This Research Bulletin has been published in Area, 36 (3), (2004), 235-244.
Please refer to the published version when quoting the paper.
Geographers have long been asking what compels financial services to remain embedded within International Financial Centres (IFC's) when technology would seem to facilitate de-concentration and geographical dispersion (O'Brien, 1992). Such questions have been comprehensively answered (Budd 1999; Taylor et al, 2003) but the dynamics of the financial system mean these geographies cannot be assumed to be static. One significant economic transformation has been the launch of Economic Monetary Union (EMU) and the Euro in January 1999 which raised questions about the continuation of established European financial geographies. As an IFC London is accustomed to its dominant role in Europe. This gives it not only financial supremacy built on an agglomeration of producer service firms (Thrift 1987) but also has effects on, amongst other things, the city's built environment and strategic planning (Pryke, 1994) and its business culture (Thrift, 1994; Thrift and Leyshon, 1992). However, The Financial Times (FT) was awash with articles leading up to the launch of the Euro questioning the implications of London being outside of EMU and the European Central Bank (ECB) locating in Frankfurt. This was said to possibly mean "a battle between London and Frankfurt" (FT 7th July 1998) and a "bitter war for supremacy" (FT 10th July 1998). Similarly, Fairlamb (1999) talked of the 'dueling markets' developing between London and Frankfurt because of EMU's implications. Moreover, although Frankfurt was seen as a small IFC because of its weak historical legacy in a decentralised urban system (Holfrerich, 1999) the city had began to strive for a more international role (Keil and Ronneberger, 1994; Schamp, 1999). Less than 10 years ago then London's future as Europe's pre-eminent IFC seemed far from assured (see Johnston, 1996; Leyshon and Thrift, 1992). However the reality today contradicts those views with London continuing to be the dominant European IFC. As HM Treasury (2003, 162) in their analysis of the impacts of the UK's position outside of EMU suggests, as regards attracting new business "[t]he strength of the City in international wholesale financial services activity should mean that it continues to do so, whether inside or outside EMU". Similarly, the Corporation of London's own research has shown how London continues to dominate European financial flows and transactions (Corporation of London, 2004a), something that makes it a 'global powerhouse' in terms of finance and wider business services (Corporation of London, 2004b). It seems therefore that we need to consider new ways of conceptualising IFC geographies in order to explain London's continued dominance. The aim of this paper is to argue that London exists in a network of IFC's rather than just as the apex of the European hierarchy as is often portrayed and that it is this network that has sustained its pre-eminence.
The rest of the paper is therefore divided into four sections. In the following section the paper evaluates the existing literatures on IFC's which view them as independent centres with their location in a hierarchy determined by competitive attribute properties. In section two it introduces the notion of networks in order to provide a new conceptual framework for understanding European IFC's. The idea of network relations and important spaces of flows between IFC's are discussed as a way of improving previous analyses and explaining the continued dominance of London. In section three both quantitative data on financial centres and qualitative interviews with senior personnel of investment banks and insurance institutions in London and Frankfurt are used to highlight the role of these processes in sustaining London's dominance and aiding Frankfurt's development as a complementary centre. The final section provides conclusions suggesting how we may interpret these findings and their significance for the way we study IFC networks in contemporary globalisation. It is proposed that instead of accepting a simple hierarchical view of the geography of IFC's we need a relational, networked analysis to understand London's continued dominance which is based on network interdependencies providing global-local ties, connectivity and relationships with other IFC's.
HIERARCHICAL EXPLANATIONS OF IFC GEOGRAPHIES
Geographers have long had an interest in IFC's. The work of Howard Reed (1981) exemplifies this in which he ranked IFC's based on their importance in the global financial system and suggested that to be an IFC required both the ability to handle and the presence of a high volume of financial transactions1. Table 1 shows the top ten IFC's identified by Reed. This work proved seminal for the study of IFC's but failed to answer one of Reed's own questions, that being that in studies "missing are the factors required in the building of IFC pre-eminence" (Reed, 1981, viii.) In producing a hierarchy Reed simply identified the different attributes of each centre rather than the processes which effected their role.
Reed's question regarding the process of pre-eminence production has partially been answered by reference to the historical dimensions of IFC's growth. For London the role of empire and the global trading links produced are seen as critical with the Lloyds insurance market and its global reach being one of the most well known outcomes (Michie, 1991). Explanations have been further advanced by Thrift (1987) who noted the importance of other producer service firms in supporting IFC growth, something which is now central to agglomeration theories (see Sassen, 2000). Scholars have also highlighted three other attributes that explain hierarchical geographies of IFC's.
Firstly, the role of national regulatory factors was originally noted as an important attribute determining an IFC's success (Pryke, 1991; Budd, 1995). An accommodating regulatory environment it was argued gave certain IFC's "comparative advantage over some territories" (Budd, 1995, 352) with for example the de-regulation of pension funds benefiting cities like London as new markets emerged around pension fund management and investment (Clark, 2001). In recent times however many have become increasingly aware of the diminishing role such a process may have upon IFC geographies (e.g. Martin, 1999) as supra-national agreements on regulation and financial standards mean the advantages of any one city have diminished (Roberts 2002; Tickell 1999). Budd (1999, 133) therefore revised his previously cited argument and suggested that re-regulation had created a 'crisis of embeddedness' as "[t]he fundamental shift in the regulatory space of the production economy is being followed by a shift in the financial economy" and no IFC's role could be assured by national regulatory advantage alone.
Secondly, commentators have identified the 'imperfect' nature of capital markets and their informational content and how this reinforces geographies of finance (Clarke and O'Connor, 1997; Tickell, 2000a). Key social and cultural processes occurring in IFC's such as face-to-face contact facilitated by social proximity are said to result in knowledge production critical to success (Boden, 2000; Thrift, 1994.) In this logic IFC's provide a place to access information whilst the need for it to be real time and contextualised make it impossible for technology to de-centralise activities with instead companies agglomerating in the city (Clark, 2002; Sassen, 2000). Having the actors present in the city who produce this knowledge is seen as a key attribute of a successful IFC.
Third, a functionality in these geographies has been identified in the form of what Porteous (1999, 106) calls "inter-regional attachments" whereby the pre-eminent IFC acts as an 'access point' for financial services for other cities. As Budd (1999) noted, the amount of trade occurring in London cannot be supported solely by the national economy, but is provided from throughout Europe. Not only is London a centre for the nation but also for the region of Europe. Budd (1998) and Parr and Budd (2000) have developed this idea using Central Place Theory and the work of Losch (1941) and Christaller (1933) to explain the geographies of finance we witness. They suggest that London can be seen as a 'specialist' centre for global financial transaction because "[h]igher order activities are located at central places, with intra-industry dispersion corresponding to lower order activities" (Budd 1998, 81) which occur in other centres. Higher order centres in this model therefore have stronger attributes as an IFC.
Although this work highlights important attributes of successful IFC's it does not fully explain the processes which sustain the advantage of any one centre and say for example why Frankfurt's markets have not grown and become the centre of European activity. If we follow the arguments to their logical conclusions Frankfurt should have become dominant for three reasons. First, the de-territorialisation of financial regulation would strip London of what is seen as one of its key competitive attributes. Second, increased knowledge production should now occur in Frankfurt because of the ECB's location in the city. Third, as a result of the former factors, Frankfurt should have gained increased functional centrality in European financial activities. Cumulatively this should have placed the city in an upward spiral, attracting more and more financial institutions and firms and ultimately threatening London's dominance in the European hierarchy. This has not happened. Therefore, in order to understand London's continued dominance along with the slight growth of Frankfurt it seems that we need to reconsider the way we look at IFC's. Instead of viewing them in a hierarchy determined by the attribute properties of each centre the rest of this paper argues that they should be seen as the result of important interdependent networked geographies at the global and regional scale. This process is more important than any 'territorial' attribute advantages alone as highlighted in hierarchy based comparative research.
NETWORKS, ARTICULATIONS AND FLOWS: EXPLAINING THE IFC NETWORK
Drawing on the ideas of a range of commentators who view the effects of contemporary globalisation as producing new network geographies it is possible to re-conceptualise the way we think about IFC's. In this conceptualisation IFC networks exist as the result of an inter-meshing of global and local processes facilitated by various networks (Amin and Thrift, 1992; Allen and Pryke, 1994) producing what Sassen calls 'global networks and linked cities' (Sassen, 2002). As Thrift long ago argued, "there is no global financial structure 'out there', as a deus ex machina, but rather a spatially distributed network of money/social power which encompasses the globe. [The] local and the global intermesh, running into one another in all manner of ways." (Thrift, 1990, 81, cited in Tickell, 2000b). Friedmann's (1995) revised model of the world city system also argues that it is 'spatial articulations' and network connections at scales from 'global financial articulations' (London) to 'multinational articulations' (Frankfurt) and national articulations (Amsterdam, Milan and Paris) which produce the world city system that exists. In Friedmann's view it is the connections between cities that are of most importance not their attribute properties. A similar logic goes to make up Castells (2000) 'network society' in which the spaces of flows between 'key nodes' of the global system are central to financial activities and make certain locations pre-eminent.
The development of all these logics by Jonathan Beaverstock, Peter Taylor and colleagues (Beaverstock et al, 2000; Taylor, 2003) in relation to world cities and how it is their network which gives them 'power' in the world system further bolsters the argument for such a method of analysis. In their schema the 'strength' of a world city is defined by the networks it has and the flows produced. This is measured using the office network of transnational producer service firms and the resultant flows of capital, knowledge and people into and out of the city. In studying cities in such a way it is argued that we can better understand the interdependent network dynamics of contemporary (financial) globalisation. Based on this logic the 'Loughborough school' have produced a report investigating London and Frankfurt's relations as world cities which highlights increasing connectivity in recent years (Beaverstock et al, 2001). They argue that London and Frankfurt have developed increased network relations since the launch of the Euro as flows of knowledge, culture, power and governance develop as co-operation between firms and authorities in the two cities increases. What they do not explain however is why this has resulted in London remaining by far the pre-eminent European IFC. Taking this framework and applying it to this question provides an opportunity to reconsider the way we understand IFC's and explain why hierarchical based approaches lead many to believe London's pre-eminence was under threat.
In a slightly different context, recent work on relational economic geographies has further shed light on the need to examine relationships in the global economy and how they give actors power and influence. According to Dicken et al (2001,94,original emphasis) these "networks relationships should be understood as being both structural and relational" as they "constitute structural power relations" for those networked together and "are constituted by the interactions of variously powerful actors". Only if we examine the various scales at which these networks operate can we understand any globally orientated activities. The flows within these networks are critical and as Bathelt and Glucker (2003) note, when looked at through a geographical lens help explain geographies of economic activity. Such a mode of analysis helps reveal how all places are enmeshed within a wider context and need to be understood through their relations with other actors, or in this case places. By considering any place or IFC as a result of the networks, flows and relations it has we can better understand and explain its role in a global system.
The second half of this paper therefore draws on both the network and relational geography literatures and argues that to understand London's continued pre-eminence in Europe we need to look at the role of IFC networks rather than using hierarchical comparisons of territorial attributes. It is argued that it is London's global and regional networks which have sustained its dominance whilst this is complemented by Frankfurt's role as home of the ECB. In the first section four key financial variables are quantified and in addition five non-financial variables used which, amongst other attributes, help measure network connectivity. This identifies London's continued position as the pre-eminent European IFC. Where possible and useful, change in these values between 1998 and 2001 (the most recent data available at the time of writing) is provided to assess any obvious changes since the launch of the Euro2. These values are then transformed to a base of 100 (where the pre-eminent centre's value is 100) in order to facilitate comparison between centres. This both replicates in part Reed's original work but also advances it based on more recent insights into the importance of networks in contemporary globalisation and economic geographies. Based on this analysis, semi-structured interviews were completed in London and Frankfurt. A sample of large financial organisations with a global office network was used with 12 interviews completed in all out of thirty organisations approached. Interviews were conducted in person in January 2001 and lasted between 60 and 90 minutes. Interviewees held senior positions as investment bankers or investors in insurance institutions. For reasons of confidentiality the actual names of the organisations and interviewees are not given. The second section therefore draws on these interviews to unpack the network processes which have sustained London's dominance but are not shown up through quantitative analysis.
RE-CONCEPTUALISING THE EUROPEAN HIERARCHY AS A NETWORK
Tables 2 and 3 show the quantitative analysis of each IFC whilst Tables 4 and 5 show the values transformed to a base of 100. As can be clearly seen, London remains far the pre-eminent centre based on this analysis. The value of its financial attributes are between 2.5 and 6 times greater than Frankfurt's whilst Frankfurt is far ahead of Paris, which is above Amsterdam and Milan that have minimal trade and financial significance (tables 4 and 5). Factor analysis revealed that no one variable could be held responsible for the overall importance of an IFC. The decrease in trade noted in all centres between 1998 and 2001 (Table 2) is attributed to the start of a wider global downturn and not the launch of the Euro. This structure strongly reflects that identified by Reed in his original work with London remaining a truly globally orientated IFC with high levels of capital availability and trade unrivalled by any other European centre (table 4 and 5). The data also identifies the stronger growth (or least decline) of Frankfurt in recent years (table 2). However, despite the launch of the Euro and the location of the ECB in Frankfurt this has been insufficient to challenge London's dominance. Data acting as proxies for network connectivity (all values in table 3 except tax burden) also show significantly higher values for London than Frankfurt.
The second part of this section then draws on interviews conducted to address the specific issues raised by the launch of the Euro and to consider how network process at work may explain London's continued dominance. The results highlight the networks that make London pre-eminent and also how Frankfurt, Amsterdam, Milan and Paris act as interdependent and complementary centres that help reproduce London's role.
Explaining London's Continued Dominance in the Network
It became clear during interviews that London's continued dominance in the European IFC network could be explained by its role in both European and wider global financial networks. Two important elements were highlighted by interviewees.
First, it became clear that a disproportionate amount of financial knowledge production occurs in the city. For London, both the size of its financial markets and the agglomeration of financial firms (see table 3) ensures the existence of this process as workers flow into the city from both within the UK and globally (Beaverstock and Smith, 1996). The launch of the Euro has done little to impact upon this. It was argued that the location of the ECB in Frankfurt has given the city some advantages over its previous position, attracting a new workforce to the city from within Germany and Europe, but this is a small issue compared with London's vast knowledge base driven by globally sourced labour. This flow of workers into the city has continued because of the global importance of the city compared to Frankfurt's relatively minor European significance. As two interviewees summed up:
A number of important ideas are highlighted by the above quotes. One important issue is the fact that London remains a magnet for skilled workers. The city attracts the elites needed to 'service' the financial industries from all over the world. This is related to London's attraction to key transnational financial and business service firms and their workforces. Together these factors give London a greater relational connectivity with other cities both through flows of people via migration and business travel and flows of knowledge through virtual communications. It is these networks which make London pre-eminent as the European centre of international financial knowledge whereas Frankfurt is a centre of Euro knowledge, something which attracts far fewer inward and outward flows. In addition to this, the presence of a 'critical mass' of transnational financial firms and their knowledgeable workforces means London can provide a range of financial services that Frankfurt cannot. This makes Frankfurt more of an 'international banking centre' rather than a complete IFC with strength in all markets (see table 3). Therefore, only if we understand why London remains a more important centre for knowledge production and trade (because of its local-global networks) can we begin to explain the reasons for Frankfurt's limited growth.
Second, although interviewees acknowledged that the UK's absence from EMU could be seen as an advantageous regulatory factor for Frankfurt, it was suggested that the actual impacts of this had been minimal. London's ability to exploit EMU to its best advantage through its 'regional' networks had reduced the impacts on the city and minimised any advantage gained by Frankfurt. This can be explained in two ways. First, London is part of and has access to the political networks of the EU and can thus ensure that Euro trading regulations are moulded in a way that does not disadvantage the city. Second, absence from EMU can be compensated for by providing trading systems which operate in Euro's and are connected to Frankfurt and the ECB through virtual trading networks. As two interviewees specifically stated:
These comments clearly highlight the connectivity and relational nature of activities in London. The city is connected to Europe by membership of the EU and the political networks this makes London part of, therefore meaning de-territorialised regulation is an advantage. In addition to this virtual trading systems link London to both Europe and other global IFC's. Connections to the New York and Tokyo markets are particularly important. This is a unique position, reflecting Friedmann's idea that London is a global financial articulation. London provides services and financial fluidity unrivalled by any other IFC based on its European and global networks. These allow trading in the Euro and numerous other global markets and currencies. As a result one interviewee argued that "[t]he major players have consolidated business leading up to the launch of the Euro" (2) and wanted to be in London whilst another commented that "an IFC must be a hypermarket, not a specialist retailer, with built up expertise, a financial centre in its entirety" (8). London's global and regional networks allow this. Frankfurt lacks this global 'deep' integration which makes London so influential. Instead, it has a new role as the location of the ECB that gives the city heightened European significance and new regional networks to other European IFC's like Amsterdam, Milan and Paris.
The Complementary Network of European IFC's
The geographies of European finance therefore are best conceptualised as an interdependent and complementary network. EMU has reorganised these networks in some ways but not changed their key properties. London's importance has been maintained because of the relationships and connections it has, particularly at the global scale. This helps reproduce its role. Frankfurt's growth has been based around Euro centred transactions giving it a new significance beyond its role within Germany through new 'regional' European network articulations. The reorganised European network means Frankfurt has strengthened relations with London whilst relations with Amsterdam, Milan and Paris are also responsible for recent growth as increasing flows of trade develop because of the ECB's location in the city. However, London remains pre-eminent providing truly global service, unique markets and global connectivity which all European IFC's need to access and rely upon. Therefore there is an interdependency of centres that is reproduced by the networks of trade and knowledge between each city which exist in varying strengths. London serves a global role, Frankfurt a regional Euro based role, whilst Amsterdam, Milan and Paris act as domestic centres. Most interviewees (10 out of 12) suggested such a phenomena was important and three specifically stated:
Those working in the IFC's of London and Frankfurt are thus acutely aware of such a relationship developing and its implications for the functioning of European finance. It is interesting to note that interviewees in Frankfurt focussed more upon how Frankfurt can complement London in its role as a Europe's pre-eminent financial centre whilst those in London focussed upon how the City has a dominant role and this has continued. Undoubtedly the increased connectivity and relationships between London and Frankfurt in recent times have reinforced this belief and negated any competitive behaviour. The two IFC's complement one another and work in a synergistic way to service the financial needs of Europe's businesses. This can be seen in the strategy of many of the key transnational financial firms who continue to have offices in both cities but with most having their HQ or largest office in London. This reflects the fact that London offers unique trading opportunities unavailable in Frankfurt. A new form of relationship has developed in many cases between these offices with flows of work and personnel between London and Frankfurt intensifying and the 'London-Frankfurt commute' from City Airport to Frankfurt now being something common to those involved in finance. At the same time firms in Amsterdam, Milan and Paris have developed increasing relations with Frankfurt. For these firms the networks and relations between cities are now critical. As a result there is a European network of IFC's rather than a hierarchy. Each centre has a specific role that is reproduced by its interdependent relationships with other IFC's. However, London remains dominant in this network because of its unique global-local networks that other European IFC's are dependent upon.
CONCLUSIONS: THE IFC NETWORK
In this paper it has been argued that the geography of European IFC's should be depicted as a relational network in contemporary globalisation. The continued pre-eminence of London in the European financial network can be explained when such an approach is used. It has cultivated a global network that means it is a centre for global financial transactions and therefore attracts many of the key global financial institutions and firms. Flows of capital, knowledge, trade, people and political influence (within both the EU and wider global financial networks) result from and reinforce this role in the network. No other IFC in Europe has achieved this to such an extent and thus London's dominance of European networked financial systems. The launch of EMU has simply re-organised the European network to give Frankfurt a new regional role. The city has been growing in recent years but principally based on domestic trade and increased Euro based trading thanks to the location of the ECB in the city. It cannot however provide the same services as London because of its lack of global connectivity. Adding an attribute to the centre in the form of the ECB has not altered this although the reorganisation of the European network it caused has benefited Frankfurt. For Frankfurt, and other European IFC's then, London still has a vital role for truly global trading and for European financial activities of global firms.
At the same time however all of the European IFC's are complementary to one-another with Frankfurt's European role complementing London's more global role. This has produced increased connectivity and flows between the two centres since the launch of the Euro. These flows of capital, trade in each-others markets and people have become increasingly important. Meanwhile Amsterdam, Milan and Paris act as 'national' centres that complement both London and Frankfurt. In effect then London is now relationally closer to Frankfurt because of the launch of the Euro whilst Amsterdam, Milan and Paris remain relationally more distant. The proximity between London and Frankfurt has not however lead to an eroding of London's pre-eminence but has instead reinforced it. Important networked interdependencies therefore exist between European IFC's and produce an European network of IFC's. Analysing the system from this perspective helps explain why London has remained dominant since the launch of EMU.
I am indebted to Jon Beaverstock's invaluable help and advice regarding the planning and execution of this research and his comments on previous drafts of this paper. This project was undertaken in parallel to Jon Beaverstock, Michael Hoyler, Kathy Pain and Peter Taylor's Anglo-German Foundation Study 'Comparing London and Frankfurt as World Cities,' and I thank Jon Beaverstock again for allowing me access to secondary sources collected as part of this study.
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1. Reed measured this using the following variables: Local bank HQ's; Local banks direct links; Foreign bank office; Foreign bank direct links; Foreign financial assets; Foreign financial liabilities; Local bank branch / representative direct links; and Foreign bank / representative office.
2. Data on number of service offices and foreign banks is from 1998 only as it proved impossible to find a more recent and equally comprehensive data set to facilitate accurate comparison.
3. The data used is from Data Set 6 from the GaWC Research Group and Network (http://www.lboro.ac.uk/gawc/). It was created by P.J. Taylor and D.R.F. Walker as part of their project "World City Network: Data Matrix Construction and Analysis" and is based on primary data collected by J.V. Beaverstock, R.G. Smith and P.J. Taylor (ESRC project "The Geographical Scope of London as a World City" (R000222050)).
Table 1: Howard Reed's top ten IFC's, 1980.
Source: Reed (1981).
Table 2: Europe's new hierarchy of IFC's (incorporating financial measures only).
** BIS (2002)
*** World federation of exchanges (2002)
Table 3: Revised hierarchy of non-factors in IFC success.
* Healey and Baker 2001** Fortune 2002*** OECD 2002**** Healey and Baker 2001. Banker 1999.. GaWC data set 63
Table 4: Hierarchy of financial factors transformed to a base of 100 (where the pre-eminent value scores 100 and all others are scaled against this as with Reed's original work.)
Source: adapted from table 2.
Table 5: Non-financial factors converted to base of 100 (where 100 is the pre-eminent centre, London).
Source: adapted from table 3.
Edited and posted on the web on 15th August 2003; last update 9 March 2004
Note: This Research Bulletin has been published in Area, 36 (3), (2004), 235-244.