Australia as an International Financial Services Management Centre: An Assessment

By Daly, Kevin; Tosompark, Chanikarn Teresa | International Journal of Management, September 2011 | Go to article overview

Australia as an International Financial Services Management Centre: An Assessment


Daly, Kevin, Tosompark, Chanikarn Teresa, International Journal of Management


In general, a financial centre can be defined as 'a place in which there is a high concentration of managed financial institutions and financial markets performing activities which are internationally recognised for their management efficacy, efficiency, and legal standing. In this study we construct a number of traditional and alternative measures to assess the importance of Australia as an International Managed Financial Services Centre relative to other major centres. In particular we draw comparisons between inward/outward international investment positions and the exports of financial services. Due to data limitations, these measures are compared on a country rather than on a city level on which activities of an IFC should be based. Australia's financial sector (gross value added) relative to the overall economy is very similar to that of many other developed economies, such as the US, UK, Japan and Canada, but significantly less than a number of overseas financial centres, most notably Luxembourg, Hong Kong and Singapore. In general our study confirms previous results which support the existence of a positive relationship between an economies openness and inward financial sector direct investment. Furthermore we find that institutional investor's country credit rating, microeconomic and institutional factors of country such as government efficiency, business environment and infrastructure were all positively and significantly related to direct investment of financial services.

Introduction

Internationally numerous reasons have been put forward for the development of an international financial services centre. The most documented of which are; empirical research demonstrates a well-established causal link from financial sector development to economic growth (Akhter and Daly 2009, Levine 2005). Countries that have highly efficient and competitive financial sectors are also likely to be exporting those services along with the creation of direct and indirect jobs and tax revenues.

Australia has arguably a comparative advantage in many parts of its financial sector compared with most other countries in the region. Australia's financial services sector is an important contributor to national output, employment and economic growth. The sector currently accounts directly for around 7.5 per cent of GDP, and employs directly around 390,000 people, or 3.6 per cent of total employment. Indirectly, financial services employs a substantially larger number of people, by way of outsourced legal, accounting, technology, administration, processing and other services. However while Australia is a very open trading economy overall, exports and imports of financial services as a percentage of GDP are, by international standards considerably lower.

It is therefore interesting to assess the relative importance of Australia as a financial services centre regionally and/or globally and examine the nature of the characteristics for a Country or City labelled an International Financial Services Centre.

Measuring the Concentration of Financial Market Activities

The conventional approach to measuring the relative importance of various financial centres is often based on the degree of concentration of international financial activities in equity, bond, credit (as represented by the banking sector), foreign exchange and derivatives markets.

In Table 1 we document the major financial services activities, benefits to consumers/ business/government and list some support services for the activities. Major financial services activates in Australia include Funds Management where as of June 2008 some 89 per cent of those funds originate from Australian pension funds (both institutional and retail), the remainder are sourced offshore 1. Rainmaker's 2007 survey estimate that Australia's share of global pension mutual and sovereign funds is around 0.2 per cent. Regards Investment banking the major activities here include mergers and acquisitions, capital raisings (debt and equity). …

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