Thursday, December 27, 2012

London Is Dying

Still reeling from the shock of the financial crisis, the world continues to get flatter. Talent that used to agglomerate in Creative Class cool cities is fleeing to cheaper locales as the convergence of the Innovation Economy accelerates. London is the latest evidence of this sea of change:

London laid the foundation for my profession. The City’s legal system has boasted a global reputation for excellence ever since, and its model has become the envy of the world. But this, perversely, is the problem. London has become the victim of its own success. International centres, particularly in Asia, are seeking to attract legal and arbitration services, once rooted firmly in the City, by copying its model.

Singapore and Hong Kong are prime examples, with the latter inheriting its legal framework directly from the British more than 150 years ago. With 1,300 foreign lawyers now stationed in Hong Kong, a former British colony that owes so much to the City’s system is now positioned to supplant it.

What is the appeal of practice in the east? In a word, cost. On this London has been the author of its own decline, particularly when it comes to arbitration services. The attraction of arbitration lies in its speed and low cost relative to court-based litigation. Yet the City’s arbitration system is increasingly mimicking the practices of its more expensive legal cousin. Fees in the UK are on the rise, and, as more businesses look to arbitration services, cheap international alternatives to London are competing for their custom.

Firms are moving high-volume work to other cities such as Belfast, while new forms of legal process outsourcing, or LPO – some of which firms are investing in – are emerging.

The economic geography that Richard Florida made famous is dying. The iconic metros of each economic epoch are victims of their own success (e.g. Detroit and the Manufacturing Economy). We are entering a new era that will have its own group of winners (and losers) as talent agglomerates someplace else for reasons that are not yet clear. Why pay London rents when your firm can be just as effective in Belfast or Wheeling, West Virginia?

I think we can bank on more regions competing for the same talent that used to only gravitate towards alpha global cities such as London, which will make the cheaper locations even more attractive. A concurrent trend is the maturing of social media technologies as our soft skills catch up with recent innovations:

For Cowen, people who can find inexpensive, tasty food are the same type of people that use information to make themselves more productive economically. In his book The Age of the Infovore (2010), he argues that the internet means information can be better absorbed, organised and deployed than ever before. “That’s where contemporary innovation is at, in lieu of the flying car, or the teleporter, or the trip to Mars.”

Cowen is walking-talking-tweeting evidence for his theory. Why, then, apart from an early surge in the 1990s, hasn’t the internet led to more measurable economic gains? “My view of the internet is that it is way overrated in what it’s done to date but considerably underrated in what it will do.” He notes that it took decades for earlier major inventions to have institutions built around them, such as roads for cars and grids for electricity. “If you’re an optimist about what has come before, you tend to be a pessimist about what’s on the way.”

Emphasis added. The Flat World hype was premature, not wrong. As for the world is spiky, that's yesterday's economy. Innovation is diffusing, not agglomerating.

If you want to see where we are headed, I highly recommend "Borderless Economics" by Robert Guest. Brain drain is dead. People develop, not places. Exporting talent is better than attracting talent.

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