By Fiona Morrill, Financial Services Research Officer in the Economic Development Office
Last week (4/07/17), Edouard Philippe, the French prime minister, outlined a series of measures to attract international businesses to Paris, with the aim of making the city the “number one financial centre in Europe after Brexit”. These measures include: scrapping the highest bracket of payroll tax on finance employees and lower corporation tax rates; reviewing financial regulation; and establish an international tribunal in Paris to handle financial cases in English, reflecting the prevalence of English law in financial contracts[1]. While Paris is undoubtedly trying to emulate the success of London as the world’s leading global financial centre, London’s attractiveness to international firms goes beyond its competitive tax regime, strong regulatory regime, robust legal framework, and the use of the English law and language.
A couple of weeks ago (23/06/17), our research manager Ed looked at why firms continue to choose London as a base – its size, thriving and talented population and workforce, and growing network of innovative and competitive business services. This week, we’re looking at how London stacks up against Paris and other major European centres as a place to raise finance, providing firms with the benefits of deep and liquid capital pools and financial services expertise, as well as what it gives back to the UK economy.
Source: Data taken from the World Federation of Exchanges, the Bank for International Settlements, the World Trade Organisation, Eurostat, Helaba, the Office for National Statistics, the Organisation for Economic Co-operation and Development and fDi Intelligence.
Financing business growth, capital investment and job creation
As a cluster of highly specialised financial and related professional services firms, drawing on a pool of talented, highly-skilled staff, London continues to draw internationally mobile firms to its stock exchange. 15% of all listed foreign companies choose the London Stock Exchange to list their shares and raise capital to finance growth, and the LSE has over double the number of international firms listed than its closest European competitor, Euronext, based in Paris. If we look at the flow of funds based on initial public offerings (companies listing shares on the exchange for the first time) in 2017 so far, newly listed companies have raised $3.4 billion in London, compared with $590 million in Paris.
Firms can also borrow to help fund job-creating investment and spending – the UK’s has the highest ratio of credit to the private sector as a percentage of GDP, illustrating that the UK punches well above its weight when it comes to lending and supporting business activity. Foreign governments, businesses, and financial services firms choose London as a place to raise debt finance; with the value of outstanding international funding issued in London at $2.8 trillion, over double the value of London’s closest European competitor, France. The world’s largest corporate Masala bond started trading on the London Stock Exchange in March, following several high profile Rupee bond issuances, reflecting the diverse and international nature of finance in London[2].
Managing risk and promoting trade
As well as raising finance here, firms choose to trade currencies to manage risk in the UK, either through their treasury functions or directly – over a third of total foreign exchange turnover is traded in the UK, almost double the average daily turnover of its next closest competitor, the US. If we look at euros specifically, the UK accounts for 43% of global trading in euros, over eight times the amount of euros traded in France. The forex market is critical in facilitating global investing, by allowing companies to buy and sell foreign assets and securities, as well as supporting import and export trade. This is supported by the fact that the UK accounted for 17% of total global financial services exports in 2016, while Germany, France and Ireland accounted for 6%, 3% and 3% respectively.
What does this mean for London and the UK?
London’s specialised and interlinked ecosystem of complementary financial and advisory services contributes to its strengths as a both a global and European hub for firms looking to grow and trade, and enables the financial services industry to act as an engine of growth and employment in the UK. As well as FS being the largest net contributor to the UK’s trade surplus in services, with London accounting for over half of FS exports, London acts as a draw for international investment. London attracted 149 overseas direct investment (ODI) financial services projects between December 2013 to November 2016, creating over 5,000 jobs, and London’s financial services industry employs over double the amount of workers as Frankfurt’s, and generates over six times the amount of economic output as Dublin. As Ed’s blog notes, a high proportion of London’s workers are graduates – contributing to the highly-skilled and highly-productive nature of financial services.
Looking ahead, the outcome of Brexit negotiations on the UK’s access to a highly-skilled and talented labour pool, as well as market access to our largest financial services trading partner, the EU27, will have implications for the competitiveness of the financial services industry, and its ability to contribute to give back in terms of generating trade and investment, providing jobs, and contributing to output and tax revenues. However, the City’s comparative advantage as an outward-looking centre for international commerce, finance and trade, will remain fundamental to its future competitiveness.
[1] https://www.ft.com/content/464c67d8-630e-11e7-91a7-502f7ee26895
[2] https://www.lseg.com/resources/media-centre/press-releases/london-stock-exchange-welcomes-largest-corporate-bond-issuance-cis-region-2014