Britain's Performance in International Financial Markets
Smith, A. D., National Institute Economic Review
There have been few attempts to compare and explain inter-country contrasts in the efficiency and performance of service industries. This largely reflects the inapplicability to services of productivity comparison techniques developed for manufacturing industries, relying as they do on physical output measures and focussing essentially on labour inputs. A study for the National Institute,(1) shortly to be published, endeavours to break new ground by comparing the performance of the British commercial and merchant banks with that of the relevant financial institutions in our major competitor countries on the basis of the shares obtained by these institutions in selected international financial markets.
With the advent of the liberalisation of the European Economic Community's internal market it was thought that such a study would have special interest at the present time. It was felt necessary to test the view that, in contrast to more pessimistic expectations voiced about the likely fate of the United Kingdom's manufacturing industry in 1973, Britain's financial service industries might currently be in a position to |clean up' at the expense of continental competitors.
The sample of financial markets chosen for analysis was specified on the basis of their size and representativeness, the selection being strongly biased in favour of financial services that are traded in international rather than domestic arenas. Country shares of such markets are a superior guide to the inherent competitiveness of their respective financial institutions than are domestic financial markets where for a variety of reasons, regulatory or less formalised, national institutions enjoy advantages that owe nothing to their intrinsic efficiency.
The chosen markets are: the market for foreign exchange; the market for merger and acquisition advice; the market for syndicated bank loans; the Eurobond market; the international equity market; the Eurocommercial paper market; and the market for Euro medium-term notes. For each of these markets country performance has been measured by aggregating on the basis of the nationality of the individual major participating financial institutions the market shares obtained. The results thus reflect the relative performance of British banks regardless of the global location of their operations, and not the performance of the City - comprising as it does financial institutions of all nationalities - with that of overseas financial centres.
Changes in country shares during the 1980s have been traced, and the picture at the end of that decade analysed in depth, for each market. The results reveal that whilst the United Kingdom has won substantial shares in all the markets examined in none did these shares approach those commanded by the most successful country, the United States. Britain's performance ranged from second place (in each case after the United States) in the markets for foreign exchange, M&A advice, syndicated loans, commercial paper and medium-term notes, to third place (after the United States and Japan) in the market for international equities down to an also-ran position in international bonds and Eurobonds.
The accompanying table constitutes an attempt to aggregate the results obtained for these individual financial markets using as weights typical fee/margins charged for the services. Although subject to some statistical qualifications it clearly reveals that the United States plays an undisputed dominant role accounting for about two thirds of the world market for these services, followed at some distance by Britain with rather less than a fifth of the total. As for the rest of the pack - Japan, France, Switzerland, Canada, Germany, Australia, the Nordic group, the Netherlands, Italy and Belgium - none won shares in excess of 10 per cent of markets which, clearly, are the preserve of a handful of industrialised countries.
It is illuminating to compare national performances quantified in this way with country size as measured by GDP. …