Urban Development in a Global Economy

Introduction

The emergence of a global economy bound together by international financial services and sophisticated telecommunications systems is receiving considerable public attention. Much of this attention has focused on trade flows and regulatory barriers: relatively little consideration has been given to the forces that are shaping the pattern and location of international economic activity.

This report argues that three independent forces: the deregulation of financial markets: the internationalization of "producer" services: and the evolving competitive telecommunications environment, are working to create a new set of "city-states," more closely linked to each other than to their home nations, that arc the principal world centers for information production and distribution. The report discusses city functions in a global economy and analyzes locational trends for foreign banks in the United States, and of leading American law Firms and advertising agencies in Europe and the Pacific Rim.

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 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.(1) A small number of principal world cities provide the sophisticated financial and information services that allow a Finn to operate globally. As a result, cities that specialize in international finance and producer services have witnessed considerable growth in their economic activity.

As firms expand the physical boundaries within which they offer goods and services, the boundaries of city based financial markets are also being stretched. The traditional boundaries of time and space are being redefined by the availability of on-line global telecommunications systems. In a recent report, the Group of Thirty stated that, "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."(2)

This development is one of the principal factors underlying London's continued prominence as an international financial capital. "London's position in between the U.S. 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."(3) In addition, telecommunications systems are now being used to link geographically separate stock and commodity exchanges and are 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.

As Charles Kindleberger has observed. "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."(4) A critical element in the development of this global market has been the emergence of international finance centers; however, this process has also weakened the stature and autonomy of the small and medium size cities. The headquarters of the independent firms that once thrived in smaller cities arc now subsidiaries of large, multinational companies. As a result, their headquarters' functions and associated support services have largely been consolidated with larger financial centers.

Telecommunications Infrastructure and Cities

While the initial development of international 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 comparative advantages possessed by these centers. Among the advantages of optical fiber systems are their large carrying capacity. the speed at which they transmit information, their signal strength. and their high security. However, 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 arc 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.

In the United States and other nations, optical fiber systems are being installed along transportation right-of-ways, often following the railroad routes established in the nineteenth century. In the United States. 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 Ft. 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 district of the largest cities in the United States, new intra-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 150 miles of fiber that not only provides access to their communications satellite park. but also serves as an alternative to the intra-regional public switched network. 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 9-mile fiber system along Los Angeles' Wilshire Boulevard corridor. 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.

A similar process is underway in the United Kingdom 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."(5) Mercury Communications is building a fiber system with hubs in London, Manchester, and Birmingham, that uses the rights-of-way of British Rail to link cities, and the unused ducts of the London Hydraulic System for its fiber system within London. In Western Europe as a whole, the emergence of new communications technologies is heightening the regional differences in the availability of advanced telecommunications. As is the case in the United States, these disparities are having 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 from rapidly reaching the necessary scale economies of large information markets."(6)

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 the next section will demonstrate, advanced telecommunications systems are encouraging the agglomeration of globally based financial, legal and advertising services within a relatively limited number of urban hubs. P.W. Daniels has observed this trend in his book: Service Industries: A Geographical Appraisal. Daniels observes that "producer services are highly centralized activities with disproportionate representation in the largest urban centers.(7)

Multinational Banking

As shown in Figures 1 and 2, the number of American bank branches overseas and foreign bank offices in the U.S. 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.

Sources: 11/73 - 11/81 Cho, Kong Multinational Banks, Their Identities and Determinants, UMI Research Press, Ann Arbor, MI, 1983. 1985, Extrapolated from American Banker, Foreign Banking in the U.S., 2/14/86 (Does not include representative offices).   Sources: 1960 - 1980 Cho, Kong Multinational Banks, Their Identities and Determinants, UMI Research Press, Ann Arbor, MI, 1983. 1985, Extrapolated from American Banker, Foreign Banking in the U.S., 2/14/86 (Does not include representative offices).

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. In addition. the agglomeration of services in these cities facilitates the face-to-face contact that provides the raw material for decision-making.

As Figure 3 shows. New York's role as a global city has resulted in its attracting 405 foreign bank offices, which is 43 h of all such offices in the United States. This dominance is even more striking when one considers, as shown in Figure 4, that foreign bank assets in New York amount to over $248 billion, which is 59% of all such assets in the U.S. Although New York City plays a dominant role in the global economy, Figures 3 and 4 also show a handful of additional U.S. cities which 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 8996 of the assets are located in the cities shown in Figures 3 and 4. Both San Francisco, with its historic role as a center for finance since the nineteenth century gold rush. and Los Angeles. whose growth as a financial center is in pan 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 midwestem 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.

Just as the location of foreign bank offices and assets reflect the concentration of U.S. based international activity, the location of U.S. bank branches (which are the most common American bank facilities overseas) and their assets highlights the concentration of foreign based international activity (Table 1). 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.(8)

Table 1: U.S. Member Bank Branches: 1985

Location Number of Branches: Assets Europe     Belgium France W, Germany Greece Italy Netherlands Spain Switzerland United Kingdom Total Europe: 9 12 18 21 22 3 15 12 68 180 7.4 10.3 6.2 2.3 4.5 1.0 3.9 2.8 112.4 150.4 Caribbean     Bahamas Cayman Island Total Caribbean: 74 91 165 47.9 37.0 84.9 Asia     Hong Kong India Indonesia Japan Korea (South) Phillipines Singapore Total Asia: 73 10 5 30 19 15 25 177 11.3 0.9 1.0 18 3.4 3.5 10.1 54.2 All U.S. Branches: 916 329.2

Source: Federal Reserve Board, Washington, DC.

London's emergence as the largest center for Euromarket activity has resulted in the United Kingdom having the largest concentration of branch locations and assets; in fact, as a percentage of European countries listed, the United Kingdom contains 74% of American branch assets and 38% of American 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 American 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 off-shore 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.(9)

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. The latter were once relay points used to regenerate the signal for Cable and Wireless' network that linked the British Empire. The Cayman Islands' relay stations have since been upgraded with sophisticated telecommunications equipment, and by utilizing "shell" branches, which often amount to little or no more than a street address, smaller banks can "legally" transact Euromarket activities from their home office and larger banks can take advantage of the lenient tax structure in the Caribbean.

Advertising Agencies

Apart from financial institutions, additional 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."(10) 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.(11)

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 transmission.

 

Law Firms

Another means of examining the development of global information hubs is to analyze the global location of law firms. The location of U.S. law firms was traditionally determined by the need for access to the local courthouse. Today, law firms are behaving like other service industries and are increasingly following their clients to locations far removed from their home city or nation. This branching effect mirrors the movements of mutinational enterprises to information hubs where clients form agreements and draft contracts.

An analysis based upon a survey by the Legal Times of the 500 largest American 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 American 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. With the removal of this regulatory impediment. one can expect the concentration of law firms in Tokyo to increase.

International Accounting Firms

In contrast to law firms and advertising agencies, the accounting profession in the United States has long had an international character, for example. Peat. Marwick. Mitchell, and Co. and Price, Waterhouse and Co. were originally founded in England, while Coopers and Lybrand is based upon a merger of British and American firms. As a recent study noted

"... it is vital for an accountancy firm dealing with a large multinational corporation to be able to offer a worldwide network of offices and. especially offices in the big international Financial centers where most of the corporate action still is. Bids for audit accounts often stress the layout of office locations."(12)

Implications for Urban and Regional Development

If the mayor of a large city wanted to encourage existing firms to expand their operations and new firms to migrate to a given city, the traditional approach would be to provide low-cost land through urban renewal, tax abatements or subsidized loan as to encourage construction, and/or to provide new infrastructure such as a transportation improvements or access to cultural and educational facilities. These approaches are based on the image of a city as a bounded entity not influenced by external events. This paper highlights the importance of technological and economic forces in fostering urban growth and development in a comparatively small number of major cities. Clearly, no single force has led to the preeminence of New York. London, and Tokyo as world financial capitals. Rather, the synergy produced by the deregulation of the Financial markets, the globalization of services, and the availability of advanced communications systems is leading to the dawn of new "city-states," that are geographically separate but functionally integrated.

Towards a Global City

This paper has examined two mutually reinforcing trends: the increased investment in telecommunications infrastructure designed to serve major metropolitan centers, and the growing agglomeration of advanced business services within 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 handful of global cities are able to serve the specialized needs of information intensive firms. By linking these cities with sophisticated telecommunications systems their historic comparative advantages as hubs for information and trade activities are enhanced. Such cities as New York, Tokyo, and London are already witnessing the immigration of banks, law firms, and advertising agencies into their central business districts, thus creating increased demand for scarce urban land. Telecommunications systems that permit round-thc-clock communications have created a "global city" in which ideas and information that are generated in one location are converted into decisions and services that are electronically transmitted to other urban centers.(14)

Deregulation is reinforcing this development process by encouraging the installation of the most sophisticated systems in urban centers that already are the hubs for leading Financial and business services. Furthermore, regulatory policies, as Robert Bruce notes, are influencing the location of new communication systems: "Administrations are aware that multinational enterprises seek to locate their network nodes to take advantage of the most flexible regulatory environments."(15) The development of new telecommunications systems is clearly facilitating the globalization of world Financial markets and increasing linkages among principal world cities. With increased competition, policy makers will be required to give greater attention to the role of telecommunications in the location of economic activity."(16)

 

Notes

1. T.J. Noyelle and T.M. Stanbach Jr., The Economic Transformation of American Cities (Rowman and Allenheld; 1984).

2. Group of Thirty, The Foreign Exchange Market in the 1980s (New York, 1985).

3. N. Hewlett and J. Toporowski, All Change in the City, Special Report No. 222 (London: Economist Publications, 1985).

4. C. P. Kindlebert, Economic Response: Comparative Studies in Trade, Finance, and Growth (Cambridge, MA: Harvard University Press, 1978).

5. C. Johscher, "Telecommunications Liberalization in the United Kingdom," in M.S. Snow (ed.), Marketplace for Telecommunications: Regulation and Deregulation in Industrialized Democtacies (New York: Longman, 1984).

6. J.B. Goddard and A.E. Gillespie, Advanced Telecommunications and Regional Economic Development, Center for Urban and Regional Studies, University of Newcastle Upon Tyne, 1986.

7. P.W. Daniels, Service Industries: A Geographical Appraisal (London and New York: Methuen, 1985, p. 212).

8. Saskis Khoury, Dynamics of International Banking (New York: Prager, 1980).

9. Kunio Inoue, "Tokyo Opens Up: The Japanese Money Market," Euro-Asia Business Review, Vol. 5, No. 1 (January, 1986, 8).

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

11. Roy King, "Multinational Marketers: Some Current Concerns," in Advertising Age Yearbook (Chicago, IL: Crain Books, 1984).

12. P.W. Daniels, A. Leyshon and N.J. Thrift, U.K. Producer Services: The International Dimension, Working Paper on Producer Studies, St. David's University College, Lampeter and Univeisity of Liverpool, August 1986, p., 15.

13. Independent Commission for World Wide Telecommunications Development, The Missing Link, Switzerland, 1984.

14. See Manual Castells, "High Technology, Economic Policies and World Development," Berkeley Roundtable on the International Economy, May 1986.

15. R. Bruce, "IIC Study of Telecommunications Structures," Intermedia, Vol. 13, No. 6, November (1985).

16. The Author would like to acknowledge the valuable contribution that Andrew Dunau has made to this research.

 

Originally published in Telecommunications: A Strategic Perspective
on Regional , Economic and Business Development.
Estabrooks and Lamarche (eds.) 1987.
The Canadian Institute for Research on Regional Development