New research commissioned by the Financial Conduct Authority (FCA), and published by The Productivity Institute (TPI), asks ‘are financial services hubs a route to improving regional economic growth outside London?’ and finds that adopting a less heavily centralised financial services model could boost regional economies.
In “The role played by financial services clusters and centres in local, city and regional growth”, Alfonso Silva Ruiz, Professor Michiel Daams, Professor Philip McCann, Professor Raquel Ortega-Argilés and Professor Colin Mayer of The Productivity Institute assess the economic impact of financial services hubs, explore how they contribute to GDP growth, the relative contribution of London vs regional hubs and whether regional hubs generate distinct growth benefits beyond additional growth in London.
Addressing regional inequalities, distributing growth and boosting productivity are top policy priorities for Andy Burnham’s new government, and he has promised “growth in every postcode”. This research finds that strengthening regional financial centres could support local productivity gains; proximity to a financial centre improves firms’ access to investment and other financial services which can help them to grow.
The approach
Researchers took a threefold approach to set the UK in context and make comparisons with comparable European economies. Data sources included Smart Data Foundry and Sage’s SME Performance Pulse, Productivity Institute Data Lab datasets, ONS, Bank of England, the Data City, and more.
1) TPI researchers conducted an OECD-wide investigation and literature review into the available evidence on links between financial services centres and their role in fostering regional and national growth. This provided the framing for further empirical approaches using firm-level data across all UK local authorities.
2) With this framing, TPI developed a gravity-type model analysis of the economic geography of UK growth and prosperity, integrating detailed firm-level data across all local authorities of the UK. Some of the SME data used in this study was provided through our data partnership with Sage, enabling the study of the financial strength and buoyancy of the local ecosystem of SMEs and their proximity to banking hubs.
3) The empirical approach was then extended to contrast the UK with comparable European economies, to understand how the UK may differ from European countries in the distribution of economic productivity and growth.
This research demonstrated that the growth and prosperity transmission mechanisms within the UK between financial services clusters and their wider regional hinterlands are typically very localised, whereas London has a major impact on the economic geography of prosperity of the UK.
Key findings include:
Financial services activity is strongly associated with local productivity and income benefits, but these are highly concentrated in the vicinity of the hub and benefits decline sharply with distance from financial centres, particularly London. The paper notes that the UK is particularly centralised when compared with other similar nations.
Despite increased digitisation in financial services, location seems to play an important role in access to, and the cost of, finance; proximity to hubs brings with it access to networks.
Policy recommendations:
Instead of just looking at how much financial activity happens in the UK, we need to look at where it happens. The evidence suggests that building stronger financial centres outside London could boost local economies and job creation.
But this poses the question of whether strengthening regional finance centres would create new economic growth for those regions, or if it would just mean shifting existing economic activity from London to the regions. This is where the European comparators can help.
In most European countries, medium-sized and smaller cities have thriving financial sectors that support local businesses and regional growth. But in the UK, our second and third-tier cities don't attract the same investment. Instead, London's financial influence dominates the entire country, while regional financial hubs have minimal impact beyond their immediate area.
Other European regions prosper because, in part, they have strong local banking and financial services supporting their economies. UK regions struggle because financial services activity is so heavily centralised in London and the economic benefit is not felt beyond the hinterland of the City. Strengthening and incentivising regional financial centres on a model similar to our European counterparts, we could unlock greater local economic growth and reduce regional inequalities.
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