik Dattani.

“There are certainly moves from the U.K. and across Europe to engage much more regularly with Indian business.”

With national leaders focused on Brexit negotiations themselves, grabbing the opportunities has largely lain with cities and regions, with little coordinated national strategy for doing so, said Carsten Nickel, a deputy director who focuses on Brexit at Teneo Intelligence. “It would pose massive political coordination problems across countries,” said Mr. Nickel.

While much of course has been happening behind the scenes — and beyond London — several have chosen to make a public presence in the city.

Soon after the June referendum Madrid ran an advertising campaign aimed at luring business. “London, whatever happens Madrid will be there for you,” was the slogan that popped up on several London buses - a message clearly targeted at Londoners fearful of their future in the city.

Last week, Paris launched an ad campaign targeted at Londoners. “Tired of the fog? Try the frogs!,” quipped the posters seen at Heathrow and the Eurostar terminal.

Some pull-outs

European cities may already be vying to poach business from the financial sector, but its still unclear what opportunities lie in that area or beyond. And, while there have been several notable investments and pull outs-since (Japan’s Fujitsu is cutting 1,800 UK jobs while financial services firm ING is moving up to 60 trading jobs to London) the firms have made it clear that these decisions were long in the making not Brexit-related.

“The real variable is British politics and the lack of certainty about which sector will pay the economic price: it’s not clear whether it will be London and the financial services sector or whether its going to be the rest of England, the Midland car manufacturing industry and beyond,” said Nickel. “It’s only on the backdrop of the domestic battle that we will get a clearer idea of what is up for grabs.”

Indian firms aren’t taking any chances though, and those with a presence in the U.K. have already begun to apply for necessary EU licensing, said India’s Acting High Commissioner in London, Dinesh Patnaik.

However, it’s more a precaution to prepare them for the worst-case scenario, rather than an active strategy to plan to relocate.

“Indian firms won’t move out of the U.K. unless the situation becomes very difficult. It will take a lot of negativity for them to move away from the U.K. lock, stock and barrel,” he said.

The risk of a major exodus is something the U.K. government is clearly aware of, though.“If we were not in Europe, I think there would be firms and companies who would be looking to say: do they need to develop a mainland Europe presence rather than a U.K. presence?,” Prime Minister Theresa May told an audience at Goldman Sachs at a private discussion before the referendum, a recording of which was leaked to The Guardian newspaper this week.

“We are focused on a lot of countries that have traditionally invested a lot in the U.K.,” said Hubschule, pointing to India, the U.S., Canada, Australia and Israel, among the ones being targeted by the investment agency. Small-and medium-sized businesses in the ICT sector are their “sweet spot,” he said. “We have many many industries within close reach and you can reach those businesses with your IT products,” according to him.

While Bavaria is focusing on location expansion rather than relocation, others are pursuing a more aggressive strategy to attract those already in London. Berlin has set up a trade office in London to provide a service for firms interested in relocation, said Cornelia Yzer, Berlin’s senator for economics and technology.

“Especially start-ups and tech-driven companies with business models that depend on a reliable regulatory framework, which the EU can offer, are interested to relocate,” she said in an email interview. Areas being targeted include the ICT sector and those wishing to set up research and development facilities linked to full EU membership. She is hopeful that India will have a bigger presence - pointing to a Tata Consultancy Service Summit that took place in Berlin earlier this week. “Berlin’s vibrant ICT sector and start-up scene could be a crucial factor for Indian companies to consider an investment in the city.”

Concerns that London’s status as a major global hub was under threat has been a running theme over the past years.

For example, rules that toughened up the bonus and pay regime in the banking sector were met with warnings that bankers would leave for other centres in their droves - something that failed to happen. Whether Brexit will be the event that finally tips the balance, it is too early to say.

Pragmatic approach

For now European centres seem to be adopting a pragmatic, though optimistic approach. “We don’t think there will be a big bang - it will be a gradual move and statistically hard to prove move,” said Hubschule.

“We don’t think companies will come to us and say ‘we are coming to you because of Brexit,’ but now the competition is ongoing under slightly different circumstances, and Brexit will play a role in decision-making.”

(This article first appeared in The Hindu dated October 31, 2016)

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