Introduction
When comparing London to other financial centers we will look at New York as the dominate financial center in the US, Paris and Frankfurt as the dominate centers in Europe, and Dubai and Shanghai as upcoming centers in the future. These cities all have different pros and cons as to why they are leading financial centers and those characteristics show why London is the leading financial center in the world.
Global Financial Centers
To understand the different centers and how they are the leading financial centers in the world one should first recognize the concept of a "global financial centre." As defined in the Corporation of London's The Competitive Position of London as a Global Financial Centre, a financial global centre "is an intense concentration of wide variety of international financial businesses and transactions in one location." Global centers act as a "hub" to the "spoke" cities of the world. To be truly global, a city has to do financial activity on every continent and have the ability to do business in every country. London and New York are the only two true major global centers in the world. According to The Competitive Position of London as a Global Financial Centre London is the leading global centre in the world. This study was based on fourteen different competitive factors that ranked London as number one. Some of these factors were Availability of Skilled Personnel - which was the most important factor, Regulatory Environment, and A Fair and Just Business Environment.
Global Financial Centre's are ranked on command and influence that city has.
London Background as a Financial Centre
According to the London Governmental Website, "London is the banking centre of the world and Europe's main business centre." There are many reasons to explain why this is true. One reason is the time zone of London. Because London's time zone is in the middle of China and America they are able to do business with both countries every day. It is hard for New York to do business with Hong Kong during the day because the times are so different. According to the London website they hold a quarter of the world's financial headquarters and have an average daily turnover of $504 billion. That $504 billion is more than New York and Tokyo combined. Another reason for London being the global leader is because of their cosmopolitan atmosphere; it is a very cultured and diverse city. England's Highly Skilled Migrant Program (HSMP) makes it easy for highly skilled migrants from other countries to work in London. London's culture also stems from its history; another reason it is the top global financial city. History plays an important role into the city of London and many of the business there. Lloyds of London, the Bank of England and the history of the Parliament all play into this role. When looking at the competitive factors from the article The Competitive Position of London as a Global Financial Centre London is top in most and top in the first two; Availability of Skilled Personnel and Regulatory Environment. The only factor they really lack in was Availability of Business Infrastructure which could come down to how old the city is. Overall London is the top global financial center and will stay that way due to all the reasons mentioned above.
This picture is a great representation of the time zones. As you can see London has the greatest chance of communicating with financial markets across the world.
New York
New York City is a global hub of international business and commerce and is one of the two global financial centers which makes it London's biggest competitor. NYC has the largest GNP (952.6 billion) of any city in the United States and more Fortune 500 companies (44) are located there than any other US city. It is home to the largest stock exchange in the world by market capitalization, the NYSE (New York Stock Exchange and the second largest in securities. New York City is also home to the NASDAQ which is the largest electronic screen based trading market. Many of the world's largest companies of banking, finance, and communication operate and are based in the city.
Not only is New York known for its financial district but also for its large manufacturing sector of production of garments, furs, bus line vehicles, and railroad equipment. This has contributed to New York becoming a global financial center by virtue of the quantity of goods and services in the US. With London in another hemisphere a global financial center was needed here in the Western hemisphere. The availability of skilled workers in the city helped New York develop into that center. In addition, New York is able to operate within a stable national political and financial which is appealing to companies and investors alike in the long run. New York City also has a credible and transparent monetary policy.
While London has flourished over the years as a global financial center, New York City and therefore the United States have faced some challenges. The most significant events are September 11th and the Enron and WorldCom scandal. September 11th greatly inhibited access to the city (among many things) by business people. It was not only hard to visit but even more difficult for even professionals to stay for any length of time. All the while, London remained easily accessible. As far as the economy goes, Enron and WorldCom have had an even greater negative affect; the Sarbanes Oxley act. Because if the act companies have had to spend millions of dollars enhancing their internal controls and auditing. Although it has put many domestic investors at ease it has deterred many foreign investors from taking interest in US investments. It is often times seen as more of a financial burden than its worth. An example of the affects of this act is that London's IPO's (initial public offerings) are more than three times that of New York City's. However, before 2001 NYC had drastically more than London. The London Stock Exchange has taken advantage of this and has actively sought out the growing population of Russian investors.
Paris and Frankfurt
Paris and Frankfurt are regional financial centers but have not become global. Both operate internationally but focus on regional interests.
Frankfurt's position as a financial center:
The three pillars of Frankfurt's economy finance, transport, and trade fairs.
Frankfurt is particularly strong in banking, banks and other financial institutions account for 20% of the city's GDP. It is home to many foreign and domestic banks, including the European Central Bank. Because the European Central Bank is located in Frankfurt, all of the nations in the European Union look to Frankfurt to determine their nation's monetary policy. Frankfurt is also home many strong stock exchanges including the Deutsche Börse Group, the largest exchange organization worldwide. With over 2,900 employees, the Deutsche Börse Group provides service to customers in Europe, America and Asia. Deutsche Börse Group has locations in Germany, Luxembourg, Switzerland, Spain and the USA, as well as representative offices in London, Paris, Chicago, New York, Hong Kong, Dubai, Singapore, Tokyo and Moscow. Frankfurt's position as an international financial center is strengthened by the fact that it is home to such important financial institutions like the European Central Bank and the Deutsche Börse Group. Sometimes Frankfurt is nicknamed "Bankfurt".
Frankfurt is known for its annual trade shows. It is the venue of more than 50 annually conducted trade fairs including the Frankfurt Book Fair and the Frankfurt Motor Show, generating large amounts of revenue to the city through the trade shows and also by attracting tourists to Frankfurt.
Frankfurt is also known to be a strong industrial center. Frankfurt is particularly strong in the electronics, metal processing, automobile manufacturing, and chemical industry. The city's strength in industry is complimented by the fact that Germany is one of the world leaders in imports and exports. Frankfurt International Airport receives Europe's largest cargo shipments, and ranks in the top three busiest airports in Europe. A strong transportation infrastructure is essential for a city to be a global financial center.
Frankfurt does not have many disadvantages as a financial center, but there are a few factors that have limited Frankfurt's growth to become a global financial center. It has been noted that German bureaucracy has made it difficult for some foreign banks to locate and do business there. But perhaps the biggest factor that has limited Frankfurt's growth into a global financial center is the effect that the rise of London has had. Because London has been the dominant financial center in Europe, companies are choosing to locate their European headquarters in London over cities like Frankfurt and Paris.
The Mercer Human Resource Consulting Worldwide Quality of Living Survey 2007 ranked Frankfurt at the seventh position of the cities with the highest quality of life worldwide.
Paris' position as a financial center:
Paris has been in a similar position as Frankfurt, both cities are important financial centers, but have been overshadowed by London's dominance as the leading financial center in the world. Like Frankfurt, Paris also has some unique characteristics that strengthen its position as a financial center. Paris has a very good legal system that is favorable for businesses. Paris, like London, has a strong single regulator of business, the Autorites des Marches Financiers (AMF) created in 2003, which protects investors and supports the smooth running of financial markets. These two factors make it favorable for a company to do business in Paris.
Another reason that companies are drawn to Paris to do their business is the amount of cheap office space. Paris has over 2.6 million square meters of commercial office space available. Real estate costs, in terms of housing and commercial premises, are among the lowest in Europe, much lower than both Frankfurt and London. The low real estate costs in Paris have helped Paris become home to 27 out of the Fortune's Global 500 companies, ahead of New York, London, and Beijing.
Paris has maintained its position as a dominant financial center by holding large shares in the markets for corporate bonds. France is number one in Europe in corporate bonds activities, with 33% of market share, ahead of the UK (27%) and Germany (11%) In recent years, Paris has also maintained its innovative capacity in its strong areas, such as equity derivatives and asset management, and has gained a leading edge in new markets such as CO2 finance or weather derivatives.
Like Frankfurt and other financial centers in Europe, Paris is often overshadowed by London's dominance as a global financial center. One disadvantage that is unique to Paris becoming a global financial center like London is higher tax rates. Many businesses are turned away from doing business in Paris because tax rates are significantly higher in Paris than they are in London for example. Paris also lacks a specialized industry to grow into becoming a global financial center. As the entertainment industry is the strength of Los Angeles, and New York and London specialize in investing, Paris does not have a dominant area of business to lead it into becoming a global financial center on the same level of New York and London.
Dubai as an upcoming financial center:
Dubai is one of the United Arab Emirates, located in the eastern Arabian Peninsula near Saudi Arabia. It has the largest population of all the emirates and is second largest in size to Abu Dhabi. Dubai has been under the Al Maktoum dynasty since 1833, the current ruler being Mohammed bin Rashid Al Maktoum. At this time, he is also the prime minister and vice president of the United Arab Emirates.
As of 2006, Dubai has 46 billion dollar economy with petroleum and natural gas accounting for less than 6% of it. The majority of Dubai's revenue comes from tourism and the Jebel Ali Free Zone Authority. Dubai is becoming a popular place with foreign companies due to the fact that certain area's of the country are designated as free zones. Free zones are areas where foreign companies can operate with little to no government restrictions, 100% foriegn ownership, and no taxes or import fees. Dubai Internet City is just one of the free zones located in Dubai, companies such as Microsoft, IBM, Cisco, and HP have all set up operations in the DIC. The allure of limited government regulation is going to attract more companies to Dubai making it a more important financial center in years to come. The Jebel Ali Free Zone Authority has lured 1500 companies from over 30 different countries to Dubai.
Dubai uses much of their revenue to invest overseas. Their GDP is continuously expanding; it went up 17% in 2004 alone. According to Dubai government officials, their goal for the economy is to increase growth by 11% every year until 2015. They expect to create 882,000 new jobs to offset the decreasing income from the oil reserve sector. Dubai's main financial center is the Dubai International Financial Center which serves the region between Western Europe and East Asia. The six sectors offered at this center are banking services, capital, asset management and fund registration, Islamic finance, and bank office operations.
Dubai has many qualities of an upcoming financial center including low cost of skilled labor, the Jebel Ali Free Zone Authority, rapid population increase, and a large economic boom. Dubai outsources many jobs which lowers costs and spurs competition for skilled workers. The Jebel Ali Free Zone Authority attracts outside business because it eliminates taxes. The popuation of Dubai, currently at 1,422,000, has been expanding quickly with a 26% increase in 2006. A large population provides Dubai with the human capital to place highly skilled workers in their competitive financial sector. The economy is thriving because of their current oil reserves and the large investments that are going into the city's development. The few cons Dubai has as an upcoming financial center are the cultural and language barriers along with its inconvenient locaiton.
Shanghei as an upcoming financial center:
Shanghei is currently the largest port in China and is the tenth largest city in the world. The dense population consists of 13.3 million people in a relatively small area. Shanghei is run by communist leaders which has proved to be very effective for them.
Shanghei's growing economy, massive population, and opportunity for foreign investment show its potential for a global financial center. A new airport was built in East Shanghai in 1999 which allows for a smoother flow of people in and out and shows that the city is becoming globalized. It attracts more tourists which stimilates the economy. In 2001, the financial, business services, and real estate sector made up one-fifth of Shanghei's GDP, and their economy is expected to grow 10.5% in the new year (2% above the nation's average). More than half of the world's top 100 industrial companies have invested in Shanghai.
Shanghei's increasing population can be viewed as both a pro and con when assessing its position in the financial world. It is a pro because it provides many local skilled workers. The competition for high profile finance jobs increase Shanghei's credibility and will attract talent from cities around the world. On the other side, Shanghei is having trouble managing the population growth because it is happening so quickly.
There is also a large opportunity for foreign investment. To increase interest in foreign investment, Shanghai plans to open a bidding process on some of their major infrastructure projects. In order to attract businesses and skilled workers to Shanghai, they plan to improve infrastructure, create a social development system to educate people about environment issues, and create a plan to control the population growth.
Some of the factors that could restrain Shanghai from becoming a top financial center include the high amount of taxes paid, increasing labor costs, and strong regulation. Shanghai is the largest contributor of the Chinese government's tax revenue which hurts its infrastructure and capital development. The cost of labor is increasing because of competition for jobs, the wealth gap, and environmental degradation. Also, strong regulations threaten companies' financial and economic growth. Because Shanghai is a communist city, they have many regulations to navigate around.
What is a Global City?
A global city or world city is a concept promoted by the geography department at Loughborough University which assumes that globalization can be broken down in terms of strategic geographic locales that see global processes being created, facilitated and enacted. The most complex of these entities is the "global city," whereby the connections binding a city have a direct and tangible effect on global affairs through more than just socio-economic means, with influence in terms of culture, or politics.
Characteristics of a Global City:
- Active influence on and participation in international events and world affairs
- A fairly large population
- A major international airport that serves as an established hub for several international airlines
- An advanced transportation system that includes several freeways and/or a large mass transit network offering multiple modes of transportation
- International financial institutions, law firms, corporate headquarters, international conglomerates, and stock exchanges
- World-renowned cultural institutions, such as museums and universities
GaWC Inventory of World Cities:
An attempt to define and categorize world cities was made in 1999 by the Globalization and World Cities Study Group and Network (GaWC), based primarily at Loughborough University in Loughborough, Leicestershire, England. The roster was outlined in the GaWC Research Bulletin 5 and ranked cities based on provision of "advanced producer services" such as accountancy, advertising, finance and law, by international corporations. The GaWC inventory identifies three levels of world cities and several sub-ranks. The following summarize these sub-ranks:
Different Types of Financial Centre's
Alpha World Cities
London, New York, Paris, Tokyo, Chicago, Frankfurt, Hong Jong, Los Angeles, Milan Singapore
Beta World Cities
San Fransisco, Sydney, Toronto, Zurich, Brussels, Madrid, Mexico City, Sao Paulo, Moscow, Seoul
Gamma World Cities
Amsterdam, Boston, Caracas, Dallas, Dusseldorf, Geneva, Houston, Jakarta, Johannesburg, Melbourne, Osaka, Prague, Santiago, Taipei, Wash DC, Bangkok, Beijing, Montreal, Rome, Stockholm, Warsaw, Atlanta, Barcelona, Berlin, Beunos Aires, Budapest, Copenhagen, Hanburg, Istanbul, Kuala Lumpur, Manila, Miami, Minneapolis, Munich, Shanghai