Analyse the Factor That Might Inhibit London' s Status as a Pre-eminent Global Financial Centre In the Next Decade - Essay Example

INRODUCTION This paper provides an insightful study into the pre-eminent position of London as the global financial centre and the threats that areencountered by the city towards the retention of this status. London undoubtedly occupies a dominant position among other financial centres of the world such as New York, Tokyo and Frankfurt. However, there remain several apprehensions regarding its position in the upcoming decades signifying a challenging financial environment. These threats basically lie in the factors where the city specifically and the United Kingdom generally lack the provision of ultra sufficient service. As the success of a financial centre rests on its capability to attract investments, there remains nothing once it fails to ensure that. The paper starts off by plying a brief illustration on the London’s position as the pre-eminent global financial centre and then moves on to the illumination of the study’s central concern being the menaces that are more likely to affect its ‘pre-eminent’ position. LONDON AS A GLOBAL FINANCIAL CENTRE—AN OVERVIEW According to Morison and Shepherdson (1991), there are two approaches using which the existence of a global financial centre could be well examined. International financial centres can evolve owing to a flourishing economy and through the provision of attractive incentives to the international investors. The second approach relates to the development of financial hearts in the offshore regions of the world. London has its position significant in the way that it operates in both the ways. The city mainly relies on foreign investment, which it manages to attract through financial incentives and softening of regulations. This specifies that the city follows the first approach mentioned by Morison and Shepherdson (1991). London has a very strong banking system comprising mainly of internationally owned banks that pull in the world’s greatest loan grants. The earnings from international banks account for about 90% of the city’s total earnings (The Corporation Of London, 2001). The financial transactions taking place in London are significant in the sense that they add substantially to the world’s total financial activity due to the extent of their occurrence. London’s bond market makes up about 70% of the world’s transactions (International Financial Services London, 2001a), it dominates the world foreign exchange market by contributing 31% of the daily volume (The Bank For International Settlements, 1999), the London Stock Exchange conducts 58% of the world’s foreign capital trading (International Financial Services London, 2001a), and it also has the opportunity to have the world’s third largest insurance industry (International Financial Services London, 2001b). This all sums up as an evidence to support the position of London as the most prominent financial centre of the world followed by New York, Tokyo and Frankfurt. Besides the fact that London’s financial sector contributes significantly to the world’s financial activity, it is also evident that the city is capable to attract and retain investor confidence from around the world. This fact is highlighted in the above-mentioned facts revealing the high involvement of foreign firms in the transactions being carried out in London. The following chart depicts the position of London among other leading centres of the world as per the latest research: City Score London 214.7 New York 212.9 Frankfurt 174.3 Paris 172.0 Source: Sizing up the City – London’s ranking as a financial centre Corporation of London (2003) THREATS TO LONDON’S POSITION AS A GLOBAL FINANCIAL CENTRE Despite London’s position in the world as a leading financial centre, there remain some threats posed to its current status. These threats are arising out of the changing market needs and the city’s continuous growth. For London, in order to remain competitive in the upcoming decades should consider and plan on the factors that can inhibit its growth among other existing and emerging financial centres of the world. Some of those very important factors have been discussed below: Terrorism Terrorism is being mentioned in this study as the first and foremost threat to the London’s position as the global financial centre because it is the threat faced by every country operating whether at domestic or international level. London, along with the other financial centres has been facing the same challenge for several years specifically after the 9/11 attacks on the WTC. The city also dreads the same situation that collapsed entire business activities in the New York. Coaffee (2003) indicates that London is very prone to such attacks because of its international status and its active involvement in the American war on terrorism. Although the government has been continuously implementing the anti-terrorist security measures, yet it is one of the major concerns that can inhibit the current ceaseless flow of investment into the city. Constraining Taxation The recent tightening and stiffening of regulatory policies on the part of the UK government is leading to the disinclination of foreign firms to establish in London area. The tax and regulatory policies are so cumbersome and complex that businesses need to keep aside a great deal of their time to get acquainted with these issues. Employers are becoming more and more reluctant to come to London because of the modern European legislation concerning employment and social issues. Barriers to entry into some businesses have been further aggravating the issue. These barriers are imposed in the form of Insurance premiums, tax, airport taxes, and stamp duty etc from the government leading to enhancement of business complexity (Corporation of London and the Economic and Social Research Council, 2003). The following chart specifies the position of London’s government as responsive and concerned to the city’s needs, which clearly illuminates the negative local perceptions about the government’s responsiveness to the increasing business demands and tightening of tax regulations etc the city to lag behind New York. City Score New York 3.91 London 3.25 Paris 3.01 Frankfurt 2.93 Source: Sizing up the City– London’s Ranking as a Financial Centre, Corporation Of London (2003) Tax and regulatory policies in London are therefore considered to becoming less and less favourable over the time than they once used to be. Business firms are also concerned with the involvement of UK in the Eurozone. European laws and regulations might affect the business liberty and flexibility enjoyed by the firms in London, being its main attraction. Whereas considering the rising competitive challenges around the globe, London has to retain its attractive proposition for international businesses in order to remain dominant and pre-eminent as a global financial centre. High Cost Of Location Another important concern on the part of the businesses and financial institutions happens to the cost of location in the London city. It is one of the most expensive cities in the world. The increasing cost of business location in particular has been inducing the companies to shift their location in the outer London areas more specifically the Canary Wharf area. Not only in the outer London, it is also very likely for the firms to move to other global financial centres and once this trend strengthens, London will lose its position as the global leader in financial services (Corporation of London and the Economic and Social Research Council, 2003). Therefore in order to retain London’s global competitive position as global financial leader, the UK government needs to rectify the policies concerning the costs of location. This can also be done with the help of easing prices on certain business locations. Transportation Transportation is an issue, which is the key to several other factors making the situation even more adverse. Evidently, owing to the constantly increasing financial activity, more and more people especially the working class are coming to London leading to an abrupt increase in the demand for a safer transportation facility. This situation will even ignite significantly because of further enhancement of economic activity in the country. The following chart displays the estimated increase in the demand for different means of transportation from 2001 to 2016: Modes Of Transport Estimated Increase (%) Car (Inner London) 5% Car (Outer London) 8% Bus 15% Rail 15% Under-Ground 16% Source: London Analytical Report (July 2003) There have been increasing concerns on the part of business firms on the lack of adequate transportation facilities in the London business areas over a past few years. Uneasy means of transportation implies additional costs for firms in the form of difficulties faced by consumers to reach the product or services, and also by employees to reach their work premises. Some businesses even express their concern on making business trips often to outside the London as a very time consuming due to improper means of transport. The transportation infrastructure in London has even been referred to as being similar to that of the third world countries, which is certainly harmful for its image as an international city (Corporation of London and the Economic and Social Research Council, 2003). The city greatly needs to concentrate on the issue and make possible the provision of quick and efficient means of transportation to the international firms, as it is the core issue encompassing all the business activities from production to consumption. It is threatening to the city if it fails to accommodate the increasing demand for transportation, it will very likely stay behind the other global financial centres in the upcoming decades. The following chart indicates the position of London among other financial centres in terms of transportation facility: City Score Paris 3.95 Frankfurt 3.89 New York 3.26 London 2.01 Source: Sizing up the City– London’s Ranking as a Financial Centre, Corporation Of London (2003) Concentration Of Ownership Among Foreign Firms Due to the high involvement of foreign firms in the London business, the international owners own most of the property in the city. The business ownership is thus concentrated among international firms posing great threats to the constancy of the city’s business. Kynaston (2001) suggests that UK (specifically London) is highly bunched up with foreign firms, the number of international firms mostly American or German being so high that it outnumbers the local businesses and institutions. This in itself is an issue for the stability of the city’s position as the heart of world’s financial activities. Both the top countries New York and Tokyo rely upon their domestic firms more than the international ones to provide sufficient investment. London’s domestic firms have been increasingly shifting to the offshore locations, as the city has failed to attract the local firms due to the overwhelming number of international firms. This makes the city rely exclusively on international business activities such as in the period of downswing and upswing; the London’s financial market is greatly affected. According to Lizieri & Finlay (1995), the centres having the financial system based on international firms and cross border activities, is more prone to be influenced by the economic activities in other financial centres of the world. This remains true for the case of London, while the international cities like New York and Tokyo etc rely mostly on domestic investments and face no such concern. Therefore, the UK government should provide assistance to domestic industries and support their growth, which is in turn essential for London’s future prosperity. High Skilled Labour Due to increasingly growing international investment and business in London, the city needs more high skilled labour force than before. However it is highly unfortunate that despite its attractive living environment, the city’s dominating working class comes from low-skilled labour force. It is one of the most significant concerns for new and existing businesses establishing in the city because if the area is not able to meet the labour requirements, it is useless to settle there. According to London Analytical Report (2003), the number of high skill jobs will increase significantly by the year 2010 in London: High Skill Jobs Estimated Increase: 2003-2010 (In thousands) Managers 10 Professionals 140 Associate Professionals 150 Total High Skilled Employment 300 Source: London Analytical Report (July 2003) It is highly imperative that the city is able to meet the labour requirement in future, which can be done on the part of the government through the provision of enhanced living conditions to the public especially the working class. If it fails to do so, apprehensions are there that other financial centres would become more attractive to the international investors and firms in terms of high skill labour supply. The following chart depicts the position of London in terms of labour supply among the other international cities in the world: City Score New York 4.65 London 4.57 Paris 2.89 Frankfurt 2.88 Source: Sizing up the City– London’s Ranking as a Financial Centre, Corporation Of London (2003) Clearly, London lags behind New York when it comes to the provision of adequate labour required by the industries. If the trend continues to develop in the same direction, the London city would lose its attraction as a global financial centre. Location Of Asset Management London is the most attractive location for asset management activities in the Europe (International Financial Services London, 2004). The city’s asset management businesses alone tend to generate more returns than the other countries in the world due to the flexible business environment it offers to the firms. However it still lacks behind New York and its position as the foremost location choice in the asset management activities is also likely to be affected in future due to some or more of the factors reported below: Factors For Location Importance Of Factors Position Of UK (London) Regulatory regime 3.69 3.40 Quality of life for employees 3.77 3.36 Total labour cost 3.42 2.77 Rental/property costs 2.96 2.12 Source: The Future of UK Asset Management: Competitive Position and Location Choice, Oxera Consulting Ltd (May 2005) As demonstrated by the above chart, the London’s attractiveness as a favourable location for asset management activities can be affected by the city’s lagging in the above dimensions. The asset management activities contribute significantly to the London’s financial sector and hence might forego its global prominence if the government fails to improve the conditions. CONCLUSION London is undoubtedly one of the most significant financial centres of the world. However, despite its dominating position in the global financial market it confronts with certain threats that can impair its significance among other international cities. London alone accounted for about 37% and 31% income more than the whole UK average for men and women respectively in the year 2002 (LSE, London’s Place In The UK’s economy, 2003). But along with that, London also sustains the highest unemployment level, greatest rich and poor income differences, the ever-rising property costs and insufficient provision of public health and utility services than other countries in the UK region. Apart from that, London’s ability to pull in abounding foreign investments has also led to the disappearance and re-shifting of its domestic firms. All these and the other factors sum up to the concerns and apprehensions that are faced by international businesses in London. Its high time the government needs to take considerable actions to curtail the dreadful factors while improving the city’s condition as a favourable financial centre for the whole world. Otherwise, these can greatly hamper the growth of London as a pre-eminent global financial centre. References: Coaffee, J. (2003), “Terrorism, Risk And The City”, Ashgate, Aldershot Financial Services Clustering and its significance for London (2003), Corporation of London and the Economic and Social Research Council International Financial Services London (2001a), “Securities Dealing”, London, IFSL International Financial Services London (2001b), “Insurance”, London, IFSL International Financial Services London (2004), “UK Financial Sector Net Exports”, London, IFSL Kynaston, D. (2001), “The City of London Volume IV: A Club No More 1945-2000”, London: Chatto & Windus Lizieri, C. and Finlay, L. (1995), “International Property Portfolio Strategies”, Journal of Property Valuation & Investment, Vol. 13 London Analytical Report (July 2003), accessed April 29, 2006 [Internet]: http://www.strategy.gov.uk/downloads/files/ar_full.pdf LSE (London School of Economics, October 2003), “London’s Place in the UK Economy 2003”, Corporation of London Morison, I. and Shepherdson, I. (1991), “Economics Of The City”, Oxford, Heinemann Educational Sizing up the City– London’s Ranking as a Financial Centre (2003), Corporation Of London, accessed Aril 30, 2005 [Internet]: http://www.csfi.org.uk/Sizing%20up%20the%20City%20report.pdf The Bank For International Settlements (1998), “International Banking and Financial Market”, Quarterly Review, Basel, BIS The Future of UK Asset Management: Competitive Position and Location Choice (May 2005), Oxera Consulting Ltd., Corporation Of London and Investment Management Association Read More