Telecommunications and International
Financial CentersCommunications technologies are often regarded as space-extending phenomena: specifically, they allow individuals and firms to function within a geographically larger set of boundaries (Kellerman, 1984, p. 232). For most observers, the ability to overcome traditional spatial limits implies a weakening of the city (Abler, 1975, p. 133). New technologies, it is argued, allow people to exchange information and ideas without interpersonal contact; thus, the comparative advantage of cities, whose existence has been traditionally based on their role as centers for face-to-face contact, is no longer necessary (Gottmann, 1977). This article argues that advances in communications technologies are not leading to the demise of cities; rather they are strengthening a handful of principal world cities (Hall, 1984, p. 95). Three critical issues are examined to demonstrate the way in which technological change is influencing the pattern of urban development and the emergence of global finance and legal centers.
1. How has the emergence of a global economy led to the creation of major financial centers and what role do these centers play?
2. How will the emerging telecommunications infrastructure influence further patterns of urban development?
3. What types of cities will benefit from telecommunications deregulation and why?
CITIES IN A GLOBAL ECONOMY
Telecommunication 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 Stanback (1984) have shown that such corporate headquarters rely extensively on advanced producer-services (such as finance, law, accounting, management consulting and advertising), which are predominantly situated in the central business districts of large cities. The city provides the sophisticated financial and information services that allow a firm to operate globally (Noyelle and Stanback, 1984, p. 67). As a result, cities that specialize in international finance and producer services have witnessed considerable growth in their economic activity (Cohen, 1981).
This emergence of the internationally-oriented financial capital represents a considerable departure from the traditional role of certain large cities as centers for a nation's international trade and commerce. In a report by The Economist Publications analyzing changes in London's financial markets, the authors highlight London's transformation into a global financial capital:
The City of London has always been an international financial center, or at least since the late Middle Ages. However, until recently its cosmopolitanism merely reflected the international scope of British trade and financial interests. British merchant banks . . . traditionally engaged in the finance of British trade, while the "colonial and foreign banks"... provided a banking network throughout the Empire and British trading enclaves elsewhere. The international horizons of these institutions were essentially the global horizons of the British political and economic interests which they served. However, the recent globalization of the City's interests, occurring at a time of economic recession and stagnation in the UK, is a different phenomenon from the internationalization that occurred in the nineteenth century, when the City financed British trade and economic influence. The central feature of many recent changes has been the development of the City as a center for an emerging world capital market, as opposed to its more traditional role as a financial base for cosmopolitan interests. (Hewlett and Toporowski, 1985, p. 43).
The rise of the multinational firm has been intimately connected to the globalization of banking and finance activities. Facilitated by the advent of communications technology, these activities grew for reasons that extend beyond responding to the finance demands created by the rise of the multinational firm. Specifically, the rapid rise and fluctuation of inflation and interest rates, which began in the early 1970s, created conditions of far greater uncertainty and risk. This. in conjunction with an influx of petrodollars. increased nation-state budget deficits, and the lowering of capital barriers between countries, has led to the internationalization of finance activities and the proliferation of new finance related services and products. Most important, 'Technological change, particularly the advance in computer technology, has altered the environment of financial markets. . . . The increased speed and lower cost of communication have been important to (he development and expansion of international markets.' (Germany and Morton, 1985, p. 743).
As a recent report by the Group of Thirty 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.' (Group of Thirty, 1985, p. 15).This is one of the reasons given for 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.' (Hewlett and Toporowski, 1985, p. 43). 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 has agreed to do joint trading with the New York Commodity Exchange, and the London Stock Exchange and the National Association of Securities Dealers share price information on actively-traded British, American and international stocks (Lohr, 1985a,b).
As Charles Kindleberger has wisely noted, "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.' (Kindleberger, 1978, p. 130).The emergence of international finance centers has facilitated the emergence of this global market; however, it has also weakened the role of the small-sized and medium-sized 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 cities. More than twenty-five years ago Raymond Vernon predicted that such a process of office consolidation could occur: 'To the extent that the office function grows, therefore, the growth may well occur to a disproportionate extent in the office districts of the larger central cities, at the expense of the regional centers.' (Vernon, 1959).
In the Pacific Rim, Tokyo. Hong Kong, Singapore and, to a lesser extent, Sydney, have emerged as major financial centers. Tokyo's emergence as a particularly powerful financial center is closely linked to Japan's large capital base and its pre-eminence in the Pacific Rim economy. In 1981, Japan generated 69 per cent of the Pacific Rim's GDP. Japan's economic presence also extends beyond the Pacific Rim. In a recent report by the American Banker, Japan was shown to account for 35.5 per cent of the total foreign bank lending to business in the United States, the largest single source of such activity (American Banker, 1986).
Tokyo has long been Japan's pre-eminent financial center. Despite stringent financial regulations that limit its role in offshore activities, Tokyo is the headquarters of eleven of the world's fifty largest banks. Moreover, the Tokyo Stock Exchange is the fastest growing major market in the world (McMurray and Browning, 1986). With the gradual loosening of Japan's finance regulations, and the admission of three major American securities firms as Tokyo Stock Exchange members, Tokyo is becoming an increasingly powerful world financial center. The emergence of Hong Kong and Singapore as financial centers has been closely linked to their ability to facilitate offshore capital-market activity. Hong Kong has a liberal regulatory environment, and both cities have strong historical ties to international trade and commerce. Most important, an infrastructure exists that adequately facilitates increasing demands for international communication and transport (Kirby, 1983).
In order to determine the location of international financial centers in the Pacific Rim, the ten largest US banks were surveyed. Seven of these banks indicated that they had established a regional headquarters office in the Pacific Rim. Citicorp designated regional headquarters in three cities: Tokyo, Hong Kong and Singapore. Of the remaining six, three banks established regional headquarters in Hong Kong and three in Tokyo. In addition, all banks had their largest operations in Tokyo, Hong Kong and Singapore, while three had equivalently large operations in Sydney. The importance of these financial centers is underscored by a 1983 comparison of world rental levels in which New York led, followed by Tokyo, London, San Francisco, Los Angeles and Hong Kong; Singapore tied with Sydney for seventh place (Rowley, 1984). Langdale (this volume) suggests that a loose hierarchy of international cities based on Electronic Information Services' (EISs) can be recognized. He states: It is possible to correlate the global reach of a city with its status as an international EIS center.' He classifies cities into four categories, ranging from major global cities such as New York and London to 'nationally-oriented cities [that] function as international gateway locations for their respective countries'.
As financial centers are drawn to areas with complementary services, the strength of these centers can also l)e measured by analyzing the location of branch offices of leading American law firms. Moreover, the location of these law firms underscores the concept that these areas serve as neutral settings that facilitate face-to-face contact and transactions. While many law firms rely on travel, telephone-based contact and/or correspondent relationships with local counsel, a growing number of firms recognize the need for maintaining a physical presence in the Pacific Rim. Such firms place a premium on being able to readily serve clients without encountering time differences whenever a meeting is necessary. As Table 6.1 shows. Hong Kong houses the largest concentration of American law firms, followed by Singapore and Tokyo. Although one might expect Tokyo to have a larger concentration of law firms due to Japan's economic predominance, Japan's Practicing Attorneys Act (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 that country (Weber, 1983).
Table 1: Location of 15 Largest US Law Firms in the Pacific Rim
offices in Pacific Rim
one office in Pacific RimHong Kong
Singapore
Tokyo
Melbourne
Shanghai
Taipei
Sydney
Bangkok
Peking
6
5
2
1
1
1
1
1
1
1
1
1
0
0
0
0Source: Legal Times TELECOMMUNICATIONS INFRASTRUCTURE AND CITIES
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 enhance the communications capabilities of national and international financial centers. As stated in The Economist, 'The world's telecommunications are going on a high-fiber diet. Within two years, optical fibers will carry telephone calls beneath the Atlantic and Pacific.' (The Economist, 1986). Although optical-fiber systems have inherent technological advantages over copper wire, satellite and microwave communication systems, the current stale of the technology and the economics of fiber favors high-volume, point-to-point communication 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 (Moss, 1986, p. 3). 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.
In the United States and other nations, optical fiber systems are being installed along transportation rights-of-way, often following the railroad routes established in the nineteenth century. MCI has built its north-east 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 in England, Mercury Communications is building a fiber system on British Rail's right-of-way. It is ironic that the choice of cities to be first saved by advanced fiber systems is in part due to the decisions made in the nineteenth century concerning transportation rights-of-way.
The initial comparative advantage fiber optics confer on financial centers is seen by examining New York City and Los Angeles, the United States' pre-eminent east-coast and west-coast financial centers. These cities account for approximately 30 pet cent of all overseas telephony emanating from the US. In addition. New York, with 43 per cent, has the largest concentration of foreign bank offices in the US, followed by Los Angeles with 11.8 per cent, and Chicago with 8.4 per cent (American Banker, 1986). Further, advanced telecommunications systems have reinforced the comparative advantage of New York and Los Angeles. Within each city, extensive fiber-optic systems are being used to facilitate intra-urban communication flows. New York Telephone has built three fiber-optic networks around Manhattan and an interborough fiber network that links the counties adjacent to Manhattan. In the Los Angeles region, the fiber network built for the 1984 Olympic Games provides an advanced regional telecommunications infrastructure that can support the information-intensive firms in southern California. Clearly, telecommunications has not resulted in the economic decline of the largest central cities in the United States, but is being used to move information in, through and out of such cities with greater speed and efficiency.
Telecommunications and the Pacific Rim
Just as the emergence of fiber-optic networks in the US demonstrates the way in which new technology can strengthen large cities, the fiber and analog networks being built in the Pacific Rim show similar trends. Due to the dramatic increase in trade between Pacific Rim nations and the United States, the current telecommunications infrastructure is being seriously challenged. Because the existing Hawaii-3/Transpac-2 (Haw-3/TPC-2) cable shown in Figure 6.1 is saturated, satellite transmission is being increasingly used to' meet communication needs. By the end of 1984,70 per cent of the transmission in the Pacific Rim was via satellite and 30 per cent via cable. By 1987 it is estimated that 76 per cent of transmission will be via satellite and 24 per cent via cable (Logue, 1986, p. 78).
The Federal Communications Commission considers this dependence on one medium of transmission to present risks and has therefore supported the new Hawaii 4-Transpac-3 (HAW-4/TPC-3) fiber-optic system. By 1991 this system is projected to shift the balance between satellite and cable traffic to 56 per cent satellite and 44 per cent cable (Federal Communication Commission, 1986). Further, the configuration of this cable provides valuable insights concerning the emerging pattern and location of economic activity. While the initial Hawaii Transpac cables were oriented towards national security interests with direct links from Hawaii to Guam, Figure 1 shows how the new HAW 4-TTC 3 cable is designed to accommodate both economic and military linkages. After stopping in Hawaii, the cable extends far into the Pacific and then branches in two directions: 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.
Alth6ugh the design of this network appears to favor the northern countries in the Pacific Rim, it is important to note that the ANZCAN cable, shown in Figure 6.1, connects Vancouver, Hawaii, the Fiji Islands, Sydney and New Zealand. With both the Canadian and US cables stopping in Hawaii, this will become an important point for information transfer. Further, it serves to mitigate somewhat the strong comparative advantage that the northern countries would otherwise have received.
As Figure 2 shows, there is also an extensive amount of intraregional telecommunications systems being built The systems shown on the map have been constructed since the early 1980s. As can be seen, these systems link areas that have both cultural and/or economic ties. For example, the Japan-Korean cable shows the important economic relationship between these countries. In the early 1980s, 28 per cent of South Korea's trade was with Japan; in 1980 41 per cent of South Korea's overseas telecommunications messages were with Japan (Kirby, 1983). In addition, the ASEAN cable shows how a new communications infrastructure can further the development of a coalition whose goal is to develop stronger economic and cultural ties. Urbanization, Trade and Telecommunications
While the emerging web of cable systems shows that the strength of key centers with an existing comparative economic advantage will be reinforced, Figure 3 shows that trade relationships do not completely account for international communication linkages. Although the NICs - South Korea, Taiwan and Hong Kong - show a strong association between trade and communication, Japan's pattern is different. Japan accounts for almost half of all Pacific Rim trade with the United States, yet it has only one-third of the AT&T circuits between the Pacific Rim and the United States. Given the strong cultural ties which also exist between the two countries, one might argue that this is an area where demand for international communications should be far higher. Conversely, while ASEAN accounts for 16 per cent of Pacific Rim trade with the US, 22 per cent of AT&T's circuits link ASEAN and the United States. Such disparities demonstrate that telecommunications is a permissive factor that can contribute to locational decisions, but it is not a deterministic factor which, by itself, can generate economic activity (Mandeville, 1983). The Independent Commission for World Wide Telecommunications Development has recently highlighted this complex relationship between telecommunications and economic development when it stated:
While a strong correlation has been established between the number of telephones per capita and economic development measured by gross domestic product, it has not been clear whether investment in telecommunications contributes to economic growth or economic growth leads to investment in telecommunications. That there is a link between the two is however beyond question. (1984, p. 9)
As Figure 4 shows, GDP statistics for countries within the Pacific Rim show a strong association with number of telephones. As a result, Japan's economic dominance and strong economy translates into a dominance in percentage of telephones as well. For ASEAN, where the greatest variation occurs, this can be largely explained by the lack of urbanization within member nations. With the exertion of Singapore, countries in ASEAN arc 25-35 per cent urbanized; this compares to over 80 per cent urbanization in other Pacific Rim countries. Thus while ASEAN's population is dominant within the Pacific Rim, degree of urbanization and economic development is a far better indicator of telephone dispersion and demand.
Telecommunications Deregulation and Cities
The design, development and management of the telecommunications infrastructure in all nations (with the exception of the United States) has, until recently, been totally under public control. In the United States the telecommunications infrastructure has been largely built by AT&T, several independent telephone firms and numerous rural telephone companies. Although privately owned all function under close government regulation. In the United Stales a policy of telecommunications deregulation and the divestiture of AT&T is leading to a profound transformation of the nation's telecommunications infrastructure. Public policy at the Federal level is geared toward letting market forces determine the pattern of telecommunications investment, thus supplementing the policy of universal service, the goal of providing everyone (regardless of location) with low-cost, reliable telephone service. As a result, new telecommunications systems are being built (0 serve large communications-users, most of whom are located in the nation's largest metropolitan areas (Moss, 1986).
A growing movement to rely on private firms to develop telecommunications systems is occurring in other nations as well. Nowhere, however, is this competitive telecommunications environment as pronounced as in the United States. In Britain, privatization has occurred with the creation of British Telecom; presently, limited competition in telecommunications infrastructure is taking place between British Telecom and Mercury Communications. In Japan the state-owned Nippon Telegraph and Telephone (NTT) has become a private firm; new private firms, such as the Hughes-Mitsui-CITOH partnership, are now developing systems to compete with NTT.
This movement towards competition in telecommunications is clearly bound to strengthen the telecommunications infrastructure in those cities that are centers for information-intensive industries. In the United States, COMSAT and TRT (a major international common carrier) have formed a partnership and are now building urban gateway satellite stations in San Francisco, Houston and Chicago. Further, they have already established a satellite facility at the Teleport in New York. At the international level, competition and technological innovation are largely responsible for the decision of INTELSAT to deregulate 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 sending data communications. INTELSAT's decision to deregulate a portion of its activity reflects the intense pressures brought by large information users who want to maximize the use of new technologies, such as Ku-band satellite transmission, that INTELSAT has not incorporated into its network. In a survey of four common carriers with plans to offer Pacific Rim IBS in 1986 or 1987, each stated that they were in the process of negotiating or concluding agreements with the PTTs of Japan, Hong Kong, Singapore and Australia. This pattern of development again demonstrates that each of these countries' financial centers is the source of rapid and growing information-related telecommunications demand. Further, the probability that new telecommunications systems will initially serve these areas and reinforce their pre-eminent position is underscored. As a result of these developments, planners and policy-makers concerned with regional development will need to give heightened attention to the availability of telecommunications systems in cities.
CONCLUSION
This paper has examined the relationship between advanced communication and information technologies and the future pattern of urban development It has sought to demonstrate that:
1. telecommunications technologies are facilitating the globalization of world financial markets and increasing linkages among principal world cities;
2. the emergence of fiber-optic systems for international and inter-urban communications is strengthening the telecommunications capacities of large metropolitan centers; and
3. increased competition in telecommunications will require policy-makers to give greater attention to the private sector's role in providing advanced telecommunications services in cities.
ACKNOWLEDGEMENT
The author would like to acknowledge the valuable research assistance of Andrew Dunau in the preparation of this chapter.
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Originally published in The Spatial Impact of Technological Change
J. Brotchie et al., eds., Croon Helm. New York, 1987
(C) 1999 Mitchell Moss