Policy Update 017 Pre-event Interview No.3

Global Cities: Strategic Roles and Socio-Political Implications

Professor, Department of Sociology, The University of Chicago / Centennial Visiting Professor, London School of Economics

RIETI: You argue that global cities fulfill coordinating roles and functions, rather than compete against each other. For example, in the 1980s, New York fulfilled such roles and functions as the main receiver of capital, and the center for investment decisions and for production of financial innovations, London functioned as the processor of capital through its vast international banking network, and Tokyo served as the main center for the export of capital. However, the past decade or so the pattern of international capital flow has changed significantly. How would you describe the roles and functions of these three cities today?

These cities do compete with one another, but only partially. There is also a division of functions - this is a crucial feature of this network system. Already, in the 1980s, when almost everyone saw competition, I began to find a certain division of functions among New York, London and Tokyo. Emphasizing a division of functions, even if incipient and elementary, enabled me to capture an emergent global system for finance, even if national tasks continued to prevail in each center. Today, it has become far clearer that a global network system is at work. The fact of hierarchy should not veil this division of work. At the top, this division is complex - at the bottom it tends to be a set of gateway functions that articulate national economies (once countries have deregulated and privatized their economies) to the global system.

Not all stock markets, for example, are equal. A division of labor emerges among these centers, a feature that adds to the networking nature of the global market and reflects a major difference between current markets and the pre-1980s period of highly regulated national markets. Both in the 1980s and today, New York fulfilled a very special function: It was and remains the major center for financial innovation. This entails a tight collaboration with legal and accounting experts, and their much-needed creativity. I have described Wall Street as the Silicon Valley of finance. London was and remains the preeminent international banking and financial center - far more international than any other city. And Tokyo became in the 1980s, and remains, the key provider of rather unprocessed capital - an exporter of the raw commodity, so to speak. By the late 1990s Frankfurt had emerged as an innovative financial center, as well as one of the most aggressive. Frankfurt "raided" London for top-level financial software designers and other talent. The German center worked hard, and in a very focused fashion, to reinvent itself as a financial center. And it has now tried to buy the London Stock Exchange twice.

Paris' route to the top, on the other hand, is considerably different. Paris is one of the top five global financial centers due to the structural features of its banking and financial system (a limited number of financial institutions account for a large share of national capital, enabling it to cross the threshold into global capability). Moreover, this European capital has had a long and strong tradition of international business, including leadership in several sectors. To achieve global status, however, has entailed the entry of Anglo-American specialized service firms in accounting, legal and other corporate support services. The decision by Paris to try to consolidate several European markets has resulted in the formation of Euronext - Paris, Amsterdam and Brussels - and has added to Paris' importance. Euronext's capitalization puts it close behind London's.

An issue that jumps out of this discussion is the continuing weight of major business centers in an increasingly internationalized and digitized system. It is particularly remarkable in the case of finance, the most globalized and electronic of all industries, and one that produces a dematerialized product that can circulate instantly worldwide. These features suggest that location should not matter. In fact, geographic dispersal would seem advantageous given the high cost of operating in major cities. Further, the last 10 years have seen an increased geographic mobility of all types of corporate expertise. So why do we have business centers at all?

At least three reasons present themselves:
1) The importance of social connectivity and central functions. First, although current communications technologies do indeed facilitate geographic dispersal of economic activities without losing system integration, they also strengthen the importance of central coordination and control functions for the global enterprise. Indeed, we can observe that, for firms in any sector, operating a widely dispersed network of branches and affiliates in multiple markets has made central functions far more complicated. Their execution requires access to top talent, not only within headquarters but also in the innovative milieu - technology, accounting, legal services, economic forecasting and concomitant specialized corporate services.

Major centers have massive concentrations of state-of-the-art resources that allow them to maximize the benefits of the new communication technologies and to govern the new conditions for global operations. Even electronic markets such as NASDAQ and E*Trade rely on traders and banks that are physically located someplace, with at least a few in a major financial center. The question of risk and how it is perceived and handled is yet another factor that makes location of operations in a center useful, given the close and informal contact with top-level executives from many different sectors, and with those having high levels of international experience.

This highlights, then, that for firms to maximize the benefits of new information technologies, they need not only the telecommunications infrastructure but a complex mix of other resources. Most of the value added that these technologies produce for advanced service firms lies in so-called externals. This means the material and human resources: state-of-the-art office buildings, top talent, and social networking infrastructure that maximizes connectivity. Any town can have fiber optic cables, for example, but this is not sufficient.

Emerging with greater clarity is the meaning of "information," of which there are two types. (Sassen 2001: chapter 5). One is the bare fact, which may be complex yet is standard knowledge: the level at which a stock market closes, privatization of a public utility, the bankruptcy of a bank. A far more difficult type of information, akin to an interpretation, evaluation, or judgment entails negotiating a series of "bare facts" and interpretations of a mix of facts in the hope of producing a higher order of data. Access to the first kind of information is now global and immediate from just about anyplace in the developed world; the second type of information, however, requires a complex blend of elements - the social infrastructure for global connectivity - that gives major financial centers a leading edge.

It is possible, in principle, to reproduce the technical infrastructure anywhere. Singapore, for example, has technical connectivity matching that of Hong Kong. But does it have Hong Kong's social connectivity? When the more complex forms of information required to execute major international deals are not obtainable from existing databases, no matter the price offered, then the needed component is the social information loop. As valuable as database technology is, the associated de facto interpretations and inferences that come with "bouncing off" information among talented, informed people cannot be underestimated. It is the weight of this input that has given a new importance to credit rating agencies: Part of the rating has to do with interpreting and inferring. When this interpreting becomes "authoritative" it becomes information available to all. The process of translating inferences and interpretations into information takes a unique mix of talent and resources. In brief, business centers provide the social connectivity that allows a business to maximize the benefits of its technical connectivity.

2) Cross-border mergers and alliances. Corporations operating in a global economy need prodigious resources, a trend that is leading to rapid mergers and acquisitions. These are occurring on a scale few would have foreseen as recently as the early 1990s. A recent development reveals mergers among, respectively, financial service firms, accounting firms, law firms, insurance brokers, and even across sectors. A similar evolution is also possible for the global telecommunications industry, which will consolidate in order to offer state-of-the-art, globe-spanning services to its clients.

Yet another kind of "merger" may be the consolidation of electronic networks that connect a select number of markets; a number of these networks connect markets set up only in the past few years. In 1999, NASDAQ (the second largest U.S. stock market) established NASDAQ Japan and, in 2000, NASDAQ Canada. This territorial spread has provided investors in Japan and Canada direct access to the U.S. market. Europe's more than 30 stock exchanges have been seeking to shape various alliances. Euronext (NEXT), Europe's largest stock exchange merger, reflects an alliance among the Paris, Amsterdam and Brussels bourses. The Toronto Stock Exchange has joined an alliance with the New York Stock Exchange (NYSE) to create a separate global trading platform. The NYSE is a founding member of a new global trading alliance, the Global Equity Market (GEM), which includes 10 exchanges, among them the Tokyo Stock Exchange and NEXT. Smaller exchanges are also joining forces: in March 2001 the Tallinn Stock Exchange in Estonia and its Helsinki counterpart created an alliance. A novel pattern is now observable: hostile takeovers, not of firms but of markets, such as the attempt by the owners of the Stockholm Stock Exchange to buy the London Stock Exchange (for a price of U.S. $3.7 billion).

These instances illustrate the complexity of the current system and the fact that it cannot be seen only in terms of competition among centers. The schema also reflects a networking division of functions and strategic alliances. These developments may well ensure the consolidation of a top level of select business centers at the apex of the worldwide network of about 40 cities through which the global economy operates.

3) Denationalized elites and agendas. National attachments and identities are weakening for both global enterprises and their customers. This trend is particularly strong in the West but may develop in Asia as well. Deregulation and privatization, crucial to globalization in regions of the South, have partly "denationalized" what used to be national business centers. Global financial products are accessible in national markets and national investors can operate in global markets. For instance, some of the major Brazilian firms now list on the New York Stock Exchange, bypassing the Sao Paulo exchange, a new practice that has caused somewhat of an uproar in special services circles in Brazil. While this is as yet inconceivable in Asian markets, the practice may well change, given the growing number of foreign acquisitions of major firms in several countries. Another indicator of this trend is the fact that the major U.S. and European investment banks have set up special service offices in London to handle various aspects of their global business. Even French banks have established a portion of their global specialized operations in London, something which was inconceivable a decade ago and is still not avowed in national rhetoric.

One way of describing this process is as an incipient and highly specialized denationalization of particular institutional arenas (Sassen 1996: chapter 1). It can be argued that such denationalization is a necessary condition for economic globalization as we know it today. The sophistication of this system lies in the fact that it needs to involve only strategic institutional areas - most national systems can be left essentially unaltered.

China is a good example. It adopted the international accounting rules necessary to engage in international transactions in 1993. To do so it did not have to change much of its domestic economy. Japanese firms operating overseas adopted such standards long before Japan's government considered requiring them. In this regard, the "wholesale" side of globalization is quite different from the global consumer markets, in which success necessitates altering national tastes at a mass level. This process of denationalization has been strengthened by state policies that enable privatization and foreign acquisition. In some ways one might say that the Asian financial crisis has functioned as a mechanism to denationalize control, at least partly, over key sectors of economies which, while allowing the massive entry of foreign investment, never wholly relinquished that control.

Global cities enable, and are partly constituted through, what we think of as a new subculture: a move from the "national" version of international activities to the "global" version. The longstanding resistance in Europe to mergers and acquisitions and especially to hostile takeovers, or to foreign ownership and control in East Asia, signals national business cultures that are incompatible with the new global economic culture. We could posit that major cities, along with the variety of so-called global business meetings (i.e., World Economic Forum in Davos and other similar occasions), contribute to denationalizing corporate elites. Whether this is good or bad is a separate issue; but it is, arguably, one of the conditions for setting in place the requisite systems and subcultures for a functioning global economic system.

Interview conducted by Takako Kimura, online editor, on March 15, 2005.

March 15, 2005