- What are international financial centers today?
International Financial Centres are essentially financial centres where cross-border financial transactions take place. A financial centre is usually defined as a place with an intense concentration of financial activity involving an interlocking set of financial sectors and transactions. Financial centres can and do fulfil more than one role:
- Global financial centres that are truly global – where business is transacted with places all over the world, and often, involving multiple jurisdictions. Truly global financial centres look ‘local’ to everyone.
- International financial centres (IFCs) that conduct a significant volume of cross-border transactions.
- Niche financial centres that are worldwide leaders in one sector.
- National financial centres, often within federal countries, that act as the main financial centre for financial services and related expertise within one country.
- Regional financial centres that conduct a large proportion of regional business within one country.
- What are the key functions of an IFC at the current stage of development of the global economy?
There is a distinction between the IFC as a market and an IFC as a representative, regulatory, or policy-making body.
As a market, the functions of an IFCs are to bring together three groups of people or entities, along with their advisors – consultants, lawyers, accountants, etc.:
- Investors, who commit funds to activities or products (e.g., projects, companies’ shares, loans and equity portfolios) with the expectation of financial returns. These include corporate and individual investors, assets managers, and bankers lending capital;
- Guarantors, defined as entities insuring or re-insuring projects or companies’ operations and risks; and
- Traders and other risk bearers – those buying, selling, and making markets in securities (stocks, bonds, commodities, and financial instruments, etc.), and those issuing securities, and receiving loans.
The role of IFCs as markets are to make these connections work efficiently, supported by the regulatory regime. In terms of the global economy, the key functions of markets are to direct funds towards trade in goods and services, and towards sustainable investment.
As a representative, regulatory, or policy-making body, an IFC is a set of institutions which bring together public and private interests to develop the market, whether that is through sound regulation and rule of law, investment in human capital, setting policy direction, marketing and representation, or the development of infrastructure.
- Developing countries from all over the world are founding IFCs. What challenges of the emerging markets do the IFCs solve? How do the IFCs facilitate the economic development?
While this is an under-researched area, there is general agreement and some evidence, e.g., from the Bank of England in 1990 that the development of an international financial centre leads to economic benefits, which outweigh the costs, including:
- Balance of payments improvement;
- Increased tax revenues;
- Improvement in governance in domestic markets;
- Increased employment; and
- Increased trade.
These benefits address many of the key domestic challenges that emerging markets face, but there is the potential for other specific benefits, particularly by harnessing digital technology. For example, digital technology in Africa and South-East Asia has led to improved access to financial services throughout the population through mobile phone enabled services.
- According to the GFCI rating, there are more than 120 IFCs in the world today. For what and how do they compete? What determines the competitiveness of an IFC? What factors of the IFC’s competitiveness are becoming more significant nowadays?
Competition among IFCs essentially focuses on market share in the markets relevant to the centre, whether that is direct market activity, or the provision of services. So IFCs essentially compete to bring companies and jobs to their centre, compete for talent. Other important areas of competition are around foreign direct investment, and trade.
The competitiveness of an IFC is based on a number of factors. In the Global Financial Centres Index, we track Business Environment, Infrastructure, Reputation, Financial Sector Development, and Human Capital. All the leading IFCs are strong in each. In previous research, we found that infrastructure (both built environment and digital) is a “hygiene” factor – in other words, a certain base level of infrastructure is necessary to support other activity. The measures most highly correlated with overall competitiveness tend to focus on Business Environment, Reputation, and Human Capital measures. Financial Sector Development is, interestingly, the area which has lower correlation with overall competitiveness.
- IFCs largely represent the opportunities and conditions created in the country for foreign investors. What do investors pay attention to when choosing a particular jurisdiction?
From our experience, the key factors influencing choice of location are:
- Trusted institutions – regulators, courts, arbitration systems;
- Ease of doing business and absence of corruption – how welcome are overseas institutions who wish to set up a business? Can they operate safely?
- Capital flows – the ability to move money into a jurisdiction and to repatriate profits;
- Availability of talent; and
- Quality of life for employees.
The costs of doing business (rents, tax burden, regulatory costs) are less important, although they may sway a decision within a jurisdiction (Seoul versus Busan, or Almaty versus Nur-Sultan).
- How and on what basis is the specialization of an IFC formed? How should the specialization be formed by a new IFC?
There are various models to develop specialization within an IFC. Some develop specialization through natural development, e.g., London’s insurance market grew from its position as a trading port and shipping finance and insurance remains a large part of London’s financial ecosystem. More recent centres, including Singapore and Luxembourg have both:
- taken advantage of new developments in market provision, e.g., the creation of the Asian Dollar Market in Singapore based on the time zone in which Singapore lies, and the Eurodollar market which gave an opening for Luxembourg to attract European and US banks; and
- Planned the development of new services through a strategic approach, e.g., capital markets in Singapore as part of its 1985 Economic Review approach, or the development of the green bond market in Luxembourg.
The approach that appears most fruitful is through the creation of a strategic plan for development, involving government, regulators and market players. This process allows the development of a common vision for the development of financial services and provides a focus for development. Such a plan would need to take account of:
- The strengths of the centre in terms of its current activity and talent base;
- Analysis of the likely future needs of the local and regional economy;
- Analysis of the strengths and weaknesses of the regional economy and financial systems to identify potential gaps in the market; and
- Choice of the sectors in which it is most likely that the IFC can develop a cluster of businesses, leading to innovation and further business development.
- Which centres do you see as the IFC leaders in 2030?
The current leading IFCs – New York and London – are unlikely to face significant challenge to their leading position over the next decade. The depth of their capital markets, recognised expertise, and ability to attract talent are significant advantages.
We would expect leading Asian and other US centres also to continue to perform well. There is a question over Hong Kong’s leading position in the region, although it is likely to remain important for its access to mainland Chinese markets. This may lead to Singapore continuing to challenge for the top spot.
- Uzbekistan is the most dynamically developing country in Central Asia with high economic growth rates and plans for large-scale social and economic reforms. How could the IFC contribute to the implementation of the ambitious plan of socio-economic reform?
As mentioned above, IFCs are seen as bringing economic benefits, including employment and increased tax revenue, but also encourage good governance and law in other parts of the economy. In order to attract international businesses, the business environment and political structures in a jurisdiction need to be at an international standard. This development is likely to lead to better-governed institutions across a wider part of the economy.
- Newcomers at the global IFC map are the IFCs in Dubai, Nur-Sultan and Istanbul. In your opinion, in what way are these centers especially successful? What is their specialization?
All three of these centres are established effectively as Special Economic Zones, with Istanbul passing new laws governing the development of its IFC in June 2022.
Dubai has been particularly successful in developing its business environment and human capital. The first has been enabled by the special laws that apply in DIFC and good progress on the ease of establishing and operating a business in the jurisdiction. On human capital, Dubai has relied mostly on welcoming international talent through the UAE systems of visas, including golden visas for highly skilled and highly paid people. DIFC’s recent approach on FinTech, providing cheap access to markets and free, high-quality accommodation for startups has also been successful.
Dubai’s focus has been on attracting global businesses in financial services, in particular those focused on:
- Banking and brokerage (investment banking, corporate banking and private banking);
- Capital markets (equity, debt instruments, derivatives and commodity trading);
- Wealth management (asset management, fund registration and family office);
- Reinsurance and captives;
- Islamic finance;
- Business processing operations; and
- Ancillary services (legal and accounting firms).
In Nur-Sultan, the infrastructure offering is strong, demonstrating the importance of this for emerging centres. AIFC has paid attention to the creation of a network of institutions which provide the ecosystem, whether that relates to regulation, courts, sustainability development, and human capital development.
In Istanbul, again infrastructure is well developed, and its rank on various measures of reputation is comparatively strong. It is less developed as a financial centre than Dubai or Nur-Sultan but has set its current focus on Fintech and investment management development. It is also very active in financing infrastructure development both domestically and overseas.
- How can IFCs facilitate the development of human capital nationwide? What successful examples of IFCs can you give in this aspect?
This is an interesting question. We are not aware of evidence that IFCs directly develop human capital in the wider jurisdiction. However, there is evidence, most notably in the case of Singapore, that a national human capital development strategy assists in ensuring the supply of skilled workers to the financial services industry. One key part of the strategy has been the use of skills development levies on industry to ensure that more training and education takes place within the workforce, and the provision of direct skills training alongside academic study, similar to the German dual training system.