Final Report Summary - LUSIFUNDS (Securities markets, international financial centres, and regional resilience. A comparative analysis of Luxembourg and Singapore as strategic nodes in investment funds’ global production networks)
Overall, this project aimed to develop a research agenda for studying specialised financial centres and their strategies to build resilient financial economies. This research started from the observation that – alongside with its rising significance as an industry – the finance sector underwent profound organisational changes. It industrialised, increased its complexity, deepened its global division of labour and continued to specialise by adapting to manifold processes of liberalisation, consolidation and efficiency pressures with far-reaching organisational implications to its global structure. In some urban economies/regions, the financial industry has taken on the role of an engine for economic growth, thus, shaping highly dynamic, yet, often very specialised international financial centres (IFCs). IFCs are the locations for a complex mix of financial and finance-related firms, regulatory and government bodies as well as their differing interests and strategies. They are, hence, the ‘production sites’ of global finance. Amidst all the above mentioned changes, the top-ranking IFCs have remained relatively stable over the past two decades as the examples of London, Singapore, and Luxembourg show.
Ruptures and crises are inherent elements of the present ‘securitised’ financial system, with the asset management industry being among the main drivers. By understanding ‘the local’, that is the on-site inter-firm and firm-regulatory relationships, in order to better comprehend ‘the global’, this comparative study between two specialised investment fund (IF) centres, Luxembourg (EU) and Singapore (ASEAN), addressed the question: How are IFCs able to confront ruptures and discontinuities and compete successfully by creating local resilience capacities that go beyond regulatory arbitrage?
In doing so, this project scrutinised the applicability of the framework of the global production network (GPN) to finance. Connecting the GPN framework to finance is a novelty. It permits a fresh, more comprehensive research perspective than the prevalent efficient market hypothesis. By applying the GPN framework, we link the asset management’s global industrial organisation with an IFC’s potential to capture ‘value’ from these premium financial activities and to enhance their future potential to do so. If successful, this, in turn, fosters the IFC’s own economic development. The project’s empirical findings suggest that this GPN heuristics is applicable to all financial products. This insight strengthens our conceptualisation of finance in at least two ways.
First, we can better explain the reasons for the increasingly concentrated geography of financial production. As shown through the example of IFs, each financial product requires a specific combination of specialised knowledge and a particular regulatory environment, both found in only few IFCs. Second, and referring to the contemporary ‘swollen’ and potentially unstable financial system, this research also contributes to resuscitating a critical debate on regional development strategies of IFCs primarily relying on the financial industries to foster economic growth (‘finance-led’ development).
In order to scrutinise the GPNs of investment funds, the project’s aim in the first year was to carve out the configuration of, key actors in, and (power) relations within the IFs’ GPNs. A subsequent comparison between the GPNs in Luxembourg and Singapore highlighted commonalities and differences against the background of their distinct historical developments (context analysis, archive work, desk research), but also studied elements of local resilience building. Deriving from the conceptual GPN understanding, the empirical work consequently applied structure-discovering methods, not least because of the asset management industry’s highly diverse product family, mirrored in respectively diversified GPNs. We conducted expert interviews with a broad range of industry experts in Luxembourg, London, Singapore, complemented by an industry survey in Luxembourg. The project’s second half primarily engaged with the preparation and analysis of the collected data, as well as with writing up and publishing first results. Thus far, the project’s main results suggest the following preliminary conclusions.
The application of the GPN framework on finance reveals the driving forces of an IFC’s specialisation and its inter-connectedness with other IFCs. Yet, the new framework also cautions against three assumptions common in other industries: 1) the misleading definition of ‘value’ in securitised finance, 2) the necessity to engage with increasingly intricate, transboundary epistemisation processes to produce financial complexity and opacity, 3) the distinctiveness of governance forms among financial GPNs with proliferated private contracting and ‘dark’ trading activities.
The GPN framework allows to disentangle mechanisms of IFC specialisation and their perpetuation. Scrutinising the GPNs of IFs allows to link regulation with functional up-/downgrading processes of firms and places. For example, depository banks provide large-scale businesses typically located in ‘back office’ IFCs like Luxembourg. Regulators introduced surveillance functions on depositories. These functions require more skills and are hence of higher value. The depositories’ strategic upgrading as new ‘watch dogs’ in their GPNs also boosted their host IFC’s importance. Consequently, these processes also contributed to the upgrading of Luxembourg’s relative position to other IFCs. The specialisation an IFC exploits originates in part in its historical formation; it is path dependent.
A redefinition of the facile term ‘financial centre’ would capture their functionalities better. Both, path dependence and functional upgrading suggest the need for a more precise definition that includes an IFC’s functional specialisation and the deepening of its connectivities with other IFCs. Such inter-relationships comprise e.g. division of labour and financial flows. This new definition would also exceed the notoriously political distinction between on-/off-shore centres. We propose a ‘platform’-concept with features that explain the complementarity and commonality of IFCs.
The project’s findings also highlight the urgency to scrutinise the role/s of the state in building the financial centre of the future. We found that the development bodies of the IFCs London, Luxembourg and Singapore pursue highly distinct strategies in order to establish financial growth in general and competitive advantages in particular. States themselves act as ‘innovative forces’, not only with regard to regulatory amendments in finance, and are driven by the under-researched public-private power relationships in IFCs. This issue requires further empirical investigation against the backdrop of regional integration schemes like TTIP and TiSA, and with regard to the question how financial centres can be hosts to a (more) socially productive financial industry in the future.
The outlined preliminary results have substantial potential for further impact and use, as well as socio-economic impacts, which are suggested to be of interest to policy makers in financial centres and industry representatives alike. GPN thinking allows for an alternative comprehension of the complexities between IFCs. It therefore allows to identify and assess the potential impact of dynamics in other IFCs on one particular IFC more profoundly. For both actor groups such an understanding of global finance has strategic implications. Further, the project’s results are expected to stimulate both an academic and policy discussion about disparities among IFCs, the future development of IFCs as the production sites for global finance, and how an IFCs’ size, legal and business environment, and its degree of connectivity influences its own development.
Ruptures and crises are inherent elements of the present ‘securitised’ financial system, with the asset management industry being among the main drivers. By understanding ‘the local’, that is the on-site inter-firm and firm-regulatory relationships, in order to better comprehend ‘the global’, this comparative study between two specialised investment fund (IF) centres, Luxembourg (EU) and Singapore (ASEAN), addressed the question: How are IFCs able to confront ruptures and discontinuities and compete successfully by creating local resilience capacities that go beyond regulatory arbitrage?
In doing so, this project scrutinised the applicability of the framework of the global production network (GPN) to finance. Connecting the GPN framework to finance is a novelty. It permits a fresh, more comprehensive research perspective than the prevalent efficient market hypothesis. By applying the GPN framework, we link the asset management’s global industrial organisation with an IFC’s potential to capture ‘value’ from these premium financial activities and to enhance their future potential to do so. If successful, this, in turn, fosters the IFC’s own economic development. The project’s empirical findings suggest that this GPN heuristics is applicable to all financial products. This insight strengthens our conceptualisation of finance in at least two ways.
First, we can better explain the reasons for the increasingly concentrated geography of financial production. As shown through the example of IFs, each financial product requires a specific combination of specialised knowledge and a particular regulatory environment, both found in only few IFCs. Second, and referring to the contemporary ‘swollen’ and potentially unstable financial system, this research also contributes to resuscitating a critical debate on regional development strategies of IFCs primarily relying on the financial industries to foster economic growth (‘finance-led’ development).
In order to scrutinise the GPNs of investment funds, the project’s aim in the first year was to carve out the configuration of, key actors in, and (power) relations within the IFs’ GPNs. A subsequent comparison between the GPNs in Luxembourg and Singapore highlighted commonalities and differences against the background of their distinct historical developments (context analysis, archive work, desk research), but also studied elements of local resilience building. Deriving from the conceptual GPN understanding, the empirical work consequently applied structure-discovering methods, not least because of the asset management industry’s highly diverse product family, mirrored in respectively diversified GPNs. We conducted expert interviews with a broad range of industry experts in Luxembourg, London, Singapore, complemented by an industry survey in Luxembourg. The project’s second half primarily engaged with the preparation and analysis of the collected data, as well as with writing up and publishing first results. Thus far, the project’s main results suggest the following preliminary conclusions.
The application of the GPN framework on finance reveals the driving forces of an IFC’s specialisation and its inter-connectedness with other IFCs. Yet, the new framework also cautions against three assumptions common in other industries: 1) the misleading definition of ‘value’ in securitised finance, 2) the necessity to engage with increasingly intricate, transboundary epistemisation processes to produce financial complexity and opacity, 3) the distinctiveness of governance forms among financial GPNs with proliferated private contracting and ‘dark’ trading activities.
The GPN framework allows to disentangle mechanisms of IFC specialisation and their perpetuation. Scrutinising the GPNs of IFs allows to link regulation with functional up-/downgrading processes of firms and places. For example, depository banks provide large-scale businesses typically located in ‘back office’ IFCs like Luxembourg. Regulators introduced surveillance functions on depositories. These functions require more skills and are hence of higher value. The depositories’ strategic upgrading as new ‘watch dogs’ in their GPNs also boosted their host IFC’s importance. Consequently, these processes also contributed to the upgrading of Luxembourg’s relative position to other IFCs. The specialisation an IFC exploits originates in part in its historical formation; it is path dependent.
A redefinition of the facile term ‘financial centre’ would capture their functionalities better. Both, path dependence and functional upgrading suggest the need for a more precise definition that includes an IFC’s functional specialisation and the deepening of its connectivities with other IFCs. Such inter-relationships comprise e.g. division of labour and financial flows. This new definition would also exceed the notoriously political distinction between on-/off-shore centres. We propose a ‘platform’-concept with features that explain the complementarity and commonality of IFCs.
The project’s findings also highlight the urgency to scrutinise the role/s of the state in building the financial centre of the future. We found that the development bodies of the IFCs London, Luxembourg and Singapore pursue highly distinct strategies in order to establish financial growth in general and competitive advantages in particular. States themselves act as ‘innovative forces’, not only with regard to regulatory amendments in finance, and are driven by the under-researched public-private power relationships in IFCs. This issue requires further empirical investigation against the backdrop of regional integration schemes like TTIP and TiSA, and with regard to the question how financial centres can be hosts to a (more) socially productive financial industry in the future.
The outlined preliminary results have substantial potential for further impact and use, as well as socio-economic impacts, which are suggested to be of interest to policy makers in financial centres and industry representatives alike. GPN thinking allows for an alternative comprehension of the complexities between IFCs. It therefore allows to identify and assess the potential impact of dynamics in other IFCs on one particular IFC more profoundly. For both actor groups such an understanding of global finance has strategic implications. Further, the project’s results are expected to stimulate both an academic and policy discussion about disparities among IFCs, the future development of IFCs as the production sites for global finance, and how an IFCs’ size, legal and business environment, and its degree of connectivity influences its own development.