Silicon Roundabout: cluster evolution and effect of public policy in Inner East London Startup Cluster

Digital economy is currently huge economy contributor for United Kingdom. In 2015, this sector contributed 97 billion pounds and provide more job growth than any other sector in the country (Tech City, 2017). Majority of UK digital economy activities is concentrated in London, specifically in the area called Silicon Roundabout. The cluster is the home of more than 3000 digital media and internet companies, most of them are newly-established and small-sized.

Silicon roundabout.png
Silicon Roundabout (image source)

This essay will discuss the development of Silicon Roundabout cluster and how public policy have impact on that process.  Short overview on the cluster will be discussed first as the starting point. After that the evolution of cluster will be described followed by discussion on the cluster policy impact. In the later part of the essay, challenges facing the cluster will be explained and then closed by essay conclusion.

Overview of Silicon Roundabout

Located in Hoxton and Shoreditch area, Silicon Roundabout is tech cluster in the middle of east London area.  The cluster is the home of nearly 3000 startups in IT, digital media, and mobile application business including some of the big names such as Uber, Google, and LastFM. Most of the tech companies are concentrated in the district surrounding Old Street roundabout hence the origin of the colloquial cluster name. Google Campus London, seven stories tech incubator and co-working space also located in this area. The internet giant is one of several big companies which established themselves in the cluster to setup partnership, foster innovation or maybe acquire some of them (BBC, 2011).

Silicon roundabout 2.png
Overview on the startup cluster

Majority of firms in the Silicon Roundabout are small startups working in creative and technology sector. Based on the report by Centre of London, 62 percent of the companies were less than five years old while 59 percent of them have less than 10 employees (Nathan, et al., 2012). Despite of this demography, almost a third of the startups in Silicon Roundabout operate in a global scale. This is due to the nature of digital firms which leverage the internet to deliver their services.

Concentration and Composition.png
Composition of startups in Silicon Roundabout cluster (Nathan, et al., 2012)

It is estimated that there are almost fifty thousand workforces in the cluster with majority of them are in ICT and Digital Content jobs (Nathan & Vandore, 2014). This number of workforce was growing more than double from 1997 to 2010 compared to the 44% total digital economy job growth elsewhere in the city. Number of digital startups firm in the area also double than the rest of London (Nathan, et al., 2012). This indicates that growth in Greater London’s digital economy were concentrated within Silicon Roundabout boundary, a defining trait of an industrial cluster (Porter, 1998).

Evolution from Fringe City to Tech City

Prior to Silicon Roundabout, Hoxton and Shoreditch has been associated with creative activities since the early 1990s. The area has lengthy history of arts and crafts production in watch, furniture, clothing, and jewelry (Bagwell, 2008). It is also known for lively music scene, gay clubs, and hipster bars (Pratt, 2009).  Several prominent of British artist which then officiated into Young British Artist (YBA) often held impromptu market and exhibition in the streets (Pratt, 2009). Due to this artsy scene, during the period the area was known as City Fringe area.

Evolution of Silicon Roundabout.png
Development timelines of Silicon Roundabout

What were the factors which makes Inner East London attractive to creative entrepreneurs? Hoxton and the surrounding areas was always deemed as “bad” areas by the administration due to prostitution and public drinking (Pratt, 2009). This condition made rent price considerably cheaper than the rest of London. Landlords in the area also had flexible contract hence one space can be shared with multiple tenant. City rules were not harshly enforced hence artist were free to use the streets for market and exhibition. Lack of regulation and affordable space attracted many of musicians, artist, and crafters to setup workspace in Hoxton. According to Florida, creative cluster tends to happen in an area which tolerates “unconventional” people such as gays and bohemian (Florida, 2003). Affordability, high degree of freedom and tolerance made City Fringe cluster such a magnet to creative entrepreneurs in London.

From the beginning of post-dot-com boom in 2000s, web design firms and new media agencies began to fill in the area (Foord, 2013). This was deemed as natural evolution since the artist and graphic designers started to get contract from advertising companies who want to utilize the internet. The influx of new media companies introduces high technological capabilities within the cluster. By 2007, increasing numbers of companies in internet business, software development and web design started to set up shop in the area (Foord, 2013). Matt Biddulph, founder of travel website Dropplr, came up with the terms Silicon Roundabout as an inside joke between startup community in the area (GigaOm, 2012). Several news media then used the nickname when they started covering the cluster (Financial Times, 2008) (TechCrunch, 2008). Following the media attention, more startups then settled into the area hence the Inner East London transformed itself from arts and craft into tech startup cluster.

Location Rationale
Comparison between location rationale in different time of cluster (Nathan & Vandore, 2014) (Foord, 2013)

The rationales for the startups moving into Silicon Roundabout was similar in the City Fringe era which were networks, affordable rent, flexibility to shared space and inflows of ideas and human resources (Foord, 2013). It can be argued that cluster characteristics in the current Silicon Roundabout was shaped primarily in the City Fringe era. This is in line with Duranton’s urban evolution theory, cluster generally evolved from the earlier version of themselves (Duranton, 2007). Warehouse and sweatshops which the artist converted into workshops has been converted again into startup office and co-working space with minimum effort due to the similarity of its landscape. Rent flexibility which benefitted artist also suitable for startups because they can share one office for multiple firms. These factors become increasing returns for Silicon Roundabout to build upon.

Tech City Initiatives and The Problem Within

In November 2010, Prime Minister David Cameron introduced regional policy initiatives called Tech City UK (Gov.uk, 2010). The initiative was launched in the heart of Silicon Roundabout in front of industry leader, startup founders and representatives from global tech giants such as Google and Facebook.  Leveraging the rising popularity of the cluster and drawing similarity to US Silicon Valley, the administration declared ambitious target to develop Inner East London into one of the top global technology cluster. Tech city policy has three strategic objectives (Nathan, 2011):

  • Supporting startups and SME in the Silicon Roundabout cluster
  • Attract foreign direct investment into the area
  • Utilization of post-Olympic infrastructure such as the media center for startup accelerator space providing flexible office space and other facilities

As an expansion of this strategy, several policy instruments were established and executed under the banner of UK Tech City. Description of these instrument can be seen below.

  1. Mentoring and Advice: National business mentoring scheme and 200 million pounds grow.
  2. Entrepreneur Visa: Special visa for individual with business idea and 50K committed funding.
  3. Financing: Various investment scheme and tax relief for startups such as Entrepreneurs Relief, Enterprise Investment Scheme, UK Innovation Investment Fund etc.
  4. Workspace: Empty public buildings will be converted to co-working space.
  5. Connectivity: 100 GBP Mio investment in broadband for ten UK cities including London.
  6. Government Services: Digital platform for government platform and business-related services.

At first, the policy evoked quite an excitement. Tech City strategy fit into the government bigger agenda to foster innovation, support entrepreneurship and rebalance the economy (Nathan, 2011). Tech industries embraced the attention and the opportunity to address market failures with open arms. London municipality also delighted by the initiatives. Tech City was an opportunity for the city to develop its emerging economic potential and further regeneration engine to utilize post-Olympic 2012 investment in the area. The launched of Tech City initiatives by the prime minister himself also increase national and international attention to Silicon Roundabout which in turns brings more startup into the area (Nathan & Vandore, 2014).

However, several studies argued whether cluster policy would be beneficial to the development of Silicon Roundabout (Foord, 2013) (Nathan, 2011). By definition, cluster policies are means of governmental effort to support the development of the cluster (Hospers & Beugelsdijk, 2002). The most common cluster policy is Porter-style program which highlight physical location as a vessel for firms, networks and supporting institutions while developing area-wide strategy as an alternative to sectoral intervention (Nathan & Vandore, 2014).  Scholars has been arguing that such implementation is generally ineffective and vague (Martin & Sunley, 2003). According to Duranton, clustering mechanism is very complex hence it is nearly impossible for policy makers to pull the right level (Duranton, 2011). His study also postulated that cluster policies tend to specialize the cluster even though economic diversification brings more benefit to the cluster (Duranton, 2011).   In conclusion, there is big doubt on the capacity of public agencies to develop cluster however this policy model is still preferable model for policy maker around the globe to foster innovation and increase competitiveness (Uyarra & Ramlogan, 2012).

In the case of Tech City Initiatives, it seems like the government were pushing Silicon Roundabout to be many things at the same time. Three strategic objectives conflicting with each other especially the first and second one. Within the limited spaces of the cluster, decision to invite big tech companies into the cluster will drive out indigenous local startup in the area. Landlords and real estate agents will grab the opportunity to gain profit by rising rental price. Introduction to foreign direct investment in the cluster also bears a risk of increased competition which can be detrimental to local startup (Markusen & Venables, 1999). However, one can also argue that influx of foreign investment can bring benefits in terms of knowledge and capital spillover (Javorcik, 2004). In their public report, Nathan et al suggested that foreign direct investment in Silicon Roundabout should be selected based on what is complementary for the cluster long term development (Nathan, et al., 2012). Both Nathan et al and Foord hence suggested to maximize its impact, Tech City policy intervention should just recalibrate its focus on supporting local startups and everything else will fall into place (Nathan, et al., 2012) (Foord, 2013).

Another criticism of Tech city was it seems like the strategy was driven by market success rather than the intention to address market failure (Foord, 2013). Rather than developing initiatives to help the region catchup, Policy makers and politician were jumping into the of Silicon Roundabout bandwagon. The promise of economic growth from tech startup was attractive for UK Government to take advantage with. As displayed in below graph, direct policy intervention was developed on the peak of Silicon Roundabout popularity.

Policy Intervention
Employment growth of the cluster and timing of tech city initiatives

Third argument against Tech City is how the initiatives didn’t take account the local knowledge and wisdom in developing the initiatives. The term Tech City itself was disjointed because the cluster was known as Silicon Roundabout for several years before. This choice of term resulted branding confusion regarding the area due to Tech City-brand is Government-owned while the community much prefer to refer the area as Silicon Roundabout (Nathan, et al., 2012). Another point to this argument is Tech City initiatives try to widen the scope of the cluster up into the Olympic park even though it was beyond what the community perceived as its natural boundary. The Olympic park area is around three miles from Shoreditch however it is a little bit hard to access the area using public transport. Even if the government offered free spaces in the Olympic media center, several startups raised concern that whether their clients of staff would move there (Nathan, et al., 2012). This is aligned with Mccann and Sheppard theory that cost of transportation is a crucial aspect in determining the boundaries of cluster or industrial complex (Mccann & Sheppard, 2003).

Despite the pros and cons, Tech City initiatives continued to be revamped and revised by the government. One year after the launch, new initiative was added to setup linkage between the cluster and nearby universities such as Imperial and UCL (The Telegraph, 2011). Tech City program was then widened its scope to Greater London, Manchester, and other major cities around the UK (Tech City, 2017). Started from Silicon Roundabout, Tech City initiatives are now nationwide policy effort targeted to advance the country digital economy turnover.

Challenge Ahead for The Cluster

Seven years after Tech City initiatives, Silicon Roundabout currently faced several challenges. Number of companies around Old Street roundabout declined drastically from fifteen thousand in 2014 to only three thousand in 2017 (Business Insider, 2017). Declining startup activities mainly caused due surging rent which drove out many startups from the area.  The condition further worsened due to Hackney council decision to gentrify the area by replacing office building with student apartments (Guardian, 2014). The area affordability which is a major attractiveness since the period of Fringe City could be gone forever.

However, even though firms in Silicon Roundabout was declining, other parts of London were getting increase in new business formation. City Road area which located just north of Silicon Roundabout increased its startup formation rate by almost double within the same period as Silicon Roundabout decline (Business Insider, 2017). Many believe this indicates that startup concentration in London is decentralizing.

Challenges Ahead.png
Challenges for the Silicon Roundabout

Expansion of Tech City initiatives also somewhat brings competition for Silicon Roundabout from around the country. Even though currently London is still the biggest contributor UK digital economy, second tier cities such as Bristol, Reading, Manchester and Edinburgh were growing up rapidly (Tech City, 2017). Since the policy instruments is accessible nationwide, UK tech startup have more attractive options in terms of where they should locate their business.

All is not lost for Silicon Roundabout however. Nathan and Vandore believed that the emerging financial technology trend could kickstart new growth for the cluster (Nathan & Vandore, 2014). Due to its historical concentration of banking industries, many believed that London will be the fintech startup capital of the world (KPMG, 2016). As the current de facto startup cluster in the city, Silicon Roundabout have the potential to be the home of next wave of fintech startups coming into the city.

Conclusion

Silicon Roundabout is tech startup cluster in the heart of East London area. The cluster experienced exponential growth in the past decade and currently major contributor of digital economy jobs in the whole Greater London. The area itself has a long history of entrepreneurship and creativity due to its affordability compared to other areas in London. The cluster evolved from arts and cluster based City Fringe into tech startup hub of Silicon Roundabout. From the evolution, it can be concluded that the cluster grow organically with minimum policy intervention. In fact, the lack of policy and rule implementation is the reason many artist and crafters moved to during the City Fringe. Some of the characteristics from City Fringe era such as flexible rental contract then become increasing returns for the cluster when its transformed into Silicon Roundabout.

Cluster policy intervention in Silicon Roundabout came only after growing popularity of the area. Tech City initiatives brought investment and spotlight while the policy mix was criticized due to lack of coherency between one and another. The initiatives also bring unintended consequence of rising rental price and gentrification. For Silicon Roundabout to grow, it is suggested that policy intervention should focus on preserving the growth of its natural inhabitant: the young and nimble digital tech startups.

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