The globalisation of UK law firms: expansion into emerging markets

Jan 31, 2019

Written By David Carnes

What are the possible new jurisdictions for law firms in the future, and what challenges will they face?

The globalisation of the legal profession started late compared to other industries, but it began picking up steam in the 1990s with a sudden proliferation of US and UK firms appearing in Hong Kong and Beijing to service the explosion of foreign investment occurring there. Although the UK was well-represented compared to other countries, at the time many overseas offices weren’t generating enough revenue to break even.

Stage 2 begins

Thirty years later, a presence in emerging markets is becoming an economic imperative, and the UK has become a true world leader in the export of legal services. UK firms now dot the globe, and nearly two-thirds of the partners at major UK law firms are based overseas.

This statistic is deceptive, however. Most overseas-based partners of major UK law firms are based in Continental Europe or North America, leaving relatively few partners based in emerging markets. Asia, for example, represents nearly one-third of world GDP, yet only 13% of major UK law firm partners are based there. This state of affairs needs to change rapidly over the next decade or so, in order for the UK to retain its global competitive edge.

Brexit’s looming shadow

Despite widespread economic anxieties, Brexit is expected to actually increase the availability of legal work in the short term, even if things go badly, for many of the same reasons that bankruptcy lawyers experience an upswing in business during a recession. The generators of this new work, however, are expected to be mostly limited to transactions between the UK and Continental Europe rather than anything happening in emerging markets.

Nevertheless, the global economy is becoming increasingly interdependent, and developments such as Brexit can trigger a chain reaction that leaves no market untouched. Most analysts expect Brexit to add uncertainty and increase transaction costs for UK firms operating in emerging markets. The overall effect, however, should be substantial but not decisive (with the possible exception of Poland and Turkey) under all but the most catastrophic conditions.

Three emerging legal markets to watch

Emerging markets are attractive because their economic growth consistently outperforms that of more mature Western economies (hence the designation “emerging”). UK law firms will need to be committed to a long-term presence, however, because investment levels in some of these economies is unstable. “Greed and fear are close cousins. People are in love with emerging markets one year; next minute they hate them,” according to economist Jim O’Neill.

This article focuses on three of the most promising emerging markets for the legal profession in particular—namely China, India and Indonesia. The focus on these three markets isn’t intended to detract from the potential significance of other emerging markets such as South Africa and Argentina.

CHINA

In 1995 it was a status symbol in some quarters for a UK law firm to be able to speak of “our China office”. In 2018, with foreign companies actually making money from the China market itself (rather than exploiting its cheap labour to sell products abroad, as was the case throughout the 1990s), the concerns are far more pragmatic.

At present China’s economy, although no longer roaring along with 10%-plus annual growth rates, is still one of the fastest-growing economies in the world, with an average annual growth rate of 6%–7%. With an aggregate GDP of over 11 trillion dollars USD, there’s a lot of legal work to be done—and far more competition than there used to be. The following are some of the most prominent trends:

• Outbound transactions are the new focus: the focus of the Chinese legal market has shifted from inbound to outbound, at least from the point of view of UK law firms. In the 1990s, the typical transaction involved an overseas law firm helping a Western manufacturer establish a Joint Venture (JV) or Wholly Owned Foreign Enterprise (WOFE), by practicing Chinese law without a licence as local authorities turned their heads.

Not any more. As China becomes an international economic powerhouse, the typical transaction would be better represented by a Chinese company seeking to list its shares on the London Stock Exchange.

What are the possible new jurisdictions for law firms in the future, and what challenges will they face?

• Hot areas of practice include intellectual property law, M&A, unfair competition law and commercial arbitration.

• Competition is stiffer, not only because UK law firms must compete with numerous other foreign law firms, but also because Chinese firms have ramped up their international capabilities to a remarkable degree in recent years.

• China’s legal system is growing increasingly sophisticated. China is starting to catch up with the West in terms of the sophistication and complexity of its legal system, especially with respect to transnational transactions. This state of affairs has resulted in a greater need for lawyers than ever before.

• Client sophistication has skyrocketed, and so have the expectations placed on the quality of legal work.

Going forward, UK law firms can expect even tougher competition from Chinese law firms, an increasingly sophisticated regulatory framework and greater demand for their participation in transnational mega-deals. Challenges await if China’s economy stalls, or if the current trade skirmishes between the US and China explode into an all-out trade war.

INDIA

Although it might seem difficult to ignore a nation of well over a billion people, it has been happening for decades. That’s all changing now—the Indian economy, now sixth-largest in the world, is reaching a point that renders it impossible to ignore.

India’s young population, strength in information technology and consistently strong economic growth has led to forecasts that its aggregate GDP will exceed that of the US by 2050.

Legal barriers

Firms wishing to operate in the Indian market face a disadvantage not shared by their peers operating in other emerging markets such as China—Indian law prohibits foreign law firms from establishing offices in India. As with most laws, however, there’s a loophole— foreign firms can operate in India (with respect to transnational legal issues only) by cooperating with the Indian National Bar Association and by working with local law firms.

This works to the advantage of the UK’s well-connected “magic circle” law firms—Allen & Overy, Clifford Chance, Freshfields Bruckhaus Deringer, Linklaters and Slaughter and May—and to the disadvantage of small- and medium-sized law firms. Top firms in both the UK and the US maintain India practices, and actively recruit Indian lawyers with dual qualifications. Nevertheless, you don’t have to be inside the “magic circle” to operate in the Indian legal market.

Practice areas

though M&A and foreign investment are particularly hot practice areas in India-focused transnational legal practice, the Indian legal market generates demand for legal work in a wide variety of practice areas such as corporate law, project finance, joint ventures and technology transfers. The market also encompasses disparate industries including banking, pharmaceuticals and retail.

In 2017 the Indian legal profession ranked second in size only to the US, with over 600,000 lawyers. The total legal services market was valued at over $1.3 billion USD, and it’s expected to expand at a rate much faster than the Indian economy as a whole over the next few years. Since Indian law firms increasingly seek out cooperation with foreign law firms, the future of the Indiafocused foreign legal services market looks bright in the short to medium term.

INDONESIA

Indonesia is the world’s fourth-largest country in terms of population, with a staggering 255 million people. As the world’s 16th-largest economy, it has plenty of room to grow and its economy has been cruising along with growth rates of 5%–6% for a number of years now. The country’s ethnic diversity is astonishing—over 300 native languages are spoken. Fortunately, English is widely spoken among the professional classes.

Restrictions on foreign legal services

To practice foreign law in Indonesia, foreign lawyers must take and pass a course in legal ethics. They cannot appear in court and they may not be employed by a foreign law firm. Although foreign law firms cannot operate independently in Indonesia, they can operate through alliances with local law firms or serve the Indonesian market from abroad. Many internationally-oriented Indonesian law firms are eager to cooperate with foreign law firms for mutual benefit.

The restrictions governing the practice of law by foreign lawyers in Indonesia are ambiguous in many ways, leading to inconsistent enforcement by various authorities. One issue in this regard is the exact extent of integration that’s permitted between an Indonesian law firm and a foreign law firm. Fortunately, at present the foreign legal market is currently concentrated almost exclusively in Jakarta—but this might not always be the case.

Public policy changes create new opportunities

The Indonesian government has promised billions in funding for new telecommunications and infrastructure projects. These promises are particularly good news for the future of Indonesia’s underdeveloped shipping industry, which is likely to require overseas capital and technical expertise in order to modernise.

Considering that Indonesia is composed of over 17,500 islands, the long-term opportunities for investors (and their lawyers) seems limitless.

Nationalist telecommunications regulations that require 40% local production could actually work to the advantage of UK law firms operating in the country, because they have spurred telecom giants such as Apple to establish local production facilities. Other industries that frequently generate work for UK law firms include mining, energy, banking, capital markets and M&A. Islamic financial restrictions (forbidding the charging of interest) are uncommon.

The future of the Indonesian legal market looks bright, although clouded with uncertainty. As long as the economy continues to grow steadily, UK law firms should be able to take advantage of legal work generated by both foreign investors and Indonesian companies seeking assistance with outbound transactions.

Other emerging markets

Which countries count as “emerging markets”? Some would count Poland, for example, while others might not because it was reclassified as a developed economy in 2017 (Malaysia is expected to follow by 2020). Which emerging markets are “promising” is an even more subjective determination. Ordinarily, Brazil would seem to offer a lot of promise; however, its anaemic economic growth has scared away many potential investors.

The bottom line is that there are no final answers to these questions, because the situation changes constantly. Russia and Brazil may be suffering a loss of investor confidence one year due to slow GDP growth, only to regain investor favour the next year with an economic rebound triggered by political reforms or the lifting of international sanctions. What’s needed is a thorough understanding of the long-term outlook of these markets.

The road ahead

The Chinese word for “crisis” combines the characters for “danger” and “opportunity.” While “crisis” is hardly descriptive of the situation faced by UK law firms wishing to expand into emerging markets, “dangerous opportunity” fits like a glove. Firms need to act aggressively to shore up their position in these markets; nevertheless, ambition needs to be tempered with a shrewd eye for both cultural differences and rapidly changing economic conditions.

Commercial Insights