Britain is relying on the technology sector to drive innovation, attract foreign investment, and get the UK economy back on track.

This was the message from the Mayor of London's digital advisor, Kulveer Ranger, speaking at an event held in London's 'Tech City' today. Ranger said the IT community needs to use the opportunity of the London 2012 Olympics, when the spotlight will be turned on the UK, to “set up a shop window and demonstrate our wares”.

“London is the engine of the UK economy, but there has been a need to diversify our economy,” said Ranger. “We all know there have been issues in terms of financial institutions; our manufacturing hasn't quite taken off; growth is very small. Technology is the sector. It's not the nice to have, it's a must.

“From the Mayor's perspective, we must encourage more business to come here,” he added. “London is such a great city, but sometimes it's hard to get a key message across about why you should be here. Tech City has been a way of conveying that message, of saying look at all the opportunities here, all the infrastructure, all the development that's happening without us doing anything.”

While the government is keen to encourage growth and help promote London as a place for technological innovation, it must also be careful not to interfere too much in what is already a competitive, collaborative and self-sustaining ecosystem.

“One of the most important things central government is doing is staying out of the way and not messing it up,” said Eric Van Der Kleij, chief executive of the UK government's Tech City Investment Organisation. He added that one of the few things government could usefully do is throw a spotlight on what is happening. “We do have a terrific convening power to be able to do that,” he said.

Government is also trying to remove financial barriers for entrepreneurs setting up businesses in the UK. At the beginning of this year it introduced lifetime capital gains tax relief for entrepreneurs, meaning that the first £10 million of capital gain is taxed at just 10 percent. The R&D tax credit also means that companies get 225 percent in tax credit for the investments they make in R&D.

Meanwhile, the government is sending out a message to investors with the Enterprise Investment Scheme (EIS), designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. Moreover, all the investments made in 2012 will be free of capital gains tax for one year.

“This is one of the most attractive angel investment tax policies globally,” said Van Der Kleij.

On the flip side, however, the government's decision to pinpoint Shoreditch as the epicentre of technological innovation in the UK has led to a number of large companies, such as Cisco and Google, setting up offices there. This will inevitably prompt a rise in rental prices and a gentrification of the area – which attracted startups in the first place because of the low cost of office space.

Matt Evans, founder of Solid State Group and an “incubator” at office space provider Hoxton Mix, warned that if the area becomes too commercial, startups will move further east and the area will lose its “cool vibe”. But Ranger said the Mayor prefers to think of this development as “regeneration”.

“At what point do you become a victim of your own success?” he asked. “At what point is it that an area starts improving and the money is drawn to it because people want to see things improve, they want to see new coffee shops, new bars, better infrastructure. If that helps lift this sector then I wouldn't want to call it gentrification, I'd want to call it regeneration.”

For now at least, the area is still attracting startups. Last month the Prime Minister unveiled an interactive map of East London's technology cluster, created by Trampoline Systems and Playgen, revealing more than 600 firms in the area. That number has since grown to over 1,000.

“The Tech City map supports the renaissance that is already underway in the Shoreditch area infusing technology, investment and talent into startups in East London”, says Bob Schukai, Global Head of Mobile Technology for Thomson Reuters, which partnered on the map along with Mother, LinkedIn, Cisco and Atos.

Meanwhile TechHub, the high-profile shared workspace for technology startups, is growing in another direction. The company recently announced its first development outside of London's ‘Silicon Roundabout’, with TechHub Riga, and has today opened a third office in Prague.

“While the TechHub London has been enthusiastically welcomed by the community here and abroad, we want to ensure that this community spirit and support is accessible to technology startups all over the world,” says TechHub co-founder, Elizabeth Varley.