TECHNOLOGY

Why Some of the Biggest U.S. Tech Companies See London as Their Ticket to Growth

Snap, Inc. recently announced plans to set up its international headquarters in London. It’s the latest in a series of tech companies to see promise in an independent Britain.

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BY Zoe Henry - 01 Mar 2017

PHOTO CREDIT: Getty Images

Snap, Inc. is the latest big U.S. tech company to bet that even post-Brexit, the United Kingdom will continue to be a major global market.

Last month, and just ahead of its IPO, which is expected this week, the social media giant announced plans to set up its international headquarters in London. It's the latest in a series of U.S. tech companies, including Amazon and Facebook, to ramp up investment in the U.K.

For Snap, in particular, the move marks a departure from other tech companies--which have, in recent years, chosen low cost countries for their global operations. Apple, for example, has based its international operations in Ireland, where the corporate tax rate is just 12.5 percent.

"[The U.K.] is where our advertising clients are, where more than 10 million daily Snapchatters are, and where we've already begun to hire talent," explained the company's U.K. general manager, Claire Valoti, in a January interview with the Financial Times.

To her point, Snap is now hiring nearly a dozen workers in London, including software engineers and at least one financial analyst, according to the company's jobs site. The U.K. team will reportedly be responsible for managing sales made to customers in any country where Snap doesn't have a local base. That's significant: At present, Snap claims that around half of its 160 million daily active users come from countries outside the U.S., including in Ireland, Singapore and Sweden.

Still, the investment comes as the U.K. is preparing to break away from the European Union, and amid fears that this could stall Britain's economic growth. Historically, London has been a popular destination for startups as an entry point to the broader E.U. market, and that could change if the U.K. fails to re-negotiate favorable trade agreements.

Analysts have pointed out that Brexit might also affect a company's ability to hire foreign talent. In that event, it might be easier for startups to simply avoid the U.K. market altogether, suggests Warwick Business School professor Stephen Roper.

"The U.K. is about one seventh of the European market--in terms of business and population--so there's plenty of market share to be had without entering into the kind of currency risks that are implicit in the U.K.," says Roper.

Even so, Snap is not alone in investing serious resources across the pond. Even though Apple made Ireland its home base in Europe, the iPhone maker, last fall, announced that it would move 1,400 staffers to the London headquarters, which will be completed in 2021. Also last year, Facebook said it would increase its U.K. staff by 50 percent in 2017. Just last month, Amazon said it planned to hire 5,000 new workers in the capital, where it's also opening a new head office. Consider, too, that London was recently named the No. 1 city for fast-growing private companies, according to the 2017 Inc. 5000 Europe list.

Recent interest in London may have more to do with the relative ease of doing business there, and less with its status as an E.U. entry point. "The U.K. will still remain an attractive market for companies such as [Snap] not just because of its relative size, but because it has an English speaking population that makes it relatively easy to commission market analysis studies, to find investors for their projects and roll out new products," says Ari Ginsberg, a professor of entrepreneurship and management and New York University's Stern School of Business.

Snap is hardly blind to the risks posed by Brexit. While the company failed to return a request for comment, in its S-1 filing with the U.S. Securities and Exchange Commission, it recently cited Brexit as a major risk factor. It argues that the manner in which Britain renegotiates its trade agreements could negatively impact its European business--and it's business as a whole.

"The full effect of Brexit is uncertain and depends on any agreements the United Kingdom may make to retain access to European Union markets," the filing reads. "Consequently, no assurance can be given about the impact of the outcome and our business, including operational and tax policies, may be seriously harmed or require reassessment if our European operations or presence become a significant part of our business."