Telecommunications Policy and Cities
The development and management of the telecommunications infrastructure in all nations (with the exception of the US) has, until recently, been under public control. In the US, the telecommunications infrastructure has been largely built by AT&T, several independent telephone firms, and numerous rural telephone companies. Although privately owned, all functioned under close governmental regulation. A policy of telecommunications deregulation and the divestiture of AT&T is leading to a profound transformation in the US telecommunications infrastructure. Public policy at the federal level is now geared toward letting market forces determine the pattern of investment in telecommunications infrastructure. This supplements the policy of "universal service," the goal of providing everyone (regardless of location) low-cost and reliable telephone service. As a result, new telecommunications systems are being built to serve large communications users, most of whom are located in the nation's largest metropolitan areas.
A growing movement to deregulate telecommunications systems is occurring in other nations as well. As Robert Bruce has stated, it is "becoming increasingly apparent that shifts in policy are emulative, with deregulation and divestiture in the US, along with privatization and liberalization in the UK and Japan, having effects on other nations."(1)
INFORMATION CITIES
This movement towards competition in telecommunications is clearly bound to strengthen the telecommunications infrastructure in those cities that are centers for information-intensive industries. The conventional wisdom that new communications systems would lead to the demise of cities must be reconsidered in light of the emerging pattern of telecommunications investment that is occurring in the US, Western Europe and the Pacific rim. This paper addresses two major issues: the impact of telecommunications deregulation on urban development. and the role of telecommunications in the location of advanced business and financial services.
Telecommunications systems, by allowing firms to overcome the traditional limits of distance, permit what were once separate economic activities to become highly integrated functions. Multinational firms, for example, although headquartered in one location, produce and sell a diversity of goods and services in numerous countries. More precisely, information and computer systems enable a relatively small number of people to control and coordinate production, marketing, and financing from geographically remote points. Because of the widespread decentralization of manufacturing and assembly operations, there has actually been an increased need for a central headquarters responsible for the policies and financial decision making that allow such dispersion to occur. Noyelle and Stanbach have shown that such corporate headquarters rely extensively on "advanced producer services," (e.g., finance, law, accounting, management consulting and advertising) which are predominantly situated in the central business districts of large cities.(3) A small number of principal world cities provide the sophisticated financial and information services that allow a firm to operate globally. As a result, cities that specialize in international finance and producer services have witnessed considerable growth in their economic activity.
BOUNDED BY TELECOMS
The boundaries of a city's financial markets are now defined by telecommunications systems rather than by the traditional boundaries of time and space. In a recent report, the Group of Thirty (a New York-based non-profit organization formed in 1978, whose members are bankers, academics and economists) stated, "improved telecommunications and the presence of the larger banks in several time zones have created a continuous, round-the-clock market which responds instantaneously to new developments."(4) This is one of the factors underlying London's continued prominence as an international financial capital. "London's position in between the US and Far Eastern time zones make it a useful center for arbitrage between financial markets in those zones (chiefly the markets of the USA, Japan and Hong Kong): dealings on all those markets can be orchestrated from London in the course of one deal day."(5) In addition, telecommunications systems are now being used to link geographically separate stock and commodity exchanges and leading to considerably longer trading days. For example, the Chicago Mercantile Exchange is linked to a futures exchange in Singapore, the Sydney Stock Exchange, and the London Stock Exchange and to the National Association of Securities Dealers' share price information on actively traded UK, US, and international stocks.
As Charles Kindleberger has stated, "the continuous reduction in the costs and difficulties of transport and communication over the last two hundred years has favored the formation of a single world financial market."(6) The emergence of international finance centers has facilitated the emergence of this global market: however it has also weakened the role of the small and medium size city. The headquarters of the independent firms that once thrived in smaller cities are now subsidiaries of large, multinational companies. As a result, their headquarters have been consolidated within larger financial centers. Thus, communications and information technologies are strengthening a small number of world cities while weakening the traditional autonomy of many smaller ones.
While the initial development of financial centers has been spurred by cultural, economic, and regulatory factors, a new optical fiber telecommunications infrastructure is being built that will further enhance the communications capabilities of national and international financial centers. Although optical fiber systems have inherent technological advantages over copper wire, satellite. and microwave communication systems, the current state of the technology and the economics of fiber favors high-volume point-to-point communications - from one hub to another hub. As a result, the new optical fiber systems are initially being built to serve the heavily used communication routes, typically those linking major cities. This pattern of development is in sharp contrast with communication satellites, where the economics favor traffic from one point to multiple points or vice versa.
FIBERS ALONG THE TRACKS
In the US and other nations, optical fiber systems are being installed along transportation rights of way, often following the railroad routes established in the 19th century. MCI has built its Northeast fiber system along the Amtrak right of way: Cable and Wireless is using the right of way of the Missouri-Kansas-Texas Railroad to connect the Texas cities of Austin. San Antonio. Dallas, and Fort Worth, and RCI. a subsidiary of Rochester Telephone, is developing a fiber optic system from Chicago to New York City that uses Conrail's rights of way. As these examples show, the largest and most information intensive cities are being linked by fiber first.
Moreover, within the core business districts of the largest cities in the US, new infra-urban fiber optic systems are being built by the Regional Bell Operating Companies and by new competitors seeking to attract the information intensive firms located in key central cities. New York Telephone has built three fiber optic networks around Manhattan and an interborough fiber network that links the counties adjacent to Manhattan. At the same time, Teleport Communications Inc. has installed 240 kilometers of fiber that provides access to its communications satellite park and also serves as a means of intraregional communications. In the Los Angeles region. the fiber network built for the 1984 Olympics provides an advanced regional telecommunications infrastructure that can support the information intensive firms in Southern California, and a new company has been granted a franchise to build a 14-kilometre fiber system along Los Angeles' Wilshire Boulevard corridor. Clearly, telecommunications have not resulted in the economic decline of the largest central cities in the US, but are being used to move information in. through, and out of such cities with greater speed and efficiency. A similar process is underway in the UK where, as Charles Jonscher has noted. Mercury Communications designed its strategy on the assumption that "initial customers will be businesses located within the city of London."(7) Moreover, within the European Community, there are new disparities in the availability of advanced telecommunications services, with important consequences for regional economic development. John Goddard and Anthony Gillespie have been at the forefront of identifying this problem. "In spite of the obvious distance shrinking capacity of telecommunications. it would seem that this form of technological advance is reinforcing existing concentrations of economic activity in the core regions of Europe, creating a new form of regional disparity and preventing the Community rapidly reaching the necessary scale economies of large information markets"(8)
In order to understand the effect of new urban-based telecommunications systems on future patterns of growth, it is necessary to recognize the types of activities and firms that are concentrated in a handful of world cities. As we will demonstrate, advanced telecommunications systems have and are continuing to encourage the global integration of financial, legal and advertising services, based around a relatively limited number of urban hubs.
Source: 1973-1981 Kang Cho, Multinational Banks, Their Identities and Determinants, UMI Research Press, Ann Arbor, MI 1983; 1985, extrapolated from "Foreign Banking in the U.S.," American Banker, 19 February 1986. Does not include representative offices.
Source: 1973-1981 Kang Cho, Multinational Banks, Their Identities and Determinants, UMI Research Press, Ann Arbor, MI 1983; 1985, extrapolated from "Foreign Banking in the U.S.," American Banker, 19 February 1986.
As the graphs show, the number of US bank branches overseas and foreign bank offices in the US has grown in recent years. This growth reflects the dramatic increases in international trade, foreign investment, and money market activity that technological advances in transportation and communications have fostered. As a result of these forces, commercial banks have opened offices in key markets around the world and have established global networks that operate on a 24-hour basis.
ECONOMIES OF SCALE
Paradoxically, while technological innovations allow firms to overcome the constraints of time and space. the concentration of information-based activities in global cities continues to intensify. By locating in these major urban centers, commercial banks and related enterprises benefit from the economies of scale inherent in centrally processing the actions of globally based lenders and borrowers. For example, the Clearing House Interbank Payment System (CHIPS), which is located in New York City, handles over 100,000 international transactions daily.
New York's role as a global city has resulted in its attracting 405 foreign bank offices, which is 43% of all such offices in the US. This dominance is even more striking when one considers that foreign bank assets in New York amount to over $248 billion, which is 59% of all such assets in the US.
Although New York City plays a dominant role in the global economy, a handful of other cities act as important gateways for location-specific international trade and finance activities. Indeed, of the 55 cities in which offices are located. 83% of the offices and 89% of the assets are located in six. Both San Francisco, with its historic role as a center for finance since the 19th century gold rush, and Los Angeles, whose growth as a financial center is in part tied to the ports of Los Angeles and Long Beach becoming the busiest in America, facilitate the movement of trade to and from the Pacific: Chicago has continued its historic role as a gateway to midwestern markets and an important center of commodity trading: Miami has become the gateway for Latin American trade: and Houston's growth is tied to the development of oil in Mexico and Texas.
BRANCHES
Just as the location of foreign bank offices and assets reflects the concentration of US-based international activity, the location of US bank branches (which are the most common US bank facilities overseas) and their assets highlight the concentration of foreign-based international activity. Commercial banks prefer branches because they are able to offer the full range of banking services and are under the direct control of the parent bank. Moreover, their lending limits are effectively higher than that for subsidiaries because such limits are a function of the parent bank's capital.(9)
U.S. Bank Branches Overseas
Number of branches Assets ($ billion) Europe Belgium
France
West Germany
Greece
Italy
The Netherlands
Spain
Switzerland
United Kingdom9
12
18
21
22
3
15
12
687.4
10.3
6.2
2.3
4.5
1.0
3.9
2.8
112.0Total Europe 180 150.4 Caribbean Bahamas
Cayman Islands74
9147.9
37.0Total Caribbean 165 84.9 Asia Hong Kong
India
Indonesia
Japan
South Korea
Phillipines
Singapore73
10
5
30
19
15
2511.3
0.9
1.0
18.0
3.4
3.4
10.1Total Asia 177 54.2 All U.S. Branches 916 329.2 Source: Federal Reserve Board, Washington, DC. London's emergence as the largest center for Eurocurrency activity has resulted in the UK having the largest concentration of branch locations and assets: in fact, as a percentage of European countries listed, London contains 74% of US branch assets and 38% of US branch offices. The Group of Thirty has pointed out that Frankfurt, Zurich and Paris also engage in a significant amount of foreign exchange activity in Europe, but, as noted by the concentration of US branch assets and offices, Europe's continental centers of international trade and finance activity play a secondary role to the activities in London.
Tokyo, Hong Kong and Singapore are the major centers of activity in the Pacific rim. The distribution of activity among these cities underscores the importance of the particular regulatory environment. While Japan has historically restricted offshore capital market activity. Hong Kong and Singapore successfully attracted these activities because of their liberal financial regulations and historic ties to international commerce and geographically central location. Many observers expect, however, that if Japan continues to relax its regulatory restrictions. Tokyo's stature as a global city will rival that of London and New York.(10)
The attractiveness of flexible regulatory and tax requirements in a telecommunications-based industry is also demonstrated by the remarkable concentration of branch offices and assets in the Bahamas and the Cayman Islands. By utilizing "shell" branches, often amounting to little or no more than a street address, smaller hanks can "legally" transact Euromarket activities from their home office and larger banks can lake advantage of the lenient tax structure in the Caribbean.
Apart from financial institutions, other producer services are also migrating to international financial centers. In the case of advertising, the growth of multinational firms has created a demand for agencies which can "shadow" their areas of distribution. Alexander Kroll, Chief Executive of Young & Rubicam has said, "if you don't have a complete set of worldwide resources, you're in danger of being left out in terms of getting the best clients."(11) One should note however, that the global distribution of offices is not a proxy for the locus of corporate decision making or creative enterprise. While some agencies are extremely centralized, with the headquarter office maintaining strict control over the creation. production, and distribution of material, others allow for varying degrees of local autonomy.(12)
A review of the American Association of Advertising Agencies 1985 roster shows that 166 of the 679 member agencies had more than one office. Of these branch offices, 750 were located in 163 foreign cities. In both Europe and the Pacific rim there is a remarkably even distribution of offices between the largest information hubs of nation states. This locational pattern is consistent with the notion that information hubs, as the locus for the greatest amount of communications technology, are the most efficient and effective centers for voice, video, and data
LAW FIRMS
Another means of examining the development of global information hubs is to analyze the global location of law firms. Law firms, once a highly localized profession, are increasingly following their clients to new locations, often outside their home city or nation, where their clients form agreements and draft contracts.
An analysis based upon a survey by the Legal Times of the 500 largest US law firms reveals that 48 law firms have 72 offices in 11 European cities and 19 law firms have 33 offices located in 10 Pacific rim cities. These firms are largely concentrated in the same cities as those for US branch banks. These are the largest information hubs which bring together the greatest amount of global business activities. In the case of the Pacific rim. Tokyo's role as a global city suggests that more law firms would be expected to have a presence there. However, foreign lawyers have - until recently - been restricted from practicing in Japan.
This paper has examined two mutually reinforcing trends: the increased investment in telecommunications infrastructure designed to serve major metropolitan centers, and the growing are concentrated in principal world cities. While a great deal of attention has been given to the differences in communications capabilities between developed and underdeveloped nations,(13) there is also a need to recognize the effects of telecommunications policy on the development of communications systems within advanced industrial nations. A new global city is being created, linked by sophisticated telecommunications systems, organized around a small number of principal urban centers, and designed to serve the specialized needs of information intensive firms. This has allowed the face-to-face transactions in major cities to become converted into ideas and information that are electronically transmitted on a round-the-clock basis. Deregulation is clearly strengthening the comparative advantage of selected urban centers that are already the hubs for leading financial and business services. Moreover, regulatory policies are influencing the location of new telecommunications systems. This phenomenon has been noted by Robert Bruce: "administrations are aware that multinational enterprises seek to locate their network nodes to take advantage of the most flexible regulatory environments."(14)
Advanced communication and information technologies in a deregulatory environment have profound consequences for the future pattern of urban development. As demonstrated in this paper telecommunications technologies are facilitating the globalization of world financial markets and increasing linkages among principal world cities. The emergence of fiber optic systems for international and interurban communications is strengthening the telecommunications capacities of large metropolitan centers, and finally, increased competition in telecommunications will require policymakers to give greater attention to the private sector's role in providing advanced telecommunications services in cities.(15)
References
1 . Robert Bruce, "IIC Study of Telecommunications Structures." Intermedia, vol. 13. no. 6. November 1985.
2. Mitchell L. Moss. "Telecommunications and the Future of Cities." Land Development Studies, vol. 3, no. 1, 1986.
3. T. J. Noyelle and T. M. Stanbach Jr., The Economic Transformation of American Cities. Rowman and Allenheld. Totowa. New Jersey. US, 1984.
4. Group of Thirty. The Foreign Exchange Market in the 1980s. New York. 1985.
5. N. Hewlett and J. Toporowski. All Change in the City. Economist Publications. Special Report no. 222. London. 1985.
6. C. P. Kindleberger. Economic Response: Comparative Studies in Trade, Finance and Growth, Harvard University Press. 1978.
7. Charles Jonscher. "Telecommunications Liberalization in the United Kingdom." in M. S. Snow (ed.), Marketplace for Telecommunications: Regulation and Deregulation in Industrialized Democracies. Longman. New York. 1984.
8. John B. Goddard and Anthony E. Gillespie. Advanced Telecommunications and Regional Economic Development. Center for Urban and Regional Development Studies. University of Newcastle-upon-Tyne. UK. 1986.
9. Sarkis Khoury. Dynamics of International Banking, Prager, New York, 1980.
10. Kunio Inoue. "Tokyo Opens Up: The Japanese Money Market." Euro-Asia Business Review, vol. 5. no. 1. January 1986.
11. Richard Stevenson, "Ad Agency Mergers Changing the Business." New York Times. 13 May 1986.
12. Roy King. "Multinational Marketers: Some Current Concerns." in Advertising Age Yearbook. Cram Books. Chicago. Illinois. US. 1984.
13. See Independent Commission for Worldwide Telecommunications Development, The Missing Link. ITU, Geneva. Switzerland. 1985.
14. Bruce, ibid.
15. The author would like to acknowledge the valuable contribution that Andrew Dunau has made to this research.
Originally published in Intermedia,
Volume 14, number 6, November 1986
(C) 1999 Mitchell Moss