Urban Growth, Information Technologies
and The Pacific Rim

Introduction

Cities provide the meeting ground for the face-to-face exchanges that generate trade and commerce. With the advent of new communications technologies, many observers have questioned the need for urban centers since electronic communications makes it possible to sustain regular contact and information flows over great distances without direct personal contact.

This article argues that communications technologies, while fostering geographic dispersion, are also strengthening a handful of principle world cities. The emerging telecommunications infrastructure is allowing a relatively limited number of cities to serve as gateways to new information-based goods and services. To assess this urban development process, we examine three factors effecting the growth of Pacific Rim urban centers.

1. How are multinational firms influencing financial actives in the Pacific Rim.

2. How are fiber and satellite communications systems affecting the development of Pacific Rim financial Centers.

3. How are regulatory policies linked to the development of these financial centers.

Cities, Financial Centers and the Pacific Rim

The fusion of telecommunications and computer technology allows private firms to operate across broad geographic distances. Multinational firms depend on advanced technologies to control and coordinate production, marketing and financing on a global basis. By so doing, a multinational firm's comparative advantage in either the production or processing of goods and services can be fully exploited. For multinational service firms, this comparative advantage often involves their proprietary access to capital, timely information and/or managerial and organizational expertise (Dunning and Norman, 1983).

The development of urban financial centers, which encompass information intensive activities like finance, law, accounting, management consulting and advertising. reflects the fact that cities provide a path for multinational service firms to enter new markets. As service firms expand globally, a handful of principal cities are emerging as gateways that a) enable firms to access broader markets and b) enable firms to efficiently control and coordinate their international activities. As Noyelle and Stanback have noted in their analysis of American cities, "…large and medium sized central places [are] becoming increasingly specialized in the export of headquarters and producer services that permit firms to organize, manage and control production elsewhere (increasingly in production or consumer-oriented centers)" (Noyelle and Stanback. 1983).

This phenomenon is demonstrated in the United Stales by analyzing the location of foreign bank offices. 82% of foreign banks agency, branch, and edge act offices arc located in the cities of New York, Los Angeles, San Francisco, Chicago, and Miami. This distribution is consistent with the role these cities play as gateways to international trade and finance. Both San Francisco, with its historic role as a center for financing the gold rush in the previous century, and Los Angeles, whose expanding financial sector is in part tied to the rapid growth in trade through the ports of Los Angeles and Long Beach, are gateways to the Pacific Basin. In Chicago, the linking of the Chicago Mercantile Exchange to the futures exchange in Singapore underscores the internationalization of commodity trading. In Miami, the rapid growth of foreign bank offices in this city reflects the increased financial ties the United States has with Latin America, and the dominance of New York City underscores its being a world center for banking and securities activities.

Further, it is important to recognize that the global distribution of offices in cities is not a proxy for the location of capital or corporate decision making: rather. it is simply a proxy for where firms can most efficiently coordinate or market goods and services on a global basis. In fact, the location of capital for foreign banks operating in the U.S. is highly concentrated in New York City, which contains 91% of foreign bank branch deposits (American Banker. 1986).

Financial Centers in the Pacific Rim

The major financial centers in the Pacific Rim are Tokyo, Hong Kong. Singapore, and (to a lesser extent) Sydney. In addition to serving as the primary points of entry for financial institutions wishing to access markets found in these cities, these centers also serve as the primary points for the administrative control and coordination of a firm's Pacific Rim activity. As a result, the concentration of multinational service activity in these centers is far more intense and dynamic than other Pacific Rim cities.

Of these major financial service centers, Tokyo is steadily becoming the most dominant. As Japan's preeminent financial center, Tokyo (like New York in the United States) is the focal point of Japans remarkable capital base. The strength of this base has resulted in Japanese banks, with a 25% share, being the largest international lender of capital (Norman, 1986). Thus, it is little surprise that Tokyo is the corporate headquarters of 11 of the world's 50 largest banks. Moreover, the gross national product generated by Japan dwarfs that of the other Pacific Rim nations combined. in 1981, Japan generated 69% of the Pacific Rim's gross domestic product (World Economic Indicators, 1985).

Tokyo's rule as a financial center, however, has largely been constrained by Japan's strict regulatory environment. For this reason, Hong Kong, Singapore, and more recently Sydney have become major financial centers for offshore capital market activity. Moreover, Hong Kong's and Singapore's historic ties to international trade and commerce activities and their centralized location in relation to other Pacific Rim markets, make these centers appealing locations for establishing the administrative operations of the largest multinational firms. Further, the reliable and efficient transportation and communications infrastructure in these cities permits an intense international flow of people and messages

A survey of the ten largest U.S. banks highlights the importance of financial and administrative centers in the Pacific Rim. For each bank, their largest operations are in Tokyo, Hong Kong, and Singapore, and for three of the banks surveyed equivalent operations also exist in Sydney. And as centers for administrative activity, three banks had regional offices in Tokyo, three in Hong Kong, and Citicorp has regional offices in Tokyo, Hong Kong, and Singapore.

The concentration of the world's largest financial institutions in these cities encourages further economic development by acting as a "magnet" for complementary business services. Firms that provide "producer services" (e.g., advertising, consulting, law) maintain a physical presence in these locations, reinforcing the notion that communications technology-supplements rather than substitutes for face-to-face contact. Indeed, a physical presence reduces time differential constraints inherent in telephone based contact, and disruptive time delays involved in long distance travel.

Our analysis of the largest U.S. law firms shows that 19 firms have a total of 34 branch offices in the Pacific Rim. The location of these offices is predominantly in Hong Kong, followed by Singapore and Tokyo. Although the growth of international financial activity in Tokyo suggests that more law firms would be expected to have a presence there, Japan's Practicing Attorneys Act of 1955 severely restricts the presence of foreign lawyers. Thus a regulatory impediment rather than a market impediment is constraining the growth of an international legal community in Tokyo. However, Japan's recent passage of a law allowing entry of foreign lawyers may change this pattern (New York Times, 1986)

Advertising is an example of another service drawn to these financial centers. In contrast to law firms, advertising agencies maintain a presence in these centers to market products by firms that may or many not be located in these centers. The essential purpose of a multinational advertising agency is to offer clients an array of marketing services anywhere in the world. The exceptional rate of mergers over the last two years underscores the belief of the largest advertisers that a global network is essential. After Saatchi & Saatchi Company of London announced its acquisition of Ted Bates Worldwide to form the world's largest advertising agency, Donald Zuckert (the New York President of Ted Bates) announced that, "we now have the resource to deliver to the major global corporations for which we both work an unmatched depth of client service, creative talent and media-buying muscle" (Stevenson, 1986).

Let us examine the distribution of the largest American advertising agencies with branches in the Pacific Rim. With 19 agencies having 177 branch operations, the development of this multinational service is far ahead of that for law. More importantly, their remarkably even distributions within the financial centers of Pacific Rim nation-states demonstrates the fundamental difference between a) requiring a physical presence to support the financial activities that are concentrated in a handful of world cities and b) requiring a physical presence to access the markets of a nation-state.

Telecommunications and the Growth of Financial Centers

For multinational service firms, the value of their operations is closely tied to their ability to communicate information rapidly and efficiently among geographically separate sites. Moreover, information traveling among these points is increasingly in the form of digital communication. And the most efficient, reliable, and secure means of transmitting digital communication is via fiber optics. Technological and economic advantages associated with fiber optics have enabled this technology to be considered the information user's "digital highway."

The analogy of fiber optics serving as digital highways stems from the fact that, like highways, fiber optic corridors are best suited for facilitating high volume point-to-point traffic (Corrigan. 1986). Thus, at the national level information-intensive countries like the United States, Canada and Britain are rapidly installing fiber optic corridors among cities where the concentration of information service activity is highest. Ironically, the installation of fiber optic systems often follows railroad rights-of-way, which formed the backbone of the nineteenth century transportation infrastructure. With technological improvements in the laying of fiber optic submarine cables, there is now a rush to build fiber optic corridors that span both the Atlantic and Pacific oceans. As is the case for the construction of fiber optic cables within individual nations, these cables are initially being built to serve those areas where information intensive activities are greatest.

Telecommunications and the Pacific Rim

Dramatic increases in trade between Pacific Rim nations and the United States present a serious challenge to the existing telecommunications infrastructure. By year-end 1984, 70% of the transmission to the Pacific Rim was via satellite and 30% via cable. And by 1987, it is estimated that 76% of transmission will be via satellite and 24% via cable (Federal Communications Commission, 1980). Because the Federal Communications Commission considers this dependence on one medium of transmission to present risks, it has supported the new Hawaii 4-Transpac-3 (HAV-4/TPC-3) fiber optic system. By 1991, this system is projected to shift the balance between satellite and cable traffic to 56% satellite and 44% cable.

Unlike previous cable systems, however, the orientation of this cable entails both national security as well as economic interests. The previous cable followed a national security path from Hawaii to Guam. But the HAW-4/TPC-3 cable incorporates both national security and economic interests by having the TPC-3 link extend far into the Pacific where it then branches in two directions (Logue, 1986). The national security link runs to Guam and then on to the Philippines via a branch called GP-2: the economic and trade connection extends directly from Hawaii to Japan. By 1990. other key Pacific Rim centers will be linked via a ring that will connect Guam, the Philippines, Hong Kong, Korea and Japan. By 1994, Taiwan will also be connected.

While the design of the network appears to favor the northern countries of the Pacific Rim, it is important to note that a cable entitled ANZCAN connects Vancouver, Hawaii, the Fiji Islands, Sydney and New Zealand. But because this is an analog cable, the Australian Overseas Telecommunications Commission (OTC) and the New Zealand Post Office have announced plans to build a 15,150 mile fiber optic cable which will link these countries to North America by the mid 1990s. At an estimated cost of 1 billion dollars, this project demonstrates the high stakes of being part of the emerging telecommunications infrastructure.

In addition to these systems. Pacific Telecom Inc., Cable and Wireless PLC and a Japanese consortium have announced plans to lay a fiber optic cable entitled PPAC from Seattle, Washington to Japan. Along this path, a spur to Alaska may be included for national security reasons. This system underscores the expected demand for information-oriented trade links between the United States and Japan. Indeed, in 1985 Japan accounted for 50% of Pacific Rim Trade with the United Slates, but only one-third of AT&T's Pacific Rim circuits linked the Unite States with Japan.

The PPAC cable is also significant because Cable and Wireless is a British company that was privatized in 1981, and Pacific Telecom is one of the largest non-Bell telephone companies. As a result, this joint venture represents a key element of the emerging telecommunications infrastructure that is not dominated by PTTs or tightly-regulated national monopolies. Unhindered by concerns for providing universal service, these private corridors are aimed directly at servicing the multinational corporate user. As Cable and Wireless' chief executive Sir Eric Sharp has noted. "We don't want to blanket the world, but we want to be where the action is" (Brown, 1984).

In the case of Cable and Wireless, which was the original operator of the international telecommunications services for the crown colonies and other territories, being where the action is has resulted in its forming a partnership with Teloptik Inc. to lay a fiber cable across the Atlantic, its leasing and/or development of fiber optics in the U.S., Canada and Britain, and its operation of external communications in 36 countries and domestic communications in 16 countries. It is conceivable that Cable and Wireless may be among the first private carriers to offer a one stop alternative for multinational corporations (replete with specialized services like packet switching, electronic mail, and international private leased circuits) by the early 1990s.

The development of several submarine cables is underway in the Pacific Rim. The recent announcements of the H-J-K and TASMAN-2 cables demonstrate that fiber optics is now being installed on an intra-regional level between the most heavily traveled communication points. Indeed, in 1980. 41% of South Korea's overseas telecommunications messages were with Japan (Kirby, 1983). Also, as demonstrated by the lengthy ASEAN cable, one can see how a communications infrastructure can be used to further the development of a coalition whose goal is to develop stronger economic and cultural lies.

Deregulation and Pacific Rim Financial Centers

Although the growth of world financial centers is due to a broad array of locational, cultural and economic factors, financial and telecommunications regulatory systems also affect the urban development process. In Japan, the gradual loosening of finance regulations is enabling Tokyo to become a financial center whose size and power may ultimately rival those in London and New York. Through such actions as opening up Japan's trust banking to foreign banks, loosening regulations to permit brisk trading in overseas bond issues, and allowing six foreign firms membership to the Tokyo Stock Exchange and 22 additional firms to have non member status, the largest securities and banking institutions in the world are either opening or expanding operations in Tokyo (The Economist, 1986). Symbolic of this growth is the investment bank Morgan Stanley, which opened operations with a handful of employees in 1984. Since that time, Morgan Stanley has rapidly expanded their operations and now employs 220 people. If, as expected, Japan permits an off-shore yen market to develop in Tokyo, Tokyo's financial center may influence Hong Kong's stature. But a financial center such as Hong Kong, whose liassez faire regulatory system and low tax rate will be difficult to match, will continue to thrive in the future, especially if it serves as the link to western trade and finance with China (Chira, 1986).

Telecommunications Deregulation and the Pacific Rim

Whether under the control of a nation's PPT or a regulated monopoly, the development and management of telecommunications systems in industrialized countries has typically pursued the principle of providing affordable and reliable telephone service to as many locations as possible. But with industrialized nations becoming increasingly information- rather than manufacturing-oriented, there is more pressure to allow market rather than regulatory forces to determine the pattern of telecommunications investment. For those in favor of deregulation, competition will not only insure low-cost service for business, but will also encourage innovation and service diversification (Noam, 1986).

In the United States, deregulation of the telecommunications industry has led to new investments in inter-city and intra-city communications systems. Not surprisingly, those cities with the greatest quotient of information-based service activities are being linked first as well as having the most diversified intra-city systems (Moss, 1986).

As one looks toward the Pacific Rim, Japan has privatized the state-owned Nippon Telegraph and Telephone (NTT). As a result, new firms such as the Hughs-Mitsui-C. Itoh partnership are developing systems to compete with NTT. Using developments within the U.S. as an indicator, the most information-intensive cities within Japan will reap the largest benefits. Moreover, these benefits will further facilitate the growth of information-intensive Japanese cities

At the international level, the emergence of fiber optic submarine cables as the most cost-effective means of sending high speed data communication from point-to-point is having serious ramifications. The International Telecommunications Satellite Corporation (Intelsat) has historically relied on rate averaging between high and low volumes of traffic to achieve its primary goal of providing universal connection. The advent of fiber optic corridors, however, is threatening the ability of Intelsat to price its satellite services along heavily congested routes above their true costs. Moreover, the technological configuration of the Intelsat network has been slow to incorporate new technologies, such as Ku-band satellite transmission (Cowley and Aronson, 1985).

These developments are seriously challenging Intelsat's ability to continue providing universal connectivity. In an attempt to partially meet this challenge, Intelsat has deregulated its International Business Services (IBS). For the first time, private carriers will be allowed to build earth stations and lease a portion of Intelsat's satellite capacity for the purpose of digitally transmitting voice, video, and data communication. Ultimately, this could symbolize a first step in Intelsat facilitating customized point-to-multipoint services. Indeed, while fiber optics has a comparative advantage in transmitting point-to-point communication, satellite transmission is still the preferred medium for point-to-multipoint communication.

A survey of four common carriers with plans to offer Pacific Rim IBS in 1986 or 1987 showed that agreements were initially being reached with the PTTs of Japan, Hong Kong, Singapore, and Australia. This pattern of development highlights the concept that the most advanced forms of communication technology migrate to those areas where the concentration of information service activity is greatest. As a result, movements toward deregulation will pose a serious challenge to policy-makers as they attempt to assure the survival of universal service.

Conclusion

By examining the relationship between the locational movements of multinational service firms and the emerging telecommunications infrastructure in the Pacific Rim, this article has sought to demonstrate that communications technologies are not leading to urban decline but rather are contributing to the growth of key financial centers in the Pacific Rim that are the "information hubs" for multinational firms. Moreover. it points to the increasing importance of telecommunications in economic development strategies for cities. Finally, this article highlights the need for business and industry to recognize the way in which new information and communications technologies impinge on policies that seek to control financial activities and telecommunications systems.

 

References

American Banker (1986). extrapolated from "Foreign Banking in the U.S." February 14

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Chira, Susan (1986). "Tokyo Taking on Hong Kong." The New York Times, April 21, pg. D1

Crowhey, Peter and Aronson, Jonathan. "The Great Satellite Shootout." Regulation, May/June1985 pp.27-35.

Corrigan, Richard (1986). "The Fiber Optics Future." National Journal, June 7, pp. 1371-1374

Dunning, J.H. and Norman F. (1983) "The Theory of Multinational Enterprise on Application to Multinational Office Location." Environment and Planning, vol. 15 pp. 675-692

The Economist (1986). "Japanese Gave Foreign Banks More Than They Bargained For." May 17, 1986

Federal Communications Commission (1986). Memorandum, Opinion, Order and Automation. File No. 1-1-6-85-219. June 7, p.9

Kirby Stuart (1983). Towards the Pacific Century: Economic Development in the Pacific Rim. The Economist Intelligence Unit, Special Report No. 137 London Hill 3, p. 63

Logue, Timothy (1986) "Recent Major U.S. Facilities-Related Decisions: Letting a Million Circuits Bloom." in Wedemeyer, Dan and Pennings, Anthony (eds.) PTC '86 Proceedings. Pacific Telecommunications Council Hawaii p.78

Moss, Mitchell L. (1986). "Telecommunications and the Future of Cities." Land Development Studies. Vol. 3, No. 1. pp. 33-44

Noam, Eli (1986). "Telecommunications Policy on Both Sides of the Atlantic: Divergence and Outlook." in Marcellus Snow (ed.), Marketplace for Telecommunications Regulation & Deregulation in Industrialized Democracies. White Plains, N.Y. Longman, pp. 255-273

Norman, Peter (1986). "BIS Says Japan has Passed the US in Share of International Banking." Wall Street Journal, January 31, p. 12

New York Times (1986). "Lawyers Await Japanese Rules." July 29

Noyelle, Thierry and Stanback, Thomas (1983) The Economic Transformation of American Cities. Totowa, N.J. Rowhan and Allanheld, p.7

Stevenson, Richard (1986). "Ad Agency Mergers Changing the Business." New York Times, May 13, p. D3

World Economic Indicators (1985) Business International Corporation, New York, NY

 

Originally Published in PTC Quarterly
Vol. 7, No. 4, December 1986
The Pacific Telecommunications Council