Key Asian economies have established themselves globally as the West falters. 
Sofia Lind asks what the regional economy will look like in 2021

The Landmark is one of Hong Kong's many glass skyscrapers. Inside: Gucci, Prada, Tiffany & Co, Dries van Nooten, Manolo Blahnik, Skadden Arps Slate Meagher & Flom, Herbert Smith, Gibson Dunn & Crutcher, Deacons, Eversheds and Kirkland & Ellis.

Reading the international news online via the shopping mall/office tower's free wi-fi, The BBC states: 'Eurozone leaders seek Chinese investment in bailout fund' while one of my native Swedish news sites proclaims: 'Saab to be taken over by Chinese companies Pang Da and Youngman.'

Since the global downturn plunged Western economies into the unknown three years ago, few international law firms have failed to catch on to Asia's much-touted growth story. Illustrated in the last year by a new wave of office launches, re-launches, expansion plans and the recent flurry of leading US firms forging Hong Kong law teams – among them Kirkland, David Polk & Wardwell, Sullivan & Cromwell and Simpson Thacher & Bartlett.

It's an incredibly stark contrast with less than a decade ago when Asia was mired in a global deal slump, the painful legacy of the late 1990s currency crisis and the outbreak in 2002 of severe acute respiratory syndrome (SARS).

Will the market change as dramatically again in 10 years? Can international law firms retain dominance in the Asian markets, despite buying power moving from West to East? With the largest law firms in China now counting over a 1,000 lawyers, a select few progressive domestic practices have already begun taking strides towards modernisation and ultimately hope to take their fast-growing businesses global.

But despite all the outward signs of confidence, success and conspicuous consumption in Asia, there remain lingering concerns regarding how the region's development will be managed in the long term. Many lawyers wonder how China's particular brand of centrally-planned, one party, state-backed capitalism will mature and how the country will tackle the huge gulf between the growing rich and middle classes on the one hand and the majority of the population living – by Western standards – in poverty on the other.

In addition, there is already unease sounded among some 
legal advisers about how sustainable some of Asia's hubs 
like Hong Kong and Shanghai 
will be as legal markets as the queue of international law firms seeking to build large regional networks lengthens.

Meanwhile, China is not the only growth economy in Asia-Pacific, with international firms currently moving to position themselves in 'new' key markets like South Korea and Indonesia. Firms also have to wrestle with a complicated set of Bar restrictions and a business culture that is, if not hostile to foreigners, increasingly expecting Western businesses to adapt to local practices.

The pull of PRC

The majority of lawyers I meet in Hong Kong have a self-assured smile on their face. It is the air of success that a decade ago drew US firms to London and once booming markets like Dubai.

Drawing thoughts back to the glossy Landmark shopping mall, Hong Kong-based legal recruiter James Garzon at Law Alliance says: "The Chinese are very status-dominated and like to buy status items. The city of Guangzhou across the border has over 15 million inhabitants. They have money – the companies will follow and the lawyers will follow the companies. Everyone wants to do inbound Asia work. Europe has not been the same since 2008 and now Asia, South America and Africa are the targets."

There is certainly a streak of brash consumption in Asia. It is no coincidence that Western luxury brands see Asia as their key growth markets and that companies like Prada have sought local listings on the Hong Kong Stock Exchange.

But while Hong Kong is a well-known shopping haven (I picked up four pairs of shoes for the equivalent of £30 in a street stall), shopping in the Central district is focused around the type of luxury items of which a London legal reporter can only dream. But many customers here are not from the UK or even from Hong Kong – they come from the mainland.

In the lift up to Herbert Smith's office on the 23rd floor of The Landmark's exclusive Gloucester Tower, three associates discuss this year's Christmas party, mixing perfect English with Mandarin. This is typical. A number of international firms in Hong Kong now do not consider hiring trainees or associates who are not bilingual. Some are also trilingual, speaking the local Cantonese – although aspiring lawyers who speak only Cantonese are getting squeezed with the rise of the power of mainland China.

Garzon says: "If you are looking at a listing of a Chinese company on the Hong Kong Exchange, those clients will speak Mandarin, not Cantonese, not English. If you are advising on M&A into China or outward – such as mining projects in Africa and Australia – you need Mandarin. Recently, a request for proposal was issued in Chinese by a top three US investment bank ahead of a transaction. That was very market-changing."

Herbert Smith's newly-appointed Asia head, Mark Johnson, illustrates the dramatic market developments in Asia since his arrival in 1987: "In those days, Hong Kong was a domestic practice and people would go to the border with binoculars. People just wouldn't go into China."

The biggest shift, he says, is towards a dominantly Chinese influence, while only decades ago Hong Kong would look eastwards to Japan both for trade and for popular culture.

While the Hong Kong Central district, which houses all of the major law firms, shouts of wealth and activity, lawyers say that the market here is currently dampened. Confidence is at low ebb, in relative terms at least, with investors anxiously awaiting a resolution to the eurozone crisis and an uptick in the US economy, both areas filled with consumers of Asia-manufactured goods.

Listings on the Hong Kong Stock Exchange have been few and far between for a few months now. However, this has done nothing to stem the flow of foreign firms flocking to enter the market.

As Slaughter and May Hong Kong capital markets partner Benita Yu (pictured) says: "There is a sense of everyone congregating here because it is the safe place to be. There seem to be no opportunities anywhere else."

Beyond China

Ten years ago, the market dynamics were very different, when many international firms thought "servicing Asia" could be done from recently de-colonialised Hong Kong. So how do lawyers expect the wider Asian market to change shape over the next decade? Certainly, the consensus view is that the legal market will see rapid growth and development. Chinese policymakers' commitment to retaining Hong Kong as a financial centre in its most recent five-year plan has reassured the local international business community but, in recent years, Singapore has made a significant attempt to challenge Hong Kong's position as a regional hub.

Most Hong Kong-based lawyers view this as providing healthy competition and predict that Singapore will further establish itself as a hub for Southeast Asia – serving markets including India, Indonesia and Malaysia – while Hong Kong is crucial for inbound and outbound Chinese investment (see Singapore rising – slick, competitive and turbulently liberal, below).

The competition is fiercer when it comes to attracting Asia headquarters for international businesses – here the Hong Kong Government faces a number of challenges. One is apparent just by looking out the window. The haze clouding the harbour is pollution, mainly due to heavy industrialisation on the nearby mainland. I am told that only a few decades ago, when a raft of law firms made their first foray into the then UK colony, the 
sun was not nearly as obscured 
by pollution.

By contrast, Singapore has a famously clean environment and slick infrastructure and has already managed to establish itself as the Asian centre for major global insurers as well as pharmaceutical companies and private banks.

Singapore has also attempted to take ground from Hong Kong as a centre for international arbitration, positioning itself as a place to solve disputes out of reach of Chinese authorities. But Hong Kong dispute resolution specialists typically say now that notions of China interfering with disputes arbitrated in Hong Kong are out of date. Hong Kong has also this year implemented a major reform of its arbitration regime in a move explicitly designed to bolster its position as an international arbitration centre.

Johnson, also longstanding manager of the Herbert Smith's Asia disputes practice, comments: "Clearly there is competition from Singapore, but Hong Kong still has an edge. The geography and culture is well suited to China and most disputes have a Chinese language element to them. The body of people who act as arbitrators here is very impressive. Some people worry about the proximity to China, but I think that is uneducated."

Commenting on competition between the two centres, Eversheds Asia head Nick Seddon says: "Hong Kong is in a strong position as the top Asian legal and financial centre but should not rest on its laurels when it comes to competing for international businesses. Singapore has a few advantages like clean air and access to international schools and I have been impressed at how successful they have been in certain sectors."

But Hong Kong is sure to face competition from many other pretenders over the next decade, not least from Shanghai on the mainland, which is increasingly establishing itself as a Chinese finance centre. Already the main home of Chinese private companies, it is currently floating plans to open up its stock exchange to international listings.

Meanwhile, a presence on the ground in Beijing is also increasingly important for law firms, as the home of Chinese state-owned enterprises (SOEs) and where a lawyer can build up vital government links. Further afield, many predict that cities like Guangzhou and Shenzhen will develop their legal markets, though so far there is little sign of foreign firms attempting to challenge China's fast-growing law firms in such arenas.

Allen & Overy (A&O) Asia corporate head Gary McLean says: "Hong Kong will continue to be a financial hub for as long as the clients allow it to be. Shanghai and Beijing are increasingly important centres in China, but comparatively Hong Kong is brilliantly efficient. You are able to accurately predict how long it will take to get to and from a meeting – the same can not be said of Beijing."

China's growth rate slowed this year but is still expected to come out at 8.4% in 2011. In 15 years' time, China is widely expected to have overtaken the US as the world's largest economy.

Other up-and-coming Asian markets have taken precedence of late: Indonesia attracted new entrant A&O last year, Norton Rose earlier this year and US firm O'Melveny & Myers last month, while Linklaters has said it wants to launch there and CC says it is looking but has no firm plans as yet.

Another market about to see a host of first-time entrants is South Korea, as Seoul is now open to applications from UK law firms wishing to set up to practise international law and a US free-trade agreement is also in the final stages of being passed through Parliament. Firms including Linklaters, Simpson Thacher and Cleary Gottlieb Steen & Hamilton already have significant offshore Korea practices and CC, Linklaters and Herbert Smith are all on the starting blocks to launch offices there during 2012, with more firms expected to follow to the country, which had 14 Fortune 500 Global companies in 2010.

Over a 10-year period, energy and infrastructure upgrades will be required across a number of growth markets – not least in the widely-touted Indonesia, the largest economy in Southeast Asia, with a 2011 growth rate of 6%, but also in countries including Vietnam, Thailand, Cambodia and Mongolia (Hogan Lovells is already on the ground in Vietnam and has a representative office in natural resources-rich Mongolia), and the growth markets are also widely expected to further drive demand in the technology, healthcare, retail and industrials sectors.

Johnson says: "Looking 10 years into the future, the main material change will come from the liberalisation of the Indian market, were this to happen. China is already very saturated with international firms. Indonesia will be more important because of its resources, and Korea and Vietnam will be key places to do business. We will also see more big-team moves between international firms, because that always happens in a market where money is swooshing around."

Linklaters Asia head Stuart Salt says: "All three centres in China will continue to be important. The Chinese Government has sent a strong signal of commitment to Hong Kong, making it the primary centre for offshore renminbi products, an area in which we at Linklaters have been at the forefront from the outset and which we consider to be of profound significance to the global financial system. For us, the most immediate need for growth has been in our Beijing office due to our increased involvement with regulators and representation of the policy banks and major SOEs that are based there."

In Korea, Linklaters' practice has traditionally been focused around capital markets, private equity and M&A. The firm has a 10-lawyer, US-qualified, Korean-speaking team in Hong Kong, led by Hyung Jung Ahn, and is looking seriously at opening in Seoul next year by relocating part of that team.

Salt says: "Korea's state-owned energy companies and banks are highly sophisticated investors in world-class projects while the chaebol [large, family-owned conglomerates] and other large privately-owned companies are clearly among the leading multinational companies in the world, so we are keen to continue to strengthen our offering to and relationships with these clients.

"Indonesia is at a much earlier stage of its development and does not yet have a full line up of global players like Korea, but nevertheless the economy is booming and we do expect Indonesian corporates and banks to develop a greater need for international legal advice in the short to medium term."

'The Kirkland effect'

Kirkland corporate partner Ashley Young, who joined the US law firm in August from A&O, says: "There is a real China focus at present but our clients see opportunities across the whole region. Deal flow can be a bit choppy and what happens in Europe and the US continues to have an impact on what happens in the region, particularly as regards prices of listed stocks."

Kirkland is certainly a firm to watch. Its aggressive launch of a Hong Kong law practice in August this year continues to reverberate through Hong Kong's legal community and has attracted some controversy. The US firm come under criticism from market rivals for causing a false economy in local pay rates after an ambitious launch which saw it reportedly paying its eight new partner recruits, which came from Skadden, Latham & Watkins and A&O, between $4m-$6m (£2.5m-£3.8m) per year for an initial period while launching the local practice.

While one senior managing partner of a UK firm in the region says Kirkland has made a bold bet which may or may not pay off, many rivals predict the investment can not deliver. But Young says Kirkland has a well-thought-out strategy for the region: to become the main adviser to funds in the Asia region, of which the prospect of providing a Hong Kong initial public offering (IPO) exit is an important feature.

He says: "In transactional private equity, our Asia vision for the next five to 10 years is to continue advising existing clients on Asia-related work but, also, for the vast number of new funds being raised in Asia, continuing to be a leading firm supporting private equity activity in the region. There is space for US firms here, as some incumbent firms have good Asia networks and English law practices but they lack a deep bench of expertise in the US."

Local lawyers say the motivation for money-driven entrances like Kirkland's is a dirth of available talent in the market and argue many firms get caught in a revolving door. In a culture where status and money matter, many associates move firms frequently and fail to build up a name for themselves.

In fact, when asked who the stars are, local lawyers repeat the names of deeply entrenched market veterans like Freshfields' capital markets partner Teresa Ko and Slaughters' Yu. Another name that comes up often is Herbert Smith's former Asia head, Ashley Alder, who has left practice to become head of the Securities and Futures Commission (SFC), the main Hong Kong financial regulator. It is very difficult for younger partners to break into 
this select club of marquee Hong Kong partners.

Yet as much as the stream of launches and moves into Hong Kong law would seem to be an endorsement of Asia, it has raised concerns for many as to whether Hong Kong is becoming an unsustainable bubble. Already there is huge legal pressure for London law firms to match New York-style packages being offered by US firms – though the practice has so far been largely resisted.

At the same time, it is widely acknowledged that the capital markets work that many advisers are chasing is often not very lucrative thanks to intense competition and the traditional reluctance of Asian clients to pay the kind of premiums common in the West. Others also question what will happen when the 
string of high value floats of 
large state-backed Chinese companies has run its course. Advisers will probably have to rapidly broaden their practices to cover corporate, disputes and broader commercial advice.

When you add in the rapid growth of domestic law firms, their increasing dominance of inward investment work, some question whether the hype around the Chinese legal market is entirely justified.

Outward bound

I comment that there appears to be a stronger focus on high-profile female lawyers in the market, but am told that the reason is a roughly 80:20 ratio of females to males in Hong Kong at the trainee stage, with the majority of women still eventually expected to choose family life over their law careers.

Something else in need of modernisation is the Chinese legal market. The largest firms are based in Beijing – both Dacheng and YingKe count more than 1,000 lawyers, while King & Wood has around 800 – but only King & Wood, Jun He and Zhong Lun are repeatedly named as relatively modernised or on a serious trajectory towards internationalisation. (As most Chinese firms are less than 20 years old, the familiar claim is that most function more like barristers' chambers than corporate law firms.)

The trio features as part of a trend for senior partners to move from international firms to Chinese firms, a club including former CC corporate partner and global partnership council member Rupert Li (pictured), who is now King & Wood's international managing partner, and Hogan Lovells' former China head Robert Lewis, who joined Shanghai-based AllBright in 2010 but moved to Beijing-based Zhong Lun earlier this year. Zhong Lun has also hired ex-K&L Gates local managing partner Clifford Ng in the last few months.

Many joiners speak Mandarin, but one partner who has still opted to make the leap to the Hong Kong office of Beijing-based Jun He is Stephen Wozencroft, formerly a partner with a range of international firms including Dewey & LeBoeuf, legacy Denton Wilde Sapte, legacy Barlow Lyde & Gilbert and Stephenson Harwood. For him, switching to a Chinese firm was a bit like "starting to play for the home team", where he gets access to much more high-profile deals than in a UK or US mid-market firm.

On joining a Chinese firm, he says: "To me, it is a business opportunity, as few Chinese firms have attempted to build a Hong Kong practice or go international."

But there is no question that it is King & Wood that is seen as the standard-bearer for bluechip Chinese advisers. With the firm already making no secret of its ambition to take its practice international, the firm made a bold statement of intent after entering into talks earlier this year to tie-up with Mallesons Stephen Jaques, one of Australia's leading law firms.

While not being able to comment due to confidentiality agreements, Li says: "We have come to a time where demand for legal services does not exceed supply, except perhaps in mainland China. The global service model championed initially by UK firms and followed by US firms is not necessarily the way forward anymore."

It is hard to over-estimate the impact that the talks have had on the local legal community, representing a potential watershed for the development of the market. A union between the two would create a combined entity with well over 1,500 lawyers and marry two of the strongest local legal brands.

Still, many international rivals question the viability of the idea, pointing to a profit disparity. Mallesons partners, who currently earn on average $1.235m (£781,000), take home considerably more than those at King & Wood. But probably more daunting will be the regulatory hurdles and the huge cultural differences. Even as the most progressive Chinese law firm, King & Wood is viewed as being a fair distance behind the slickly corporate Mallesons.

The pair is also unable to fully merge, due to the ban on foreigners practising Chinese law, but it is thought that they are attempting to push the boundaries for what has previously been done, and what is allowed, in structuring the union.

Many rivals also say the combination will require a third party – a UK firm. As Legal Week went to press the two firms were expected to vote this week on a union backed by a Swiss verein structure, which would allow the firms to centralise many functions and adopt a common brand while maintaining separate partnerships and profit pools. If the union goes ahead, the duo is also expected to try to extend the combination with a US or UK law firm. However, as that would mean giving up important referral relationships, this may be some time off yet.

However, there are many who see the deal – which has strong support by both firms' management teams – as hugely significant and a potential opportunity to bring together two strategically complementary businesses. 
King & Wood is also expected to benefit from Mallesons' strong training and quality control – with leading Australian law firms well known for producing excellent technical lawyers.

As interesting is the expectation that King & Wood will lobby for some liberalisation from China's restrictive Bar rules to allow a more meaningful union. While there is seen to be virtually no prospect of foreign law firms persuading the Ministry of Law to liberalise, a national champion like King & Wood would stand a far greater chance of securing concessions. That could potentially open the door a little for foreign advisers. However, the consensus view is that further liberalisation – at least of the kind that could benefit international firms – is probably a long way off.

As Li says: "An opening up of the Chinese market is going to become inevitable, but it is difficult to fit a circle into a square and China needs to perfect its legal market. We are more open than India but we are not at a place where Chinese firms can compete with the global elite. The market needs to grow in sophistication and product credibility before we can open up, otherwise it will probably result in a bit of chaos for regulators."

However, despite the huge strides made by domestic law firms, it is fair to say that questions remain over their ability to convincingly go international, given the challenge they will face competing against US and UK firms. The Mallesons/King & Wood bid looks to be an early litmus test of the credibility of their global ambitions.


Asia 2021 – 
place your bets

Despite the outward signs of confidence in Asia – and the belief that its major economies will continue to robustly grow – there are reasons to question the hype that is attached to its local legal market. For one, history shows that fast-growing economies can painfully overheat or build up structural and social problems that later burst into the open. Economic growth is rarely a straight line running over decades – as the 20-year lull in Japan's economy demonstrates.

Asia also faces a number of challenges, not least the problem in several of its growth economies of a wealth gap where the better off have prospered at a more rapid rate than the poorer classes. It also faces simmering tensions of China's lack of democracy. It is perhaps surprising how many corporate lawyers privately express unease regarding these issues and their implications – while conceding that China's centrally-based economy and political system provides enviable stability in a currently volatile global economy.

How sustainable Hong Kong and China will be for foreign law firms is open to debate. There is a widespread feeling that 10 years from now London's top firms will continue to be successful given their long-term commitment and deep roots. Most expect that the leading Wall Street firms that have moved into local law will have established lean but effective niche practices largely focused on securities work. Other firms like Herbert Smith, Baker & McKenzie, Hogan Lovells and DLA Piper appear well placed for the evolving market.

Barring a huge economic reverse, Asia will be a far broader set of legal markets powered by a string of developing economies, with Indonesia seen by many as the key growth story for the next decade. The idea of a pan-regional play for advisers could eventually be outmoded in favour of deeper entrenchment in larger economies, powered by higher domestic demand, rather than the current focus on exports.

The work handled by law firms will likely be broader than the current focus on finance and securities work. How far international firms will adapt to such a maturing of the market, which would play less to their natural advantages in English and US law, is unclear. The last five years suggests that foreign advisers have struggled to cope with a period in which Westerners are increasingly expected to adapt to Asia, not the other way around.

A key factor would be if Hong Kong or PRC law started to gain currency across the region. A 2021 in which multinationals were as likely to consider structuring contracts or deals under Hong Kong law would certainly represent a fundamental shift in the global legal market.

Li says: "Chinese law is not legal lingua franca for a transaction. That is English law, which means Chinese clients need to document their activities in English law on any cross-border transaction. This will change either when the Chinese Government creates an acceptable rule of law or when Chinese companies become so profitable that they can demand transactions to be carried out under Chinese law."

Zhong Lun's Ng strikes a similar note: "China has been very good at taking other people's technology and adapting it for its own market. I don't understand why law firms think they are any different, that they can do something that we can't."

Below the law firm office towers in the glossy Landmark shopping mall, the exclusive boutiques have stopped hiring local Cantonese speakers. When you enter, you are greeted in Mandarin. I try my luck in Dries Van Nooten and my attendant does not speak English – she is right to assume that I am not her customer.

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Mid-tiers in Asia – late-comers and high hopes

While recent attention in Asia has been dominated by the strategic jostling of top London and New York law firms, a far wider pool of upper mid-market law firms are striving to carve out a profitable place in the market.

In this bracket, US firms like Paul Hastings Janofsky & Walker and Jones Day are competing heavily on fees with UK firms including Simmons & Simmons, Ashurst, Norton Rose and Eversheds while struggling to recruit from a small talent pool – especially in Hong Kong.

Long before the Wall Street law firms began recruiting from the magic circle, the UK mid-tier was a prime hunting ground for market entrants to recruit competent partners. For example, Simmons was a key player in Hong Kong until 2006, when US law firm Fried Frank Harris Shriver & Jacobson made its Asia debut by recruiting a five-partner team. But while leading, transactionally-driven firms are generally regarded as well positioned, there is huge scepticism about the prospects of many mid-tier firms.

As such, some local lawyers have questioned what new Hong Kong entrants like SNR Denton or Berwin Leighton Paisner (BLP) will add to a saturated market. This comes as another couple of US firms and at least two UK firms are looking at a first-time launch. This includes Taylor Wessing, which is hoping to enter through an alliance with a local firm, but aside from its fellow Interlex network firm Deacons – Hong Kong's oldest and largest independent firm – there are few independents still viable (the 2008 union of once-proud local leader Johnson Stokes & Master with Mayer Brown is regarded as a symbolic of the loss of status of domestic law firms).

BLP Hong Kong head David Robins says that while the market may be saturated, he believes there is a space for his firm. The firm's strategy to target real estate is also commended by a magic circle partner: "At least it is not trying to be all things to all people." By a similar token, many see better opportunities for firms with defined specialisms or industry focuses, like Clyde & Co or Holman Fenwick Willan, than commercial generalists.

Meanwhile, SNR Denton faces the baggage of having left Asia in 2004 in a blaze of publicity. But Keith Brandt, leader of the office that opted to switch from Hammonds to SNR Denton for the firm's re-launch earlier this year, says the firm has received a warm reception from clients, arguing that the legacy Denton Wilde Sapte brand remains strong in Asia.

A few mid-tier players do stand out in Asia. Baker & McKenzie, with one of the largest practices in the region, has the advantage of early commitment to the market and has established some of the strongest offices in its global network in Asia. DLA Piper's Asia practice is also more highly rated than it is in the rest of the world and the firm has high hopes of the benefit it will gain from its recent merger with its Australian ally Phillips Fox.

Two firms attempting to set themselves apart from the crowd are UK top 10 firms Ashurst and Norton Rose. In merging with Australia's Deacons in 2010, Norton Rose is widely viewed as having secured a highly effective deal and reset expectations about how an Australian practice could fit within a wider Asia-Pacific offering. Ashurst, of course, is hoping to go one better, having in October finalised its tie-up with leading Australian law firm Blake Dawson, which is set to lead to a full merger in three years' time.

Fairly or not, the Blake Dawson deal has been criticised by many rivals (though the same thing happened at the time of Norton Rose's Deacons deal). The critics argue that, as a late entrant to the market, if Ashurst wanted to raise its profile, why merge with a firm that does not have a strong brand in Asia? Ashurst Asia head Geoffrey Green (pictured) takes a different view. He says: "First, I would rather merge with the firm that has the right practices and lawyers, including culturally. Second, we have around 65 lawyers in Asia, which means we will double our scope here on day one.

"To us, the biggest challenge will be to make it work successfully, especially with London and Sydney so far apart. As the firm has never done a merger before, Asia will be the test of how a merged firm operates."

What the high-stakes deal does demonstrate is the hunger among firms to make ground rapidly in Asia, even if it means taking a few risks along the way.

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Singapore rising – slick, competitive and turbulently liberal

If the intense focus on Hong Kong was in danger of overshadowing the wider market, Singapore regained the headlines when news broke this month of merger talks between Linklaters' Singapore joint venture ally Allen & Gledhill and Allen & Overy (A&O).

The discussions are big news in their own right – the 300-lawyer firm is arguably the most highly regarded local firm in Singapore – but also highlights the issues that the local firms are facing as they struggle to position themselves across the region.

The talks also highlight Singapore's peculiar position. Despite a small local economy and population, it has effectively styled itself as a regional hub thanks to a prime location, good infrastructure and a business-friendly government. Indeed, Singapore is seen as an increasingly competitive threat to Hong Kong as an international business centre. Particular successes have included building a strong international arbitration offering and attracting high-profile foreign listings like this year's Manchester United football club float.

Part of that commercially-minded approach was signalled in the roll-out of a more liberal Bar regime in 2008, the Qualified Foreign Law Practices (QFLP), which allows international firms to practise many areas of local law. Six firms were initially awarded licences to practise, including A&O, Herbert Smith, Norton Rose and Clifford Chance, and the model has proved more popular than the restrictive and generally disliked joint venture regime, which has led to a string of abandoned alliances.

However, the impact of liberalisation and expectations that the Singapore Government will further open the market has considerably shaken up the local legal community. Allen & Gledhill, for one, concluded that it needed an international partner to allow it 
to plug in to the 
wider region.

One complication is what some argue is a lack of demand for Singapore law advice among international clients – a factor that led Linklaters to reject an approach from Allen & Gledhill before it began discussions with A&O. Some also argue that large local firms like Allen & Gledhill and Rajah & Tann – which both have around 300 lawyers – are too large to combine with more profitable foreign law firms. Either way, other leading local firms like Drew & Napier and WongPartnership are expected to be reviewing their options.

There is currently a proposal with the Singapore Ministry of Law for a merger between A&O and Allen & Gledhill and it is expected that the willingness of local regulators to back the structure of the deal will be crucial. Importantly, the ongoing ban on foreign firms practising local litigation suggests that the 130-partner domestic firm would be restructured ahead of a merger with A&O.

However, regulators are expected to maintain the pro-liberalisation stance that is seen as underpinning Singapore's rising regional profile. Local law firms, it seems, will just have to keep up.

• Related: King & Wood Mallesons emerges as post-merger name as partners vote on union
• Click here for Legal Week's in-depth feature on the emergence of Chinese law firms