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GLOBAL FINANCE AND OFFSHORE FINANCIAL CENTERS:
A CASE STUDY OF THE ISLE OF MAN
SHARON CORKILL COBB
A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY
UNIVERSITY OF FLORIDA
Sharon Corkill Cobb
For Artie and the continuance of insatiable curiosity.
Support to enable this research to take place was given by the University of Florida
Geography Department and the National Science Foundation Grant #SBR-9600490.
Grateful thanks go to my committee members, Drs. Fik, Flannery, McDade, and Warf, for
their wisdom and guidance throughout the whole Ph.D. process, and to Adam Grodek for
cartographic support. My deepest appreciation goes to my advisor and mentor, Dr. Edward
Malecki, who has become not only my "guiding light" in academia, but also my dear friend.
The Corkill family in the Isle of Man and the Cobb family in Jacksonville have been
unwavering in their support and encouragement for me especially over the past four years
and I give them all my love and thanks. From the bottom of my heart, I thank my wonderful
husband, Larry, and children, William and Ellie, for their patience, understanding, and
unconditional love, especially when the going got tough.
TABLE OF CONTENTS
ACKNOWLEDGMENTS ............... ............................ iv
LIST OF TABLES .................................................. viii
LIST OFFIGURES ..................................................... ix
ABSTRACT ....................................................... x
1 INTRODUCTION ............. ..................... .......... 1
Overview .............. ............................. 1
Research Objectives ................ ............................. 3
Research Outline ............... .................... ........... 4
2 GLOBAL FINANCE AND OFFSHORE FINANCIAL CENTERS .......... 8
The Global Financial System ...................................... 8
Offshore Finance and Offshore Financial Centers: A Critique ............. 13
The Rise of OFCs: A New Theoretical Interpretation .................... 21
The Global-Local Debate ................. ................. 21
Regulation ............................................. 24
Regulation of an Offshore Financial Center ..................... 31
Networks ........... ............................... 34
Summary .............. ........................................ 40
3 GROWTH OF AN OFC: CONCEPTUAL FRAMEWORK, RESEARCH
METHODOLOGY, AND PRELIMINARY EVIDENCE ................ 43
Introduction .................................................. 43
Conceptual Framework ................. ........................ 45
Forging Local-Global Links ................. ..................... 50
Locational Dimension .................................. 51
Functional Dimension .................................. 53
Regulatory Dimension ................. ................... 54
Research Methodology ................ ......................... 54
Primary Data ........................................... 55
Secondary Data ......................................... 57
Data Analysis ........................................... 57
Setting the Stage: The Isle of Man as an OFC .................. ....... 59
4 THE GROWTH OF OFFSHORE FINANCE IN THE ISLE OF MAN .... 66
Introduction ................................................. 66
Data Collection Process ................ ........................ 67
Findings ...................................................... 69
Type of Service Provided .................................... 70
The Growth of the Manx Financial Sector ....................... 73
Local-Global Linkages ................. ........................ 81
Networks ................ ........................... 86
5 REASONS FOR GROWTH OF THE ISLE OF MAN AS AN OFC ...... 91
Introduction .................................................. 91
The IOM: A Low Tax Area ...................................... 93
Role of Regulation .............................................. 94
The Importance of Financial Legislation and Regulation ........... 98
W ho is regulated? ..................... ............. 100
Onshore regulation ............... ................. 101
The Role of Networks in Creating the Regulatory Regime ......... 102
Information and influence ............................. 105
Influence ................... ............... 106
The Labor Issue ............................................. 106
The Communications Infrastructure .............................. 110
Geopolitics of Offshore Finance ................................. 111
Summary ................................................... 114
6 MARKETING "IOMPLC" ..................................... 116
Introduction ........................................... 116
Niche Services ................................. ............. 117
Jurisdictional Competition .................................... .. 119
Networks as a Marketing Tool ................. .................. 121
Direct Marketing Efforts ...................................... 122
7 CONCLUSIONS AND THE WAY AHEAD ......................... 128
Growth of the Financial Sector ................................. 128
Revisiting the Role of Regulation ............................... 130
Networks Revisited ................................ ........ 131
Public-Private Interaction as an Economic Development Strategy ......... 133
The Future ......................... ........................ 134
Implications of Structural Changes in Offshore Financial Industry ... 135
Future Directions for the Isle of Man .......................... 137
Further Study of OFCs ....................... ........... 139
A ISLE OF MAN FINANCIAL SERVICES SECTOR QUESTIONNAIRE ... 141
B SUMMARY REPORT OF FINDINGS .............................. 147
C SELECTED AGGREGATE SUMMARIES .......................... 153
REFERENCE LIST ............................... ........... 158
BIOGRAPHICAL SKETCH ........... ................ ............ 173
LIST OF TABLES
2.1. Offshore financial centers ................. ........................ 12
3.1. Financial services firms, 1995 ................................... 63
4.1. Type of survey respondents .................. .................. .. 70
4.2. Respondents by sector ................ ........................... 74
4.3. Specific services provided by firms ................................... 72
4.4. Descriptive statistics for the variable "Years" ........................... 74
4.5. Descriptive statistics for the variable "employment" ...................... 78
4.6. External linkages .................... ..................... .. 84
4.7. Local linkages ........................ ....................... 85
4.8. Network membership ................... ................... .... 87
5.1. Reasons for initial location of firm in island, and/or growth of business for
the firm ........................... ... ..... ............ 92
5.2. Importance of low taxes ............... ............. .............. .. 94
5.3. Importance of financial legislation and regulation ........................ 95
5.4. Importance of financial legislation by financial sector ..................... 96
5.5. Regression results ...................................... ... ... 97
5.6. Unemployment 1987-1996 ................. ...................... 107
6.1. N iche services .......................... ........... ... ......... 119
6.2. Major jurisdictional competition ......... .......... ... ....... 120
LIST OF FIGURES
1.1. The Isle of M an ................... ........... .... ............. 5
2.1. Global distribution of small island OFCs .............................. 16
3.1. Factors influencing the growth of OFCs ............................. 46
3.2. Forging local-global linkages ................... .............. .. 51
4.1. Type of financial service offered in each sector .................. ...... 72
4.2. Number of years present in the island ................................. 75
4.3. Number of years present in the island, by service sector ................... 76
4.4. Number of years present in the island by type of service offered ........... 77
4.5. Firm size ...................... ........ ............ 79
4.6. Firm size by service sector ................... ................... 80
4.7. Firm size by type of service offered .............................. 81
4.8. Local-global linkages ............... ........... .................. 83
4.9. Financial services networks .................... .................. 89
5.1. Public-private interaction in the financial sector ........................ 104
Abstract of Dissertation Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy
GLOBAL FINANCE AND OFFSHORE FINANCIAL CENTERS:
A CASE STUDY OF THE ISLE OF MAN
Sharon Corkill Cobb
Chairperson: Dr. Edward Malecki
Major Department: Geography
It is widely accepted that the complexity of the global financial system has increased
in recent years. This study addressed the way in which this complexity is represented in
space, by focusing on one of a large number of small places acting as offshore financial
A survey of financial practitioners in the Isle of Man was undertaken based upon a
theoretical framework meshing elements of the global-local debate, pragmatic regulation, and
network analysis. A conceptual framework identifying the major "success" factors for an
OFC and the ways in which the local (the Isle of Man) interacts with the global was then
developed. Respondents were asked why they thought the island's offshore sector had grown
so much over the past decade, what type of niche services were provided, and what type of
local-global interaction takes place.
Findings suggest that the major reason for growth was the establishment of a
proactive regulatory regime which enabled the island to develop a superior reputation in the
world of offshore finance. Public-private interaction through networking activities appeared
to be the major driving force behind the establishment of this regime. Survey respondents
were concerned about the lack of government efforts at marketing and promoting the
offshore financial sector. This concern has been addressed in recent years by the formation
of a government Commercial Development office, the establishment of the IOMpIc
Roadshow where both government and private sector officials visit a particular target area
for marketing purposes.
Suggestions for future research are threefold: firstly, investigate implications of
structural changes in the offshore industry, such as the trend for "one-stop shopping" for
financial services; secondly, address other economic development strategies for the Isle of
Man itself; thirdly, implement comparative studies with other OFCs to discover if the
regulatory regime is the critical factor for growth.
The evolution of financial services over the past two decades has resulted in a
sophisticated and complex global financial system (Bank for International Settlements, 1994;
Pavel and McElravey, 1991; Thrift and Leyshon, 1994). This complexity can be linked to
the demise of the Bretton Woods system of fixed exchange rates in 1973, the rapid rise of
the Euromarkets, the recycling of petrodollars and the rapid advances occurring in
information technology and communications (Corbridge, 1994; Goldberg et al., 1988; Lewis
and Davis, 1987; Panic, 1995; Strange, 1994; Warf, 1989). Sophisticated means by which
money can make more money have exploded over the past few years. New financial
instruments such as derivatives have become more complex and less understandable to all
but a few City and Wall Street analysts (The Economist, 1995; Kelly, 1995).
The functional complexity of the global financial system is mirrored by the system's
complex representation in space. Even though it is widely accepted that the world's major
international financial centers are London, New York and Tokyo (Hamilton, 1986; Sassen,
1991; Thrift, 1994), capital is flowing around the world in an ever-increasing quest for
greater rates-of-return. The fluidity of the financial system of the 1990s has resulted in a
large and increasing number of so-called financial centers looking to attract and manage
those rapidly circulating streams of capital. Some of these places are known as offshore
financial centers (OFCs)--small island economies often whose only other comparative
advantage is tourism. Relatively little attention has been paid to these small places scattered
throughout the globe, yet when looked at as a whole, the offshore financial world "captures"
a significant amount of circulating investment capital.
This research attempts to begin to redress the paucity of empirical work analyzing
OFCs--a field that is still grappling with the theoretical and conceptual underpinnings of the
geography of financial services, particularly with respect to offshore financial centers. This
research analyzes the growth of OFCs and their position in the global economy by placing
empirical evidence from one OFC (the Isle of Man) within the framework of a theoretical
mesh of: (1) the global-local debate (Swyngedouw, 1992), (2) pragmatic regulation (Moran,
1991), and (3) the network paradigm (Cooke and Morgan, 1993).
Common threads tying this analysis together will be the analysis and application of
the concepts of regulation, networks, trust, and knowledge to the arena of offshore financial
centers as those centers strive for continued growth based upon the establishment and
maintenance of a superior reputation. One of the biggest challenges confronted by OFCs
is the establishment and preservation of a reputation among financial services providers and
their clients as a safe, confidential, and well-regulated place to do business, particularly as
accusations of OFC laundering of drug, mafia, or other "dirty" money abound in the onshore
world (Blum, 1984; Courtenay, 1996; Hampton, 1996a).
The recent proliferation of OFCs, combined with the increasing complexity and
sophistication of their functional role, has resulted in the perception of the center itself as a
stable and safe place to put money becoming a critical element in the center's survival and
success. Some OFCs, such as Cyprus, Antigua, and the Seychelles, have a reputation as
dubious and disreputable places where illicit money is stashed, and others, such as Jersey,
Cayman Islands, and the Isle of Man, strive to deliberately construct a much more positive
reputation (Stewart, 1996; Courtenay, 1996; The Economist, 1997a). Fundamental to the
reputation of an OFC is the perceived quality of its financial regulatory and supervisory
environment. It will be shown that spatiallyfocused regulation and supervision in the Isle
of Man is developed through a process of continuous public-private interaction using a
variety of networking processes.
Geographically and functionally, small offshore financial centers (OFCs) such as the
Cayman Islands or the Isle of Man have experienced both growth and increasing diversity
in financial services over the past twenty years. A number of research questions are posed
by this significant growth and change. How do the smaller OFCs fit into the global financial
system? Are the financial services and instruments employed by OFCs different from those
used in London, New York or Tokyo? Why do customers choose to deposit money in OFCs
rather than in other larger financial centers?
The purpose of this research is to gain a greater understanding of the role that one
OFC--the Isle of Man--plays in the "big picture" of global finance. The Isle of Man is a small
semi-autonomous island nation located mid-way between England and Ireland in the Irish
Sea (see Figure 1.1). The land area of approximately 220 square miles contained a
population of over 71,700 in 1996 which is the highest population recorded since the Census
was first undertaken in 1821. The Isle of Man's (or Manx) economy is now dominated by
the finance sector, which has doubled in importance over the past twenty years to comprise
36% of the island's GNP and almost 20% of the workforce (Isle of Man Government, 1996a;
Lapper and Stuart, 1996).
The major research questions to be addressed in this study are:
1. How does the island's financial sector link in to the global financial network?
2. What type of niche market (if any) and core competencies does it offer?
3. Why has the Manx financial sector grown so rapidly over the past 20 years?
These questions can be adequately answered only through the collection and analysis of
primary data, supplemented by an analysis of secondary data using a mix of quantitative and
qualitative techniques (Uzzi, 1996).
Chapter 2 presents evidence of previous research by social scientists and financial
economists regarding the global financial system. Following a discussion and subsequent
critique of existing theoretical approaches to the study of OFCs, an alternative theoretical
framework will be developed. It will be shown that neoclassical, radical, and political
economy theoretical approaches offer a macro-level top-down approach to the study of OFCs
and fail to consider micro-level growth from within (or bottom-up) approaches to
I 200km I
Figure 1.1. The Isle of Man
An alternative theoretical discourse will be developed that, first, addresses the way
in which the "local" interacts with the "global" using theoretical foundations from the global-
local debate. Second, consideration of the critical role of regulation will be addressed both
from functional perspective distinguishing between the "government" versus "marketplace"
schools of thought, and from a spatially focused perspective as individual OFCs strive to
create a regulatory environment to make that OFC more attractive than others. Third,
analysis of the way in which such spatially focused regulation is developed and subsequently
promulgated will be developed using elements from the network paradigm. One of the major
reasons for the use of networks is to facilitate the generation and transmission of knowledge
(Malecki, 1997a). Furthermore, the successful functioning of networks is conditioned upon
building trust among its members (Yeung, 1994). The establishment of trust and growth of
knowledge are tasks more easily done in small places (such as most OFCs) or spatial clusters
of companies engaged in providing the same type of service such as the City of London,
where everyone knows everyone else of importance (Thrift, 1994).
Chapter 3 develops a conceptual framework to further the understanding of the
position of OFCs in the global financial system by addressing the ways in which these
(usually) small places link into the global economy. It is shown that local-global linkages
can be conceptualized along three dimensions: location, function, and regulation. In
addition, Chapter 3 presents a methodological framework used to gather empirical evidence
from a case study of the Isle of Man and sets the stage for analysis of survey results by
documenting the initial development and growth of the island as an OFC in the 1960s and
The empirical findings from the Isle of Man case are analyzed in Chapters 4, 5, and
6 and attempt to mesh evidence with the theoretical frameworks developed in Chapters 2 and
3. Chapter 4 analyzes evidence supporting the rapid growth of the Manx offshore sector
during the 1980s and into the 1990s; Chapter 5 addresses the perceived reasons for this
growth; and Chapter 6 documents current marketing strategies established by the island to
ensure future growth. Specific reference is made to the deliberate creation of an appropriate
regulatory environment in the Isle of Man. Results from a study of 71 financial service
providers and regulators in the Isle of Man show that the island's current regulatory regime
is the result of deliberate public-private interaction aimed at improving the image and
reputation of the island as an OFC. Public-private collaboration has facilitated the
development of a proactive regulatory regime designed to promote stable, reputable growth
in the financial services sector. Furthermore, public-private interaction is used to develop and
implement marketing strategies for Isle of Man plc with the aim of promoting the island and
increasing awareness of the island and the niche products and services offered here and
Conclusions and directions for further research are presented in Chapter 7. Avenues
for future research are considered along three directions: first, is a consideration of structural
changes within the financial services industry and how these changes may be used for further
gain by the offshore world. Second, suggestions of economic strategies for further growth
and development of the Isle of Man's offshore financial sector will be offered. Third,
directions for future research of the offshore financial sector in general will be offered with
the aim of applying the research method presented in this study to other OFCs.
GLOBAL FINANCE AND OFFSHORE FINANCIAL CENTERS
The Global Financial System
If there is any arena of economic activity that has become global in recent decades,
it is finance. Modem means of communication...help transfer vast sums of money
across national boundaries every day. Money moves faster and in response to smaller
price differentials than do goods or people (Herring and Litan, 1995, p. 1).
The 'new international monetary system' is a system in which the evident volatility
of interest and exchange rates, not to mention capital movements, is countermanded
by new financial institutions and new instruments designed to share risks and to
provide insurance for the market's major players (Corbridge and Thrift, 1994, p. 11).
The ease with which capital can flow around the globe has increased dramatically
over the past two decades. This increasing fluidity of capital has been ascribed to several
factors, including the breakdown of the Bretton Woods system of monetary order, the
increasing use and sophistication of telecommunications technology, and the rise of a system
of spatially differential financial regulatory practices throughout the world (Corbridge 1994;
Warf, 1995; Edwards and Patrick, 1992).
The new mode of operation of the global financial market is reflected by the use of
increasingly sophisticated financial instruments invented over the past two decades to "attain
exactly the right articulation of time, space, and risk" (Thrift and Leyshon, 1994, p. 303).
The rapid rise and importance of derivatives--defined as "complex financial instruments
whose values derive from other assets and indices of these asset values" (ibid)--such as
futures contracts, swaps, options, "swaptions" and the like, has resulted in a degree of global
disorder as the world's financial regulatory and supervisory regimes struggle to come to grips
with the risk and complexity of these mechanisms (The Economist, 1995).
The financial services sector has been described as "totally fundamental to the
operation of every aspect of the economic system" (Dicken, 1992, p. 358). However, until
recently, most research on the finance sector occurred within the domain of financial
economics and, not surprisingly, was driven by the neoclassical theoretical perspective
(Aliber, 1984; Bird, 1990; Mullineux, 1987; Silber, 1975). The financial system was seen
as the outcome of an ordered, logical process driven by the aim of accumulating capital
through the behavior of utility-maximizing individuals and firms. Traditional neoclassical
economic interpretations of the global financial system form the core of research in the
business and finance world (Aliber, 1980; Crane and Hayes, 1983; Johns, 1983; Johns and
Le Marchant, 1993; Kapstein, 1994; Walter, 1988).
The rapid growth and importance of the finance sector was largely ignored by
economic geographers until recently when the globalization of financial services stimulated
recognition of the need for a new understanding of this increasingly complex, flexible, and
uncertain system (Leyshon, 1995; Leyshon and Tickell, 1994; Thrift and Leyshon, 1994).
Only over the past decade has serious research taken place on this aspect of the global
economy by economic geographers; theoretical debate is still in the formative stage and
empirical evidence is relatively sparse.
Perhaps the greatest contribution by geographers is (and will continue to be) the
development of an alternative approach to the analysis of global finance and financial
services. Geographers search to make sense of a world that is increasingly complex, flexible,
and uncertain-- possibly more so in the field of finance than any other part of the global
economy. The globalization of financial services heralds the need for a new understanding
of this increasingly complex system (Clark and O'Connor, 1997; Corbridge, 1994; Corbridge
and Thrift, 1994; Leyshon and Tickell, 1994; Thrift, 1994; Thrift and Leyshon, 1994).
Leyshon (1995) believes that "the growth of geographical treatments of money and
finance may be seen to have developed in lockstep with the growing economic, social and
cultural prominence of the financial system during the 1980s and 1990s" (p. 531). Leyshon
highlights research on the geographies of money and finance by examining political economy
approaches to the subject, focusing on issues of the geopolitical economy of finance, the
geoeconomics of finance, and the geographies of financial exclusion. Not surprisingly, so
far the role of geographers has been greatest in the third of these issues, which is inherently
the most spatial (Leyshon and Thrift, 1994; Pollard, 1996).
Consensus is widespread regarding the spatial and functional complexity of the global
financial system. The spatial organization of financial services appears to be a synthesis of
order and disorder depending on the scale of analysis. Even though it has been argued that
the powerful impact of information technology implies the "end of geography" (O'Brien,
1992), the largest and most important financial centers in the world are widely recognized
to be the "world cities" of New York, Tokyo, and London (Friedmann, 1986; Hamilton,
1986; Lewis and Davis, 1987; Martin, 1994; Sassen, 1991, 1994; Thrift, 1994).
A lack of consensus exists, however, on a method to describe adequately the relative
importance of the world's other financial centers. Should the system be defined as the three
primary world cities with everything else subordinate (Hamilton, 1986) or as a distinct
hierarchy based upon volume of capital flows (Dicken, 1992; Friedmann, 1986)? In a
hierarchical system based upon volume, should the spatial scale be nodal--Chicago, Paris,
Los Angeles, Frankfurt, Sydney, Singapore, Hong Kong--or regional--Switzerland,
Luxembourg, Germany, Canada (Martin, 1994; Reed, 1981)?
This research will adopt a nodall" approach by focusing upon the increasing number
of much smaller financial centers--in particular small island OFCs. At this lowest level in
the hierarchy of financial places, the system appears quite murky--even confused-with a
large and ever increasing set of smaller financial centers dispersed across the globe (see table
2.1). Most of these smaller places-for example, the Isle of Man, Cayman Islands, Jersey,
and Bermuda-function as "offshore" centers where the majority of capital invested belongs
to non-resident institutions or individuals (Burt 1995; Johns 1983).
Regarding the position of OFCs in the global financial system, there is debate as to
whether they should (1) comprise the lowest level in the hierarchy (Arndt, 1988), (2) be
considered independently of the "big spatial picture" (Holstrom, 1988; Moore, 1992; Walter,
1985) or (3) be linked into the global financial system (Roberts, 1994, 1995). This study will
address, among other issues, ways in which OFCs interact with the global economy.
OFCs have to strive hard to become accepted into the global system of finance by
creating superior reputations as stable, secure, yet confidential places to invest money. The
key to establishing a quality reputation is the formation of an appropriately balanced
regulatory and supervisory framework for financial services. Those places that choose not
to establish rigorous regulatory and supervisory frameworks geared towards attaining global
standards, such as those established by the Basle Committee for Banking Supervision, are
often the ones accused of money laundering, crime, and corruption (Quirk, 1997).
Table 2.1. Offshore financial centers
EUROPEAN CARIBBEAN ASIAN-PACIFIC OTHER
REALM REALM REALM
Andorra Anguilla Cook Islands Bahrain
Campione Antigua Hong Kong Kuwait
Cyprus The Bahamas Labuan Lebanon
Dublin Barbados Marshall Liberia
Gibraltar Belize Islands Mauritius
Guernsey Bermuda Nauru United Arab
Isle of Man British Virgin Philippines Emirates
Jersey Islands (BVI) Singapore
Liechtenstein Cayman Island Taipai
Luxembourg Costa Rica Tonga
Madeira Dominica Vanuatu
Malta Grenada Western Samoa
Netherlands Netherland Antilles
San Marino Nevis & St. Kitts
Turks & Caicos
Source: adapted from Hampton 1996c; Davis, 1994; Roberts, 1994
Until recently, little attention has been paid to the small--literally "offshore"--
financial centers (OFCs) that are found scattered throughout the world and little work has
been done to provide any empirical evidence from a "bottom-up", i.e., a place-focused
perspective. Many such places exist and even though when each, looked at individually, may
be insignificant in terms of the amount of capital invested there, when considered as a whole,
play an important role in understanding the workings of the modem financial system (Lewis
and Davis 1987). According to Diamond (1994), offshore financial bases service an
estimated $5 trillion of investment funds each year.
Offshore Finance and Offshore Financial Centers: A Critique
In the past six years offshore financial centers have become increasingly important
to the international financial system. They have also come to be regarded with
greater respect ... Today, offshore financial bases have an estimated US$5 trillion
of investment funds and are a powerful necessity in the daily operations of
multinational corporations, small and medium-size companies, banking institutions
and executives in the legal, accounting and investment counseling professions
(Diamond, 1994, p. 22).
The new phase of capitalist development which is emerging in the post-Bretton
Woods era is characterized by increased capital mobility and the rise in importance of
offshore markets (Amin, 1994; Gill and Law, 1988; Guttmann, 1994). "Offshore" markets
had their origin with the decline of U.S. hegemony' that characterized the Bretton Woods
system of fixed exchange rates and the subsequent desire of American institutions and
individuals to circumvent their restrictive banking system and search for increasing rates-of-
retum elsewhere. This stimulated the growth of the "Eurodollar" market centered on London
where Americans deposited U.S. dollars outside the U.S. (Greenbaum and Thakor, 1995;
Lewis and Davis, 1987; Martin, 1994). Today, the Euromarket concept has broadened to
include many currencies in many markets-the key element being the placement of capital
'Many argue that U.S. hegemony exists in a reconfigured format as the post-Cold War
world has placed the U.S. at the forefront of the global economy with unchallenged economic
and political power (see Agnew and Corbridge, 1995; Hancher and Moran, 1989).
outside the individual's or institution's country of residence. Moreover, "offshore markets
are markets for currencies, loans, bonds and a host of other financial instruments which exist
beyond the reach of regulation by the original national economies" (Roberts, 1994, p. 93;
But how is this fundamentally "aspatial" system, where credit-money (Guttmann,
1994) is mysteriously moved from one financial market to another, revealed geographically?
While the ownership of money is usually beyond doubt, the control of flows of money passes
from the owner to a financial "manager." In the control of the "manager," a flow of credit-
money may pass from financial center to financial center (onshore and offshore places) in
its quest for greater rates-of-retur. How many places and which places are involved, and
exactly who makes the decisions as to how the money is invested? The intricacies of this
spatial process have, to this point, defied understanding, as evidenced by the actions of so-
called "rogue traders" and, more recently, fund managers operating throughout the world
(The Economist, 1996a)2.
The role played by OFCs and their linkages into the global economy were explored
by Roberts (1994), who argues that the formation of OFCs is tied to the growth and
development of the Euromarkets themselves. As the total amount of capital invested
"offshore" has increased over the past two decades, so has the total number of offshore
places increased. However, widespread consensus regarding the absolute number of such
places is hindered by the lack of a single accepted definition of an OFC. The 1994 edition
2Clark (1997) provides a thought-provoking analysis on the "demonization" of such
persons and the "problems of dealing with so-called rogue behavior in the context of
[financial] regulation and regulatory regimes" (p. 221).
of The International Offshore and Financial Centers Handbook covers 26 jurisdictions, but
other classifications place the number of OFCs significantly higher than this. Table 1.1 (see
back) shows 52, Diamond (1994) refers to 61 tax havens, Hampton (1996c) lists 43 main
tax havens, and Roberts (1994) also classifies 433.
Roberts (1994) recognizes that OFCs may be classified in terms of their volume of
services and differentiates between major OFCs (for example, Hong Kong, Singapore,
Panama) and minor OFCs (for example, Malta, Netherlands Antilles, Vanuatu). Roberts
goes further to introduce the critical element of spatiality into her analysis. She illustrates
that the global distribution of OFCs can be thought of as a series of "regional clusters" using
time zones as the most obvious reason for such groupings. Each major regional cluster is
aligned with its nearest world city, for example, the Caribbean OFCs with New York and the
European OFCs with London. Table 1.1 is organized in terms of geographic realms using
similar rationale to Roberts' work. Figure 2.1 illustrates the global distribution of small
island OFCs based on Hampton's (1996b) work.
A current definition of an OFC is "a center that hosts financial activities that are
separated from major regulating units (states) by geography and/or by legislation. This may
be a physical separation, as in an island territory, or within a city such as London or the New
York International Banking Facilities (IBFs)" (Hampton, 1994, p. 237).
'Roberts' classification is, however, different to Hampton's as Roberts includes mainland
and island OFCs, whereas Hampton only considers small island OFCs.
1 Isle of Man
13 Western Samoa
14 Cook Islands
17 Cayman Islands
21 British Virgin Islands
25 Netherlands Antilles
26 Nevis & St. Kitts
27 St. Lucia
28 St. Vincent
29 Turks & Caicos
10 Marshall Islands
One classification of OFCs is provided by Hampton (1996c), following McCarthy
(1979), who proposes "tiers" of OFCs comprisingfunctional (where a variety of financial
activities actually take place), notional ("brass-plate" offices that make book entries of
financial activities), and compound (a mixture of both).
Fisher (1994) identifies eight categories of offshore centers or tax havens driven by
different levels of taxation:
1. nil tax regimes;
2. traditional tax havens that do not impose a tax on profits;
3. low tax regimes;
4. low tax countries that impose a relatively low rate of tax on profits but have
special exempt regimes for international and offshore business carried out in the
5. no tax on foreign source income (a strict territorial basis of taxation);
6. privileged tax regime territories, which have high rates of local tax but have
special tax regimes and incentives for certain operations such as mutual funds,
holding or finance companies;
7. retirement havens for high net worth individuals (HNWIs);
8. tax planning havens that can sometimes be exploited by residents and non-
residents in a tax efficient manner.
The key to the existence of OFCs, notwithstanding the definitional problems, is the notion
of capital placed and managed outside and beyond an institutions' or individuals' onshore
regulatory regime. This case-study example (the Isle of Man) is classified by Hampton
(1996c) as a "functional" OFC, by Roberts (1994) as a "major" OFC, and by Fisher (1994)
as a "low tax" country.
Analysis of the creation and growth of "offshore" financial places is limited to a
handful of researchers, each using quite divergent theoretical and conceptual frameworks.
Johns (1983), Johns and Le Marchant (1993), Doggart (1979), McCarthy (1979) and Walter
(1985) provide traditional neoclassical interpretations of the existence and growth of OFCs.
Hampton (1996a, 1996b) uses a political economy approach, Roberts (1994, 1995) uses a
more radical framework, drawing upon seminal works by Harvey (1982, 1989). Most work
(including the findings from this study) is of a case-study nature and, as yet, a firm theoretical
basis underlying the rationale for the existence of OFCs has yet to be developed.
Neoclassical analysis of the growth of OFCs in the global economy draws theoretical
foundations from Kindelberger's (1974) work on the creation of international financial
centers. Factors of comparative advantage such as minimization of transactions costs for
transnational corporations in the arena of international business were seen as the driving
force behind the establishment of such places. The neoclassical approach as applied to
offshore financial centers stressed similar theoretical logic, often resulting in predominantly
descriptive listings of "advantages" of one OFC over all others (Johns, 1983; Johns and Le
Marchant, 1993; Doggart, 1979; McCarthy, 1979).
Hampton (1996c) argues that neoclassical location theory, particularly with respect
to the further development of an established OFC through agglomeration economies, makes
a valid contribution to understanding the growth of OFCs in the global economy, but does
not go far enough. Criticism of the neoclassical approach focuses on the inability of these
discourses to explain why OFCs developed in the first place (Gorostiaga, 1984; Hampton,
1996c). Furthermore, the dismissive nature of factors of location that cannot be easily
measured or quantified, such as the development of differential regulatory and taxation
regimes (see Reed, 1981; Goldberg et al., 1988), is seen as a major flaw.
Gorostiaga (1984, introduction) argues that a more radical approach to the study of
financial centers is needed and that "IFCs [international financial centers] will be analyzed
as the product of changes in the very nature of capital itself and in the organization of
capitalism at the center of the system" and not as endogenous phenomena. Roberts (1995,
p. 237) attempts "to further a Marxian understanding of how capital increases its flexibility
and averts crisis (not unproblematically) through the financial system." This new system,
according to Roberts, produces new spatial forms or, in her words, new regulatory spaces,
asserting that "in the financial markets, spatial advantage may be defined primarily through
regulation" (p. 252).
Hampton (1996c, p. 136) promotes a radical political economy approach by analyzing
the "significance of the primary attractions of taxation, regulation (or deregulation) and the
underlying political relationship of the island or microstate to its nearest 'Big Brother'
country" (emphasis added). The importance of Hampton's contribution to the theory of
OFCs in the global economy is twofold: first, he is concerned with the evolution of an OFC
and argues that
In the early stages of OFC development the lack of many other financial services
could act as a deterrent to new arrivals. Other factors aside from location, such as
regulation, taxation or secrecy, may therefore initially attract a financial services firm
to a new OFC. Location thus appears to be of lesser importance in the first stage of
emerging OFCs than the major factors of taxation, bank secrecy, regulation and the
political situation and there would seem to be some sort of moving sequence with
different factors influencing spatial location at different times (1996c, p. 134).
Second, Hampton employs a neo-Marxist "fractions of capital" approach to argue (using
Jersey as his case-study) that the special relationship existing between mainland states and
their offshore territories is central to the development of offshore finance.
The weakness of so-called radical analysis is the inherent top-down macro-level focus
of the neo-Marxist structural approach and concomitant lack of consideration of "bottom-up"
approaches. The notion that change can be affected from within, or at the micro-level,
through the existence of proactive local actors and institutions is ignored. It is argued here
that the creation and growth of OFCs is a function of global forces and local actions and this
research will subsequently derive a theoretical framework based upon elements of the global-
local debate, regulation, and network analysis.
Functionally, many of the older established OFCs such as the Cayman Islands or
Jersey have experienced both growth and diversity in financial services over the past twenty
years. The concept of a "generic" OFC or tax haven no longer exists. Furthermore, "there
is no single offshore center which will be all things to all people... users of offshore centers
... are becoming more sophisticated at selecting the appropriate center for their particular
operations" (Fisher, 1994, p.21). One of the recurring themes that will be shown in this study
is the attempt by public and private organizations in the Isle of Man to develop new and
innovative financial products for particular niche markets.
The Rise of OFCs: A New Theoretical Interpretation
Existing theory of OFCs either adheres to the traditional neo-classical interpretation
of factors of comparative advantage (Johns, 1983; Johns and Le Marchant, 1993) or to
variants of the radical critique of capitalism (Gorostiaga, 1984; Hampton, 1996a,b,c; Roberts,
1994, 1995). It has already been shown that neither approach fully accounts for the rise of
OFCs and their successful linkages into the global economy. This research project will
attempt to provide an alternative theoretical framework by meshing elements of three
different theoretical discourses: the global-local debate, regulation, and network analysis.
The Global-Local Debate
Insight into the complex spatial tensions of the global economy in the 1990s has been
provided in part by the global-local debate (Peck and Tickell 1994): one of the theoretical
threads running through current discourses is the dialectic of "locality and globality" (Lipietz
1993, p. 8). Swyngedouw (1992, p. 40) describes the local-global phenomenon as "a double
movement of globalisation on the one hand and devolution, decentralisation or localisation
on the other". This phenomenon has been given the name "glocalisation". It is seen by Peck
and Tickell (1994) as a process of disorder as places function to compete against each other
in the global economy, driven by the underlying dominant politico-economic order of
Amin and Thrift (1993, p. 405) contribute to the local-global debate through
"consideration of the way in which globalisation and local development are locked together
at an institutional level". For Amin and Thrift, globalisation represents "a redefinition of
places as juxtapositions of intersecting, overlapping and unconnected global flows and
historical fixities" (1993, p. 411). But what makes one specific place (the local) better at
fitting in, and successfully participating in, the global than any other place? Amin and Thrift
argue that successful local development within the global economy is driven by "institutional
thickness"--the amount, variety, vibrancy, enthusiasm, and level of interaction of institutions
within a specific place. The melting pot of institutions is place-unique and serves to
differentiate between those places that can and those that cannot successfully participate in
the global economy.
The application of these macro-economic discourses to global finance and the
growing importance of OFCs in the global economy is limited. Johns and Le Marchant
(1993), in their study of the development of the British Isles' offshore financial centers
(Jersey, Guernsey, Isle of Man), conclude that
Island governments must be alert to the possibility of institutional divestment and to
the fact that their mesoeconomic actors are not obliged to have local national
loyalties: their allegiance is to their global company advantage and not to a specific
territorial advantage (p. 276, emphasis added).
Roberts (1995, p. 254), in her work on the Cayman Islands, is more cognizant of the
global-local phenomenon, stating that
OFCs are spaces that exemplify the contradictory movements toward global
integration (as the flows of capital around the globe move faster and faster, for
example) and local variation and fragmentation (as places act entrepreneurially to
exploit niches in world markets and as capital hones its ability to arbitrage
Lipietz (1993) contends that "there can only be a certain type of 'regions which win'
within the framework of a certain type of nation state ... and these states will only 'win' in
international economic competition if they know how to create this type of regions which
win" (p. 16, emphasis added). Can this theoretical logic be applied to very small nation
states offering a particular type of economic service, i.e., the OFC?
For OFCs the creation of "regions which win" can only occur through the creation
of a superior reputation driven by establishment of an appropriate financial regulatory and
supervisory regime. In the world of offshore finance, a superior reputation develops when
spatially focused regulation is created through the cooperation of the public and private
sectors of the economy. Such regulation is designed to create a specific regulatory
environment that is somehow different from other places. This regulation aims to "reconcile
contradictory needs for safety and innovation" (Burgess, 1997, p. 73).
Moran (1991) explores the notion of a system of regulation of financial services by
competitive conditions in financial services are uniquely sensitive to regulatory
arrangements because the 'goods' traded are themselves mostly regulatory creations -
contracts, legally binding or otherwise, embodying a structure of financial claims and
obligations... systems of regulation are themselves powerful sources of comparative
advantage (pp. 6-7, emphasis added).
The importance of the system of regulation and the significance of the creation of a
balanced regulatory and supervisory regime for an OFC will be analyzed in the next section.
Regulation is virtually a defining feature of any system of social organization ... it
involves the design of general rules, the creation of institutions responsible for their
implementation, the clarification of the exact meaning of a general rule in particular
circumstances, and the enforcement of the rule in those circumstances (Hancher and
Moran, 1989, p. 271).
The financial world has become one in which services that cannot be provided
onshore are provided offshore, those that cannot be provided on the balance sheet are
provided off the balance sheet, and those that cannot be provided with existing
instruments are provided with new ones supervisors have shown that they are
aware of the need to keep up, but can they? (Mullineux, 1987, p. 60)
Regulatory issues are of critical importance in the changing world of international
finance. As the global financial system becomes more complex and capital flows around the
world at an ever increasing pace, both regulation and supervision of the financial sector have
become issues of concern among social scientists as well as those in the finance and business
world (Bird, 1990; Coleman and Porter, 1994; Gentle and Marshall, 1992; Goldberg, 1994;
Hayes, 1993; Kim, 1993).
Many social scientists have embraced "Regulation Theory" as a way of further
understanding the capitalist crisis of post-Fordist flexible accumulation (Aglietta, 1979;
Lipietz, 1987; Peck, 1994; Tickell and Peck, 1992; Smith, 1995). Proponents of regulation
theory argue that the complexities within the global economy can best be analyzed by
addressing the specific regime of accumulation (Fordist and Taylorist assembly-line practices
rather than post-Fordist flexibility) and mode of social regulation (socio-economic
conventions and practices) present within society at any given time. Thrift (1994) states that
the form of the mode of social regulation can vary over time and space and, more
importantly, that regulation theory can be used to identify and analyze "the connection
between the success of economies and their patterns of social regulation" (p. 371).
Debate exists, however, regarding the rationale for, and uses of, regulation theory.
For example, Murdoch (1995) argues that regulation theory is a "macro account and
concentrates on how micro phenomena are 'pulled' into place within specific regimes" (p.
734). On the other hand, Smith (1995) asserts that "there are many sites of regulation and
that these various 'regulatory sites' are influenced both by state and non-state institutions and
interactions between agents which constitute an economic system" (p. 761).
Most regulation theorists acknowledge that relatively little research has been
undertaken on the mode of social regulation under the new regime of flexible accumulation
(Peck and Tickell, 1992; Peck, 1994; Smith, 1995; Yeung, 1994). Although regulation
theory is perceived by many as being robust and applicable to many of the complexities of
the modem economy, it is the lack of theoretical consensus and validity with respect to the
mode of social regulation--surely the most important piece of regulation for finance, and
particularly for OFCs--and the inherently macro-level focus, that makes it unsuitable for use
in this study. The study of offshore financial regulation in particular has to recognize the
pragmatic nature of regulation--regulation that takes into consideration the human precepts
of trust, confidence, familiarity, and security at the local level as well as the global.
Differential spatial regulation implies that growth is likely in those financial centers
that have deliberately chosen to construct attracting regulation, especially small OFCs that
have a politically dependent relationship with a larger state. Roberts (1994) considers such
OFCs as "groups of marginal places ... which exist as adjuncts to one of the three financial
blocs centered for the moment on London, Tokyo and New York" (p. 101). The British Isles
OFCs--"Crown Dependencies"--of the United Kingdom fit neatly into this category
(Hampton, 1994, 1996c; Johns, 1983; Johns and Le Marchant, 1993).
The creation of an appropriate financial regulatory regime hinges upon functional
regulation of the services provided by firms within the sector. For example, banking
institutions in the world's largest economies are regulated via standards imposed by the Basle
Concordat. Similar global functional regulation is provided for international securities
transactions by the International Organization of Security Commissions (IOSCO). An
additional supranational organization, the Enlarged Contact Group (ECG), regulates
collective investment schemes (mutual funds or unit trusts) and their operators. Furthermore,
insurance providers are regulated by the International Association of Insurance Supervisors
(IAIS) (Bhala, 1994; Isle of Man Financial Supervision Commission, 1995, 1996; Shirreff,
For international banking, the most important regulatory development of the 1990s,
one which recognized the increasingly global characteristics of the modem financial system,
was the 1988 Basle Agreement by the Group of Ten leading industrial nations to impose
uniform capital standards for banks (Coleman and Porter, 1994; Guttmann, 1994). By the
end of 1992, banks operating in those countries were supposed to maintain capital equivalent
to 8 percent of assets, weighted by risk. This international convergence of capital adequacy
measurement and standards "may be regarded, therefore, as a significant milestone in the
establishment of a common supervisory response to the existence of a single, highly
competitive, international banking market" (Cooke, 1990, p. 311). Herring and Litan (1995)
the Basle standards have helped make disclosure of the financial conditions of banks
around the world more uniform, a result that has enhanced the effectiveness of
market discipline (by facilitating comparison of banks by depositors, creditors, and
However, it is also recognized that the Basle Accord in and of itself has limitations.
Most importantly, the Basle countries form an exclusive club: the agreement does not apply
to many industrialized countries and no less-developed countries belong. Breeden and Isaac
(1992) go so far as to assert that risk-based capital rules were a mistake. In addition to
distorting credit flows, those standards may create a potentially serious safety and soundness
problem by altering a bank's portfolio of risk-management strategies or exposures.
Debate exists regarding the underlying rationale behind financial regulation.
Kopcke (1995, p. 37) asserts
Current discussions, like those in the past, engage views of financial markets that are
difficult to reconcile. Some, who believe that these markets potentially are relatively
efficient, advocate minimal interference. Regulations that require more than the
necessary disclosure of investments and risks might introduce burdens that exceed
their benefits. Others, who believe that the predominance of intermediaries reflects
the limits of savers' information, advocate regulation to ensure the safety and
soundness of intermediaries. At the very least, regulations may diminish the force
of "credit cycles" and the threat of widespread insolvency among intermediaries.
Stiglitz (1993) believes that there is a necessary role for the state in financial markets
because potential market failures are likely to be pervasive. He argues that "there exists
forms of government intervention that will not only make these markets function better but
will also improve the performance of the economy" (p. 20).
Government intervention is most evident with respect to banking regulation as
virtually all aspects of the operation of a bank are subject to government oversight and
regulatory restriction (James, 1995). This is deemed necessary because of the widely held
view that banks play a special role in the national, and increasingly international, economy
as providers of transaction services and as sources of liquidity (Greenbaum and Thakor,
1995; Lewis and Davis, 1987).
Consensus exists regarding the most critical element of banking regulation: bank
safety and soundness (Borio and Filosa, 1994; Eisenbeis, 1990; Lemieux, 1993; Mullineux,
1987). The "safety and soundness" argument has been particularly relevant for banks, where
a lender of the last resort (usually a country's central bank) refinances banks' illiquid asset
portfolios when other funding sources are unavailable or prohibitively expensive. In
addition, many countries have deposit insurance, and also guarantee the integrity of the
payments and clearing system (Greenbaum and Thakor, 1995). This consensus is based,
however, on a relatively restricted foundation as "almost all the theoretical literature in the
field of [banking] regulation ... derives from an examination of the American experience"
(Bourke, 1990, p. 144). The American banking system is unique in its makeup and is
currently undergoing significant regulatory reform, in particular with respect to attempts to
repeal of the Glass-Steagall Act separating commercial and investment banking in order to
"level the international playing field" for American banks (Asher, 1995; Kwan, 1995).
An alternative school of thought regarding financial regulation is that minimal
institutional involvement should occur and a reliance on market efficiencies should be used
to regulate the system. Flannery (1994, p. 313) asserts that "private (market) regulatory
services provide credible alternatives to traditional government regulation". He believes that
whereas government controls tend to be restrictive and inflexible, market controls provide
a schedule of alternative restraints from which the least costly ones may be chosen.
Flannery's approach is to compare the financial sector to the corporate sector and to argue
that the methods by which the corporate world have chosen to regulate themselves (via
contracts, covenants, monitoring, evaluating, controlling and pricing risk) could be adapted
and used in the financial sector. Although Flannery argues against complete governmental
withdrawal of government regulation, he argues strongly for "the notion that market investors
can perceive bank risks accurately, and hence could provide adequate supervision if the
government curtailed its existing insurance coverage" ibidd, p. 323). Borio and Filosa (1994,
p. 31) raise the issue of the
search for an appropriate balance between official involvement and market
discipline. The broadening of the range of banks' activities within the financial sector
and of their ownership linkages with non-financial companies carries the risk of
extending the "safety net" generally put in place to prevent systematic crises. Market
participants' incentives to prudent behavior may thereby be blunted (emphasis
What is needed, therefore, is prudential regulation and adequate supervision by
regulatory agencies. However, the dynamic and complex nature of the modern financial
system renders it difficult, if not impossible, for regulators to keep up with changes,
particularly with respect to financial products and financial engineering. Current research
by financial economists indicates a concern for the ability of financial regulation to keep up
with the changing features of the global financial system (Berger et al., 1995; Bourke, 1990;
Eisenbeis, 1990; Guttmann, 1994; Herring and Litan, 1995; Marshall et al., 1992).
Challenges facing the regulators and supervisors of such a diversified international system
include: developing the ability and the resources to regulate large geographically and
functionally diversified corporate networks; existing lack of understanding of complex
trading risks; and lack of ability to assess management and control elements of financial
institutions (The Economist, 1996b).
One of the major dilemmas faced by financial regulatory bodies is how, and by
whom, the vast array of cross-border flows that comprise the bulk of the modern financial
system should be regulated (Edwards and Patrick, 1992). Concern with regulation and
supervision of financial conglomerates--both within and across national borders--also has
been raised by Borio and Filosa (1994). They are especially concerned about the existing
highly compartmentalized prudential supervisory frameworks, and the increased possibilities
of "contagion" risk occurring within conglomerates. To counter this, "supervisors should be
in a position to access information about the various group units, including unregulated
ones" (p. 22, emphasis added). Possible solutions proposed by the authors include: (a)
consolidated supervision, and (b) harmonization of capital standards across function within
Proponents for change in the way financial services are regulated stress the need for
greater cooperation between the various functional regulators (The Economist, 1996c;
Shirreff, 1996). One of the major problems to be addressed is the diversity of financial
functions now provided by a single institution. For example a banking conglomerate may
offer insurance and mutual fund services in addition to traditional banking services such as
deposit taking and loan making (Eisenbeis, 1990; Hayes, 1993; Metais, 1990). Shirreff
(1996, p. 48) advocates "more coordination between regulators, better information gathering
and sharing, and swifter procedures for dealing with anything that threatens to jolt the
Regulation of an Offshore Financial Center
Tensions in the regulatory process evident in the above macro-economic discourses
can also be analyzed first in terms the development of spatially focused OFC regulation and
supervision and second in terms of "onshore-offshore" finance (Hancher and Moran, 1989).
The complexity of the modem financial system is characterized in part by the rise in
importance of "offshore" markets with no national allegiance (Amin, 1994; Gill and Law,
1988; Guttmann, 1994). As no national regulatory body can adequately supervise and
monitor cross-border capital flows, the responsibility of regulation must therefore defacto
fall to some kind of supranational institution.
Even though some have argued that the workings of the modem financial system
implies the end of geography (O'Brien, 1992), others argue that place still matters (Leyshon,
1995; Swyngedouw, 1992; Thrift and Leyshon, 1994). The importance of "place," however,
can be seen even within the evolution of supposedly aspatial offshore markets. For example,
London was the first and consequently the most important center of the Euro- (or offshore)
dollar market in the 1960s and 1970s (Mullineux, 1987; Sassen, 1991; Thrift, 1994b). In the
1990s, though, other places became important centers of offshore markets, such as the
Bahamas and Cayman Islands for Euro-dollar markets and Singapore for the Asian-dollar
market, in part because of regulatory issues (Martin, 1994; Pavel and McElravey, 1991;
Stiglitz, 1993; Tan, 1989). This change in location signaled a shift from placeless offshore
markets to a proliferation of offshore financial centers (OFCs) which served as nodes in the
offshore marketplace as well as the basis of local economic development strategies of
(usually) small spatial entities.
OFCs are perceived by many to have less stringent regulation than that found in the
"onshore" world (Doggart, 1979; Hamilton, 1986; Hampton 1994; Johns and Le Marchant,
1993; Kinsman, 1978; McCarthy, 1979; Roberts, 1995, 1994; Walter, 1985). In many
instances, the main function of OFCs is to provide services for individuals and institutions
wishing to escape the regulatory practices of their "onshore" places of residence. Roberts
(1994) considers such OFCs as marginal places existing as adjuncts to London, Tokyo and
New York". Seen in this light, the reputation of the center is critical and current efforts are
underway by many OFCs to improve their "image" by imposing more rigorous regulatory
standards (Courtenay, 1996, Stewart, 1996).
Small island offshore financial centers--places at the margins of the global economy
--have to try much harder than major financial centers, such as London and New York, to
establish and maintain their reputation as safe and secure places to do business in the world
of global finance. It is widely recognized that a major factor at stake in an OFC is the
reputation of the center itself, leading to spatially focused regulatory aims. In Europe for
example, many of the older small island OFCs, such as Jersey and the Isle of Man, have
established their own regulatory bodies (the Financial Services Commission, and the
Financial Supervision Commission respectively) that seek to enhance the reputation of the
place through actively regulating and supervising those providing financial services
(Hampton, 1996b; Solly, 1994). Moreover, the Isle of Man's Financial Supervision
Commission goes so far as to acknowledge that reputationall risk is particularly important
for those centers which are not major money centers and affects the regulatory body as well
as the center as a whole" (I.O.M. Financial Supervision Commission, 1994a, p. 5).
In addition to an inward-looking focus, many small island financial regulatory bodies
link into large supranational institutions as they seek to adhere to global functional standards.
For example, the Offshore Group of Banking Supervisors, which was set up in 1990 at the
instigation of the Basle Committee on Banking Supervision, now comprises 19 OFC
jurisdictions. The purpose of the Offshore Group is to uphold the Basle standards for the
supervision of international banking groups. In addition, some OFCs seek to gain
membership or "recognition" in other international regulatory bodies such as IOSCO or ECG.
Regulatory challenges are apparent when considering type of offshore financial
services offered. Usually, the largest institutional players present in OFCs are banks (Burt,
1995; Hampton, 1994; Johns and Le Marchant, 1993; Roberts, 1994). Offshore banking is
inextricably linked to the rise of the Eurocurrency markets beginning in the 1960s (Blum,
1984; Metais, 1990) and more liberal domestic and international legislative changes in the
1980s and beyond (Berger et al., 1995; Borio and Filosa, 1994). The offshore banking sector
is facing distinct regulatory challenges as bankers are beginning to realize that the world
market for private offshore banking business is changing rapidly, and the banking community
will have to be nimble to take advantages of the changes. Quality regulation is needed to
attract both banks and quality clients and the regulator should be seen as 'being at the
shoulder' of international offshore banking business.
The spatial distribution of OFCs and indeed the global system itself is, therefore, in
part conditioned by the regulatory practices which affect those engaged in providing financial
services. Of particular importance is the development of comprehensive, accommodating,
high-quality modes of financial regulation and supervision. Findings will show that for one
OFC (the Isle of Man), creation of this type of regulation occurs through the extensive use
of networks. The theory of networks as applied to financial services and regulation is
discussed in the next section.
Economic space [is] a 'relational' space, the field of social interactions, interpersonal
synergies and social collective actions that determine the innovative capability and
the economic success of specific local areas (Camagni, 1991, p. 1).
In the spatial sphere, the key elements of the networked region include: a thick
layering of public and private industrial support institutions, high-grade labor-market
intelligence and associated vocational training, rapid diffusion of technology transfer,
a high degree of interfirm networking and, above all, receptive firms well disposed
toward innovation (Cooke and Morgan, 1993, p. 562).
The study of networks, whether in the form of Network Analysis (Knocke and
Kuklinski, 1991) or development of the Network Paradigm (Cooke and Morgan, 1993) has
enjoyed a recent resurgence in the arena of economic geography. Current researchers
acknowledge that the roots of the modem network approach lie in the study of business
organizations (Cooke and Morgan, 1993; Yeung, 1994). Frances et al. (1991, p.14) assert
that "a network is often thought of as a 'flat' organizational form in contrast to the vertically
organized hierarchical forms" of market and hierarchy (see Williamson, 1975, 1985).
Furthermore, a rich sociological literature has been used by economic geographers
as the building block for a new conceptualization of the way in which businesses are
organized (Murdoch, 1995; Powell, 1991; Thorelli, 1986; Yeung, 1994, 1997). The
sociological roots of current discourses in economic geography stress the importance of
interpersonal relationships as the driving force behind network success (Thompson et al.,
Most applications of the network approach have addressed interfirm networks of
production (Christensen et al., 1990) applied to the manufacturing sector of the economy
(Cooke, 1996; Malecki and Veldhoen, 1993; Malecki and Tootle, 1996, 1997; Park, 1996).
Applications of the network approach to the service sector of the economy stress information
and telecommunications networks (Antonelli, 1992), business networks (Perry and
Goldfinch, 1996), intrafirm networks (Beyers, 1990), supplier-user networks (Anderson et
al., 1990), and local networks (Bennett and McCoshan, 1993). Several types of network may
be identified. Rhodes (1991) distinguishes between policy and territorial communities, issue
networks, professional networks, intergovernmental networks, and producer networks.
Grabher and Stark (1997, p. 534) see networks as the "proper analytic unit" to be used when
addressing economic change over time and space.
Powell (1991, p. 272) asserts, "Networks are particularly apt for circumstances in
which there is a need for efficient, reliable information." Use of the network approach in
research on the geography of finance--where information is critical--has been limited
(Leyshon and Thrift, 1997) and no-one has yet applied the network approach to the study of
offshore financial centers in the global economy. Specifically, what has yet to be analyzed
is the role played by private-public networks in the creation of spatially focused financial
Debate exists regarding the trueform of the network approach as evidenced by Cooke
and Morgan's (1993, p. 543) assertion that "... the network paradigm is not so much a theory
as a potentially rich analytical framework for understanding new trends in corporate and
spatial development" (original emphasis). In contrast, Yeung (1994, p. 473) argues that the
"purpose of network analysis in economic geography is to revitalize the neglected aspects of
industrial organization in space." Yeung acknowledges that the notion and meaning of the
network concept is still ambiguous and offers a more precise definition of a business network
as "an integrated and co-ordinated set of ongoing economic and noneconomic relations
embedded within, among and outside business" (p. 476, original emphasis). Furthermore,
according to Yeung, a network should be considered as both a structure and a process. In
other words it is a dynamic entity concerned with both notions of economic relations and
power structures inherent within interpersonal relations and interactions.
The successful functioning of networks, therefore, is conditioned upon the existence
of some basic constructs of human behavior, notably: trust and cooperation (Granovetter,
1985; Thompson, 1991; Malecki, 1997a; Yeung, 1994). The importance of "trust" has been
recognized as playing an important role in the successful functioning of the modern economy
(Gertler, 1988). Park (1996) introduces the notion of spatiality with respect to the construct
of trust by arguing that trust can "be built up over a period of time through repeated
interactions. Since these repeated interactions are required to build up trust, geographical
proximity is regarded as an important factor" (p. 487, emphasis added). Trust as a specific
cultural construct has been explored by Mitchell (1995) with specific application to Asian
The importance of face-to-face interaction in the provision of financial services is
becoming apparent within an international financial system which "has become more social,
more reflexive and more interpretive since the breakdown of Bretton Woods" (Leyshon and
Thrift, 1997, p. 292). They argue that the new international financial system is best theorized
by drawing upon actor-network theory--a postmodern4 discourse developed by French
sociologists Callon (1991), Latour (1993), and Law (1994). Leyshon and Thrift (1997, p.
297) define actor-networks as "actors who are constantly acting through intermediaries--
texts, humans, non-humans and money--which are put into circulation in attempts to
construct and maintain power relations". Such networks are seen as the "chief structures of
governance in the international financial system, which together constitute the fragmenting
'post-politics' of international money" ibidd, p. 298). This theoretical discourse is abstract
and offered at the macro-level. Its contribution to the geography of offshore finance and
OFCs lies in the exposition of the organization of money capitalists--one of the four actor-
networks which Leyshon and Thrift claim to exist within the international financial system.
Leyshon and Thrift argue that the need for trust and reciprocity within the organization of
4"Postmodernity" refers to the attempts by social scientists to develop theoretical
discourses to understand the "sea-change in cultural as well as in political-economic practices
since 1972 ... which is bound up with the emergence of new dominant ways in which we
experience space and time" (Harvey, 1989, p. vii). According to Yapa (1996) it can be
thought of both as object or ontology (a description of the world) and as epistemology or
attitude toward research (how we know what we know). See Harvey (1989) and Leyshon and
Thrift (1997) for further discussion and analysis of postmodern money.
money capitalists is a critical element in the successful functioning of the international
Offshore finance--where the major service provided is management of other peoples'
money--is a sector of the economy where the development of trust between service provider
and consumer, and the existence of cutting-edge knowledge of financial products and
regulatory constraints on the part of the service producer, are essential to the successful
functioning of businesses. A fundamental building block supporting the creation of these
necessary constructs is the establishment and maintenance of a superior reputation of the
offshore center itself (as well as the service provider) in the world of international finance.
Because of the rapid increase in the number of OFCs in recent years, offshore financial
services providers argue that reputation is place-based as well as institutionally- and
individually-based. Some places aim to become known as reputable international financial
centers by developing strong regulatory frameworks, recognized as such throughout the
world (Burgess, 1997). This usually requires commitment by both the public sector (the
government, acting as regulator and supervisor) and the private sector (financial services
firms) to work together in a combined effort to promote the OFC. In other words, using
Amin and Thrift's (1993) nomenclature, the place must exhibit "institutional thickness" when
striving to create trust and reputation, and to share knowledge-so critical the offshore
financial services sector-through the successful operation of networks of financial services
providers and government regulators and supervisors.
Public-private networks or partnerships have become an important means of regional
economic development in recent years (Bassett, 1996; Bennett and McCoshan, 1993).
Bennett (1996, p. 540) reports that, in an urban context, such partnerships can be seen as a
"form of community regeneration more sensitive to the realities of market forces and more
in tune with the need to mobilize local communities to compete with other cities for a share
of increasingly mobile, global investment". Hastings (1996, p. 259) argues that such
partnerships produce synergy "in the form of an increased profit for the private-sector
participants and in producing new resources to advance the social goals of the public-sector
This research project argues that the successful creation and functioning of local
issue-driven networks--public-private, and professional--is a critical element in the success
of a small OFC. The successful functioning of these networks is facilitated by the trust that
is relatively easy to develop and maintain due to the fact that in these small communities
everyone knows everyone else. Bennett and McCoshen (1993, p. 206) argue that the
"character of local networks, their leadership and elites, is ... fundamentally determined by
the economic structure and layout of their economies which itself depends on the relation of
the local economy to the national and global economic system." Uzzi (1996, p. 675,
emphasis added) argues that "the structure and quality of social ties among firms shape
economic action by creating unique opportunities and access to those opportunities".
In a small island OFC, such ties occur through proximity and are used in the
formation of public-private issue-driven networks relating to the creation and maintenance
of a superior reputation amongst OFCs. Such partnerships can create policy synergy
(Hastings, 1996) resulting from the interaction of actors representing the different
perspectives of both public and private sectors. As Mizruchi & Galaskiewicz (1994 p. 245)
conclude, "... decision making is embedded in social structures, both at the interpersonal
and interorganizational level. Administrators and executives are en-meshed in an elaborate
network of social relations both within and across organizations." As has already been
argued, the creation of a superior reputation by an OFC is necessary for its successful
participation in the global economy and it is driven, in part, by the dynamic nature of these
issue-driven networks as actors switch roles and positions within the private sector, and--
common to the workings of small island OFCs--often switch role between private and public
The successful growth of an offshore financial center is conditioned upon the
development of various links between the local and the global. Conti (1997, p.7) recognizes
that "local actors or agents interact globally not only as individuals but also as an expression
of the territorialized socio-economic relationships within which they are embedded. At the
same time, the same local systems interact with other systems at other levels through the
intermediation of the individual agents that belong simultaneously to both local and global
The financial services sector is a piece of the global economy where the creation and
maintenance of trust is a vital part of the successful functioning of the system. It is argued
that the most critical linkage is the creation and subsequent promotion of a superior
reputation in the global economy, a reputation as a safe, confidential, and secure place to
invest capital. Reputation of an OFC is based upon the creation of a spatially focused
regulatory and supervisory regime with the aim of concurrently exploiting and legitimizing
regulatory differences to offer advantages to global investors which cannot be found
This research project argues that local-global linkages with respect to regulatory
issues are established through the successful functioning of local networks and the existence
of what Amin and Thrift (1993) call "institutional thickness." Because of local interaction
through inter-firm and public-private networking, issues are identified which are critical to
the attractiveness of one OFC as compared to others. The willingness of both public and
private sectors to work with each other in the creation of regulatory-based legislation and the
subsequent agreement of the private sector to be monitored by the public sector seem to be
essential in the establishment of a superior reputation. Further local-global issues are
necessary as the OFC has to be seen to be willing to conform to supranational regulatory
standards as well as establishing their own regulatory regime. In addition, local-global
linkages are developed by both public and private sectors--through the functioning of
international business and social networks-- as part of OFC marketing strategies for the place
itself and for niche products and services found within. Often, international business, and
concomitant social, networks are driven by the migration patterns of skilled labor as they are
transferred across the globe as part of career trajectories with transnational banking,
accounting, or insurance corporations (Beaverstock, 1991, 1996; Beaverstock & Smith,
Drawing upon the above theoretical discourse, this paper will develop a conceptual
framework in the next chapter to show, first, what combination of place-specific factors
drive the creation and success of an OFC, and second, how the local is linked into the global
with respect to the provision of offshore financial services. It will be argued that such local-
global links are forged along three dimensions: location, function, and regulation. This
framework will be used to analyze the growth of the Manx (Isle of Man's) offshore financial
services sector. The Isle of Man is a British Isles' Crown Dependency lying in the middle of
the Irish Sea and is one of four major British Isles' offshore centers (the others being Jersey,
Guernsey, and Dublin's International Financial Services Center or IFSC).
GROWTH OF AN OFC:
CONCEPTUAL FRAMEWORK, RESEARCH METHODOLOGY,
AND PRELIMINARY EVIDENCE
To successfully participate in the global economy, OFCs (the majority of which are
small island economies) have to find ways of successfully and reputably interacting with the
rest of the world. The global financial system is predicated upon the relationship between
financial institutions, financial instruments, and spatial nodes interacting with the market and
operating within the bounds--wholly or partly--of regulation and supervision. Financial
institutions comprise a wide range of organizations, including: traditional financial firms
such as commercial and investment banks and credit unions; financial companies proving
mutual fund services; pension funds; insurance companies; and non-traditional companies
such as large manufacturing multi-national corporations (Hirtle, 1993; Lewis and Davis,
1987). Institutions lie (supposedly) totally within the sphere of regulation and supervision
in which they are geographically located. As such, they are influenced strongly by the
financial and business climate provided by the spatial node. The activities of institutions can
in turn influence the success and the reputation of the financial center.
Financial instruments are those things that either: (a) facilitate the exchange of claims
of borrowers and lenders, such as a mortgage or car loan, or (b) use financial markets to
increase capital, such as mortgage-backed securities, futures contracts, and hedging
strategies. Financial instruments lie both within and outside the sphere of regulation and
supervision. The simple exchange of claims between borrowers and lenders falls well within
the sphere of regulation, whereas the phenomenal growth of the number and range of
derivative instruments over the past decade has surpassed the scope of the existing regulatory
and supervisory framework (Kelly, 1995).
Both institutions and instruments have been greatly affected by the increasing use of
securitization of, for example, mortgages and other consumer loans. Securitization refers to
the transformation of nonmarketable loans into marketable securities (James, 1995;
Greenbaum and Thakor, 1995). This implies the creation of a whole new range of
instruments and institutions thus adding to the complexity of the financial system. Current
research is beginning to address the issue of financial regulation and supervision of this
increasingly complex system (Akyuz and Conford, 1995; Gentle and Marshall, 1992;
Marshall et al., 1992).
Financial centers comprise the most spatial and "real" element of this increasingly
dynamic, complicated and intangible system. These spatial nodes operate within and without
the sphere of regulation and supervision due to their dual role as (a) creators and monitors
of place-specific regulatory and supervisory regimes and--critically for offshore finance--(b)
as active players in the financial marketplace by creating wealth through the facilitation of
the appropriate business climate for financial activities to take place. Furthermore, the
regulatory and supervisory framework established by specific offshore places can
significantly alter the reputation of that place in the global economy.
How can an OFC create a superior reputation and become a "successful" participant
in the global economy? Previous research indicates that the major factors influencing the
growth and development of a small island OFC are:
(1) regulation and supervision
(2) communications technology
(4) labor characteristics
(6) political stability (see Figure 3.1).
The major driving force behind the creation of an OFC is the initial development of
a "welcoming climate" with respect to regulation and taxation. Such a climate results from
a deliberate legislative program to create an accommodating legislative and regulatory
regime when compared to the onshore world. Elements of this regime include: low income
tax or corporate tax rates; low start-up costs and fees for offshore or non-resident companies;
and, more importantly, the ability to instigate proactive rather than reactive legislation in
order to exploit a niche market or a niche product.
Fundamental to the continued growth of an OFC is the establishment of a superior
reputation in the arena of offshore finance which is based upon the perceived quality of its
financial regulatory and supervisory environment. This usually requires commitment by both
the public sector (the government, acting as regulator and supervisor) and the private sector
Figure 3.1. Factors influencing the growth of OFCs.
(financial services firms) to work together in a combined effort to promote the OFC. In other
words, using Amin and Thrift's (1993) nomenclature, the place must exhibit "institutional
thickness" when striving to create trust and a positive reputation, and to share knowledge,
so critical to the offshore financial services sector (Thrift, 1994), through the successful
operation of networks of financial services providers and government regulators and
It is accepted by many that the globalization of service industries has been driven by
technological change (Malecki, 1997b). Moreover, the provision of global financial services
and products is inextricably linked to the availability of high-quality telecommunications
services (Hayter, 1993; Gillespie and Williams, 1988; Langdale, 1985, 1989; Moss, 1987;
Warf, 1989, 1995). Superior telecommunications services, complemented by quality of life
considerations (such as recreational amenities) and good air transportation links for necessary
face-to-face linkages, add to the attractiveness of an OFC (Goldberg et al., 1988).
Formal and informal business networks have been shown to be critical to the success
of small places and small firms (Malecki and Tootle, 1997; Murdoch, 1995). Rather than
facilitate the efficient provision and distribution of tangible products by connecting suppliers
and manufacturers (Malecki 1997a), local business networks in the context of offshore
financial services play a variety of roles. Both formal and informal networks of actors exist
within financial communities (see Thrift, 1994, for the example of the City of London) that
are both local and global in nature due to the flexible characteristics of the actors themselves.
Such networks are used to share information and knowledge about all aspects of the financial
system, and market the (intangible) financial products offered by that particular place.
Furthermore, local public-private networks are used to further refine and massage the
existing regulatory framework that allows particular financial services and products to be
marketed in that place. This network role is of critical importance when identifying those
offshore places which are successfully and reputably participating in the global economy.
Other global-local linkages may occur through networks that are based upon
historical trade or capital flows, for example, an investment bank in a British Isles OFC
having traditional links to the Far East may interact with Hong Kong or Singapore on a daily
basis. Complementing corporate networks, informal linkages may exist between key
individuals working in the financial sector. For example, the migration of a key British
expatriate back to a British Isles OFC may well foster specific global linkages within the
sector corresponding to that individual's own social and business network and the trust and
knowledge that is established within that network over time (Granovetter, 1985).
As the financial system of the 1990s is characterized by its complexity, particularly
with respect to new financial instruments used in the marketplace, a well-educated, literate,
skilled workforce is a crucial requirement for an offshore center. Particularly important is a
pool of highly educated, skilled and relatively mobile professional and managerial workers
who are willing to locate to a small place and who then form the core of the business elite
(Beaverstock, 1991, 1994). Frequently, such professionals are non-local moving within the
corporate network of large financial firms, such as banks or insurance companies, as part of
the progression up the corporate ladder. They bring with them new knowledge and insights
to the financial sector and serve to diffuse innovative practices and products within the
offshore center. Often, the turnover of these upper management professionals is high
resulting in a steady stream of new information to the OFC. In other instances, local actors
develop skills and expertise from within and use their local knowledge to complement that
of non-local actors.
Location, specifically proximity to a major financial center, is an important element
in ensuring the success of an OFC. Proximity may be thought of both in a literal sense (in
terms of physical distance and accessibility) and in a figurative sense (in terms of similarity
of legal infrastructures and type of law practiced). In the case of the Isle of Man, the Manx
legal system is based on the principles of English common law but with important
differences: "Manx law has been developed to meet the Island's special circumstances,
particularly with regard to direct taxation, company law and financial supervision" (Isle of
Man Government, 1996b, p. 6). The judicial system based on English common law which
is present in the Isle of Man and most Commonwealth countries is seen as a sign of stability
and security and is an attractive force for several OFCs including the Isle of Man, and former
British colonial possessions in the Caribbean.
So much is at stake in the workings of the financial marketplace that the political
stability of the financial center must never be in question. A well-established democratic
system is one of the reasons cited for the success of the British Isles OFCs (Johns and Le
Marchant, 1993). Hampton (1996c) has taken the political issue even further, asserting that
the political status of an OFC is of paramount importance. "Most OFCs are either
dependencies, ex-dependencies or colonies of a major power or are in some form of
relationship with a mainland or 'onshore' country" ibidd., p. 69). Hampton further argues that
the attitude of the onshore state toward the offshore state helps understand the location of
OFCs today. Since the London-based establishment of the Euromarkets in the 1960s, the UK
has been known for its more permissive attitude toward OFCs especially when compared to
the US. Moreover, "the overall attitude of the UK government towards OFCs appears to
have changed over time from acquiescence to encouragement" ibidd., p. 77).
Some of those factors argued to be important to the success of OFCs are more global,
controlled and facilitated in part by the nearest financial core, specifically, the factors of
legislation, political relationship, and location. The other factors (technology, networks and
labor characteristics) are more local and tend to be developed independently by the
marketplace and are less influenced by the political relationship between OFC and core. The
next section will further develop the conceptual framework by analyzing how the local and
global are linked in the workings of an offshore financial center.
Forging Local-Global Links
How does one OFC link into the global economy? Figure 3.2 illustrates the local-
global links along three dimensions: location, function, and regulation (see also Cobb,
forthcoming). Although reputation, created in most instances through specific financial
regulation and supervision, is the most critical element in the successful operation of an
OFC, the position (or location) of the OFC, as well as the functional links exhibited by
financial firms operating in the center, are essential elements in the analysis of global-local
OFC FUNCTION O OFCs
Figure 3.2. Forging local-global linkages
Links to the nearest world city (London, in the case of the Isle of Man) are stronger
than links to other world cities due to proximity and same time zone (this factor was noted
by Roberts 1994). Proponents of the view that location no longer matters (O'Brien 1992)
have been far outweighed by those who believe that face-to-face interactions will always be
important (Granovetter, 1985; Pryke and Lee 1995; Thrift, 1994). Moreover, regular face-to-
face contact solidifies both the trust that develops between those involved in the provision
and consumption of financial services, and the necessary and often fluid knowledge that is
required for the successful provision of such services (Leyshon and Thrift, 1997). Much
face-to-face contact occurs between an OFC and a world city, on the part of financial services
providers, offshore clients, and the OFC government acting as the regulator of such services,
so proximity (via an accessible and reliable airline connection) is vital. Regular face-to-face
contact serves to deepen the critical construct of trust between offshore service provider and
onshore client, and to solidify the necessary flow of information or knowledge between
onshore and offshore regulators and legislators.
But the locational or geographic relationship between the OFC and mainland centers
is more complex than just a matter of distance. The links between OFC and mainland center
has to be seen in terms of the political infrastructure linking (or separating) the two.
"Relationships between the dominant blocs and the adjunct offshore financial centers at their
margins are contradictory, as the powerful countries treat the offshore centers at once as
useful and as an irritating potential threat" (Roberts, 1994, p. 101). The relationship between
an OFC and a core financial center may take many different forms. The nearest mainland
center may have the power, depending on the political status of the OFC, to curtail OFC
access to the global financial system by legislatively "shutting down" offshore operations.
In the case of the British Isles' OFCs the relationship may be described as parasitical, as
OFCs could not survive without the political consent of the core (London). That relationship
is also fragile and vulnerable, in that the dependent political status of the OFC ensures that
changes in the political climate of the onshore jurisdiction could have serious ramifications
for the OFC. The relationship between non-dependent territories (for example Cyprus or
Barbados) and their respective financial cores may be less overt and the political will of the
core be felt less keenly in the OFC.
The functional fit, expressed in terms of the organizational relationships between
financial services providers in an OFC, on the one hand, and international markets, head
offices, other financial companies and international investors, on the other, is another way
to conceptualize global-local links. Spatially, this is particularly evident in the way in which
one OFC is in regular contact with other OFCs because of the functional networks
established by service providers. Formal linkages are normally present within the corporate
structure of many of the financial institutions present on an OFC, for example, the
distribution of branches of a global banking network or insurance firm. Within the past year,
many global offshore banking facilities in the British Isles' OFCs (for example, offshore
operations of some of the major high street banks, along with some of the older investment
houses), have reorganized provision of services within a functional offshore grouping which
typically includes all the British OFCs (Jersey, Guernsey, Isle of Man). In other words, all
offshore services whether provided and managed from Jersey, or the Isle of Man, are part of
the same corporate group. In some instances it is possible to recognize distinct spatial
divisions of labor within a particular corporation as front office functions are provided in one
OFC and back office functions in another.
Kleinfeld (1994, p.20) argues that when prospective offshore clients compare
jurisdictions, the most important factor is the "legal and regulatory environment which has
been specifically established to benefit the type of business being considered or sought".
Fisher (1994, p. 19) identifies one of the major OFC success factors as "quality of
regulation-a center should be capable of maintaining high standards of regulation combined
with a flexible approach ... it should be easy to use not to abuse".
An OFC is in regular contact with much of the rest of the global economy (the
onshore world) in its quest for acceptance and recognition as a reputable place to do
business. The legislative "climate" of an OFC specifically with respect to regulation and
taxation issues is of fundamental importance to its initial establishment (Doggart 1979;
Walter 1985). Furthermore, deliberate public and private marketing and promotion efforts
are necessary to see continued growth and success. For example, the government of a small
OFC may deliberately target specific financial institutions by passing a piece of legislation,
or a specific geographic market by writing legislation, that legitimately meets the needs of
wealthy onshore clients in their quest for efficient wealth management strategies.
No doubt exists as to the complexity of the modem financial system and the existence
of three primary financial centers. It has been argued, however, that small island OFCs have
a small, but nevertheless important, role to play in the global circulation of capital. But what
makes a small island OFC tick? What are these OFCs doing to ensure their continued
success and growth? How exactly do they link in to the global system of capital flows? This
section addresses a research methodology to be used to analyze one OFC, the Isle of Man.
The major research questions to be addressed in this project are:
1. Why has the Manx financial sector grown so rapidly over the past 20 years?
2. What type of niche market (if any) and core competencies does it offer?
3. How does the island's financial sector link in to the global financial network?
Primary data were obtained using a personal interview/questionnaire technique, in
part because of the author's links to the island as a native, and the fact that representatives
of some of the firms are known personally to the author. More importantly, this technique
has been used with considerable success by other researchers (see Healy and Rawlinson,
1993; Malecki and Veldhoen, 1993; Markusen, 1994; Schoenberger, 1991; Yeung, 1995).
Approximately 300 firms offering financial services are located on the Isle of Man
(Isle of Man Government Finance Factfile, 1995). A stratified sample of 25 percent (=75
firms) of the total number of firms was drawn to ensure that firms from all parts of the
financial sector were included. Specifically, weighted random samples were drawn to ensure
inclusion of the following types of firms: banks; investment businesses; collective
investment schemes; building societies; insurance companies; shipmanagement companies;
stockbrokers; accountants. Representatives of the Manx Government, the Financial
Supervision Commission, the Insurance Authority, and other "key players" in the finance
sector were also interviewed for further insight on the evolution of regulation and supervision
on the island. Finally, a representative from Manx Telecom was interviewed to gain further
knowledge of the role of telecommunications both in the growth of the financial sector and
the facilitation of global linkages.
The survey was a mixture of objective and subjective questions (Beaverstock, 1994;
Healy and Rawlinson, 1993), and was divided into three sections. Section One of the
questionnaire addressed general information about the firm being surveyed. The most
critical questions asked in this section pertain to the size of the firm, the type of services
provided, the ownership structure of the firm, the length of time the firm has been present
on the island, and the growth in size of the firm since its inception.
Section Two addressed the number and type of linkages established by the firm on
a daily basis, both external to the island and internal to the island. Types of communication
link used, purposes of communication link, and specific places contacted was ascertained.
Also, the identification of any formal and informal business networks used by each firm was
Section Three addressed, with subjective, open-ended questions, perceptions
regarding the reasons for the establishment/growth of each firm surveyed and also the growth
of the Manx financial sector in general. Questions addressed the importance of the six major
success factors: regulation/ supervision, communications technology, networks, labor
characteristics, location, political stability (Figure 3.1).
Secondary data were compiled both to compare with, and expand, the findings from
the primary data. Secondary data were gathered to ascertain the exact quantitative growth
of the sector over the past twenty years, coinciding with the First Banking Act of 1975
(I.O.M. Financial Supervision Commission, 1994a). The data were compiled from a variety
of sources including: I.O.M. Census, I.O.M. Government Policy Reports, I.O.M. Government
Industrial, Financial and Commercial Directory, I.O.M. Financial Supervision Commission
Annual Reports, telephone directory yellow pages, Isle of Man Examiner.
Secondary data addressing legislative changes made over the past twenty years were
compiled from Isle of Man Government Policy reports and information available from the
Isle of Man Government Office of the General Registry. Specific legislative changes (Acts
of Tynwald) were compared temporally to the growth in the number of financial institutions
operating on the island. Data addressing specific changes in the telecommunications industry
over the past twenty years were obtained from Manx Telecom.
Chapters 4, 5, and 6 analyze the results of the survey/questionnaire given to financial
practitioners and government officials. Findings will show that responses to all questions
vary by type of service provided by the firm:
1. Banks are likely to: be branches of international firms; have been on the island for a
relatively long time; have been influenced by the Banking Acts 1975-86; have
benefitted from the establishment of the Financial Supervision Commission in 1983;
make large numbers of external linkages using private, sophisticated communications
networks centered on London; have the need for a relatively large number of skilled
and semi-skilled workers.
2. Investment Businesses and Collective Investment Scheme Managers are likely to: be
newer additions to the island's financial sector having responded to specific
legislation and supervisory practices established in the late 1980s; have less
sophisticated modes of communication; have mainly U.K. rather than global
linkages; require a skilled labor force.
3. Building Societies are relative newcomers to the island, due to the passage of the
Building Societies Act of 1986, and are likely to: have most linkages with the U.K.;
require both skilled and semi-skilled workers; believe location is a critical factor.
4. Insurance Companies are likely to: have seen the greatest amount of growth after the
passage of the Insurance Act of 1986; contain a mix of global and local firms with
associated differences in mode of operation; require skilled and semi-skilled workers.
5. Shipmanagement Companies are likely to: vary in size; have mostly global linkages;
require skilled and semi-skilled workers.
6. Stockbrokers and Accounting Firms are likely to: vary in size and ownership
structure; require a relatively large number of workers with professional
qualifications; vary in type of linkages but focus on London; use and benefit from
In general, it is expected that the six so-called success factors will vary in importance
according to the type of services provided by the firm. It is likely, though, that
regulation/supervision and formal and informal networks will be critical factors for every
firm. The importance of technology will vary according to size of firm and type of service
provided. All firms have certain labor characteristics in common, i.e., the demand for skilled
labor, but the mix of skilled/semi-skilled labor will vary by size of firm and type of service
provided. The factor of location will vary in importance depending on type of service
provided and niche market served. The political stability of the island and its political
relationship with the U.K. will be important, but not critically so, to all firms.
Setting the Stage: The Isle of Man as an OFC
The Isle of Man is a British self-governing Crown Dependency located mid-way
between England and Ireland in the Irish Sea (Figure 1.1). The land area of approximately
220 square miles contains a population of over 71,700 in 1996 which is the highest
population recorded since the Census was first undertaken in 1821. The Manx economy is
now dominated by the finance sector, which has doubled in importance over the past twenty
years to comprise 36% of the island's GNP and almost 20% of the workforce (Lapper and
Stuart, 1996). The Isle of Man lagged behind the Channel Islands (Jersey and Guernsey)
which began to function as OFCs in the 1950s and 1960s) in its quest to become a
diversified, international OFC (Hampton, 1996b). However, the importance of the Manx
offshore financial sector has been evolving slowly over the past 30 years, beginning with the
deliberate effort by the government in the early 1960s to establish the island as a "tax haven"
for high net worth individuals (HNWI). These HNWI were attracted to the island because
of the development of a favorable income tax regime created by abolishing the island's surtax
and reducing the standard rate of income tax (Solly, 1983), and a concomitant punishing tax
regime (as perceived by many British HNWI) existing in 1960s Britain under the Labour
The island enjoys total independence from the UK on matters of direct taxation.
Features of the tax system include low corporate and personal tax rates, no capital transfer
or gifts tax, no capital gains tax, and no death or estate duties. Although not full members,
the Island, along with Jersey and Guernsey, has a special relationship with the European
Union (EU) under Protocol 3 of the Act of Accession of the UK and is required to apply the
Common Customs Tariff and equivalent measures to those operated by the UK under the
Common Agricultural Policy. This relationship allows for free movement of goods between
the Island and the EU whilst at the same time releasing the Island from compliance with all
of the other bureaucratic regulations regarding the marketplace. This special relationship
with the EU might be perceived as an extra factor conditioning the growth of the island as
an OFC as "outsiders" are able to gain access to the EU through the island. Furthermore, the
island is considered outside the Union for trade in financial services and products, and is not
therefore bound by Union directives in this area (I.O.M. Financial Supervision Commission,
With the aim of further developing and broadening the island's financial services
industry, two significant pieces of legislation were enacted by Tynwald (the Manx
Parliament) in the 1970s: the Companies Act of 1974, and the Banking Act of 1975. The
former served to authorize insurance companies carrying out business in the island, and the
latter provided for the licensing of banks and certain investment businesses in the island.
What was lacking at this point, though, was effective regulation and supervision of
businesses once authorized or licensed. Furthermore, the lax regulatory regime enabled a
series of business failures to occur in the early 1980s-in particular, the devastating crash
of the Savings and Investment Bank Limited (SIB) in 1982, with the loss of a deposit base
of over 40 million, which was attributed to lax regulation and nonexistent supervision. As
reported by Solly (1994, p. 90), "the reverberations of these failures continued throughout
the decade of the nineteen-eighties. The cost of damage in terms of loss of reputation, loss
of confidence, both locally and elsewhere, and the additional expenditures incurred in the
winding up, reporting, and various civil and criminal legal actions and, finally, compensation
to depositors, is incalculable".
The Manx Government instigated reactive legislation to establish a comprehensive
regulatory and supervisory regime to ensure that an "SIB" would never occur again. To this
end, the Financial Supervision Commission (FSC) was established in 1983, and the
Insurance Authority in 1986. Since the respective dates of their inception, these two
Statutory Boards have introduced proactive regulation in the form of "meaningful systems
of licensing and supervision of banks, building societies, investment businesses, collective
investment schemes [mutual funds or unit trusts] and insurance companies" (Solly, 1994, p.
90). Attraction of offshore business entities, such as non-resident companies, offshore banks,
exempt insurance companies and unit trusts (mutual funds), occurs through exemption from
Manx income tax. Non-resident companies are particularly attractive to an OFC because of
the fees (in the form of an annual license) they generate. In addition, the island is attractive
to those wishing to form non-resident companies because of the low labor costs involved.
The most recent legislative agenda of the Manx Government has been of a more
proactive nature whereby sophisticated regulatory massage of already existing onshore
legislation has resulted in the promulgation of new laws designed to attract international
investors seeking to minimize tax obligations within a clear legal corporate entity. This is
best exemplified by the Isle of Man's Limited Liability Company Legislation (LLC) based
upon the U.S. "Wyoming Principle", which came into force in October, 1996.
Table 3.1 shows the number of firms providing specific financial services in the Isle
of Man in 1995. Currently, the deposit base for Manx licensed banks is over 14 billion, up
from 2.5 billion 10 years ago; the number of collective investment schemes managed in the
island is now well over 100, with assets of over 1 billion; the assets managed by insurance
companies stands at over 4 billion; and the number of companies registered in the island
is over 36,000 (Offshore Outlook 1996; Isle of Man Government 1996).
The financial services sector is a diversified one with similar numbers of banking
establishments; insurance companies and brokers; and accountants. In fiscal year 1994/95,
the Manx financial sector generated 36% of the island's GDP of 612 million (Isle of Man
One of the most critical global-local links with respect to regulation is the island's
membership (along with 18 other OFCs) in the Offshore Group of Banking Supervisors,
which was set up in 1990 at the instigation of the Basle Committee on Banking Supervision.
According to the I.O.M. FSC (1994b, p. 5),
The Offshore Group supports the Basle Committee's minimum stands for the
supervision of international banking groups and their cross-border establishments;
and the Basle Committee's Capital Convergence proposals. The Group is also
committed to the Basle Committee's recommendations and to the International
Financial Action Task Force recommendations on money laundering.
Table 3.1. Financial services firms, 1995
TYPE OF FIRM NUMBER
Bank (domestic, offshore, building society) 60
Insurance Companies Life 14
Insurance Companies Other 22
Independent Insurance Brokers 24
Investment Businesses 46
Fund Management Companies 20
Accountants 64 (5)
Advocates (Lawyers) 21(20)
Legal Practitioners 12
Ship management 20
Source: Compiled from I.O.M. Government Finance Factfile, 1995.
Note: figures in parentheses show number of firms designated as "regulated persons", that
is, allowed to conduct investment business.
In addition to adherence to international standards, all banks operating in the Isle of
Man have to be granted a license by the FSC and have to conform to issues of both financial
and non-financial regulation. Financial regulation covers capital adequacy, prudential ratios,
audit, and disclosure requirements, whereas non-financial regulation deals with matters such
as ownership, management and conduct of the business. The mechanism which the FSC has
chosen to use to minimize reputational risk is a "firmly applied and clearly defined licensing
policy. [Also] the Commission has also always been of the view that it should not license
any institution or business which it cannot effectively supervise.....Hence, one of the basic
requirements is that applicants should be managed and controlled on the island" (IO.M. FSC
1994a, p. 8, emphasis added). The FSC uses an initial "fit and proper" test which addresses
the applicant's satisfaction of three broad criteria: integrity, solvency, and competence. In
addition, "in the conduct of banking business a key requirement is the business must be
conducted on a day to day basis by at least two individuals (known as the 'four-eyes
The other major statutory body in the island is the Insurance Authority, which
functions to implement the Insurance Act, 1986, which is "designed to ensure that those who
run insurance businesses are fit and proper and that the companies have sufficient resources
at all times" (I.O.M. Insurance Authority, 1996). The Authority authorizes and supervises
firms that wish to offer insurance services and also issues permits and registers all insurance
management companies doing business in the island. Global-local links for regulation are
forged by regulation of Manx-based insurance providers by the International Association of
Insurance Supervisors (IAIS) as well as the Isle of Man Insurance Authority.
Further functional and regulatory linkages are forged through membership of Manx
regulators in the International Organization of Security Commissions (IOSCO) for
international securities transactions, and recognition of the Manx regulators by the Enlarged
Contact Group (ECG) which is a global regulator of collective investment schemes (mutual
funds/unit trusts) and their operators. The rational for the Manx, and other small island
financial regulatory bodies, to link into global supranational regulatory and supervisory
bodies is two-fold: first, to increase the reputation of the OFC as that OFC seeks to adhere
to global standards and, second, to benefit from flows of information regarding global
financial issues particularly with respect to anti-money laundering policies.
In addition to establishing global linkages, the Isle of Man seeks to benefit from the
trust, knowledge, and networks inherent in a small place when creating new, and in many
instances proactive, regulation and legislation. The creation of new financial legislation
occurs though a process of consultative committee networking (Moran's (1991) "Meso-
corporatism") whereby representatives of various elements of the private sector (banking,
insurance, mutual finds, lawyers, accountants) meet with members of the government (the
Treasury, banking and insurance regulator and supervisors) on a regular quarterly basis to
address problems and issues of concern. Members of both the private and public sector can
place issues on the agenda and free-flowing discourse is encouraged. In many instances, the
end result of the consultative committee process is a new piece of financial legislation for
the island, often created proactively to exploit niche markets in the burgeoning onshore
demand for wealth management strategies. This process, and other networking strategies,
is analyzed in further detail in Chapters 4, 5, and 6.
THE GROWTH OF OFFSHORE FINANCE IN THE ISLE OF MAN
Perspectives regarding the growth of the Isle of Man as an international offshore
financial center, from those actively involved in the provision of financial services on the
island, were gathered via a series of personal interviews. A sample of 20 percent of all those
engaged in providing financial services was drawn from information published by the Isle
of Man Government Finance Factfile (1995), and the Financial Supervision Commission's
Annual Report (1995), together listing all practitioners in the sector. The resulting sample
size was 68 private sector firms, ranging from banks and building societies, to life and
captive insurance firms, to company and trust formation and administration firms, to
accountants, lawyers, ship management firms, and others. The final completed sample size
was 60 (or 88% response rate), due to the refusal of some firms to participate in the study,
and the doubling-up' of listings from government sources. The private sector sample was
complemented by a survey of 11 representatives within the public sector, in order to capture
the difference in perspectives (if any) from the different sides of the financial services sector
'"Doubling up" refers to the fact that one organization might actually be listed in
government documents as two different companies providing different services and having
different financial licenses. The personnel involved in providing the services for the two
companies are actually identical though.
itself. One difference which soon became apparent during the survey was the perceived role
played by each side in marketing and promoting the island as an OFC. Many of the private
sector respondents felt that they alone were responsible for promoting the island until very
recently, whereas the public sector respondents had a much more positive outlook on their
marketing role. The issue of marketing and promotion of the island is analyzed in much
greater detail in Chapter 6.
Data Collection Process
The period of data collection lasted for approximately two and one-half months
during the summer of 1996. Representatives from those firms appearing in the original
sample population were sent letters of introduction one week prior to my arrival in the Isle
of Man, briefly describing the research project and requesting their help. Effort was made
to contact the top executive in each firm: some of these names were available from
government publications; others were found through inspection of recent business sections
of the local newspaper; some were known through links to the island as a native; and a small
number were ascertained by telephone calls to receptionists of the firms themselves.
First, potential respondents were contacted by telephone as a means of identifying
myself2, once again asking for their cooperation, and requesting an appointment for an
interview to take place. Second, a pilot study was undertaken to test the effectiveness and
appropriateness of the questionnaire (see Appendix A for a copy of the questionnaire).
2In a small place like the Isle of Man, receipt of an "official" letter from the United
States resulted in almost immediate recognition of my name when first phoning, even by
some of the larger firms surveyed.
The actual interview period lasted for 9 weeks and the number of interviews per week
ranged from 4 to 13, with an average of 8 per week. Summer months were expected to be
"slower" in terms of business activities because of holiday time and some interviews had to
be arranged in between executives' off-island holidays3.
It was not possible to schedule more than 4 interviews a day due to the projected
length of each and the time taken to review and write up notes taken after each interview
(Yeung, 1995; Markusen, 1994). The business culture of the island (corresponding with the
UK and unlike that of the US) results in a working day from 9am to 5:30pm4. Most
respondents did not want to schedule an appointment "first thing" in the morning or last thing
at night, so the effective window for interviewing lasted from 10am to 4pm. The interviews
were semi-structured with a number of both closed-end objective questions and open-ended
The private sector interviews ranged from 20 minutes to 2 hours, although on average
the interviews took between 45 and 60 minutes. The private sector questionnaires (n = 60)
were structured in a different way from the public sector questionnaires (n = 11). Key public
sector participants were selected when the survey of the private sector was already underway
and the construction of the questionnaire for the public sector was influenced by continuing
'Deliberate planning to conduct the interviews in early to mid-summer rather than late
summer resulted in less disruption for respondents' holiday plans. British (and Manx)
schools traditionally break for summer holidays from mid-July to late-August or early
September which is when the majority of business people also take holidays.
4lHowever, a small number of firms (particularly the larger corporations) had extended
working hours to correspond with their corporate linkages to offices in other time zones.
feedback from the private sector. The public sector questionnaires, although based on the
private sector questionnaire, consisted of a number of additional open-ended subjective
questions addressing the reasons for the growth of the Manx financial sector, and the
perceived role played by the public sector.
The quality of the information gathered during the interviews varied somewhat: all
respondents were polite and most were interested in receiving feedback from the study5. As
expected, public sector respondents were very enthusiastic about their role in the
development of the financial sector and were interested in promoting the island as much as
possible. Furthermore, some private sector respondents were genuinely interested in the "big
picture" of offshore finance and offered unsolicited opinions on issues not covered in their
questionnaire. These open-ended subjective comments are analyzed further in Chapter 5.
This section presents findings from the objective sections of the questionnaire given
to the private sector participants (see Appendix C for aggregate summaries of findings).
Most of the open-ended questions including all public sector findings is analyzed in Chapters
5 and 6. The presentation and discussion of data is organized to correspond with the format
of the questionnaire. First, general findings illustrating the growth of the finance sector are
presented. Second, local-global linkages will be explored and, third, specific linkages in the
form of networks is analyzed.
5All survey respondents were promised a summary report of findings which was
mailed to them in January, 1997. See Appendix B for a copy of this report.
Type of Service Provided
Of the 60 private sector interviews, 9 (or 15 percent) of the respondents did not
provide any type of "offshore" services and are henceforth referred to as the providers of
"domestic" financial services. The remaining 51 (or 85 percent) of respondents provide
offshore services to non-residents of the Isle of Man and services to high net worth
individuals (HNWI) resident in the island; 25 firms also provide domestic services to other
firms or services to non-HNWI resident in the island (Table 4.1).
Table 4.1. Type of survey respondents
SURVEY RESPONDENTS NUMBER %
Private Sector Offshore only 26 37
Private Sector Offshore & Domestic 25 35
Private Sector Domestic only 9 13
Others 11 15
TOTAL 71 100
Source: author's survey
Note: a government officials, regulators, Chamber of Commerce, Manx Telecom.
Findings from the private sector were grouped by distinct financial services sector
into 4 categories: banking, insurance, accountancy, and "other". The banking sector
includes retail or "high-street" banks, investment banks, and building societies. The
insurance sector comprises life assurance (insurance) companies, captive insurance
companies, insurance brokers, and individual insurance agents. The "other" sector includes
company and trust formation and administration firms, law firms, investment companies, and
shipmanagement companies. Table 4.2 shows that these groups are roughly equal in size and
so illustrates that a balanced sample of firms was identified.
Table 4.2. Respondents by Sector
SECTOR FIRMS %
Banking 15 25
Insurance 14 23
Accountancy 12 20
Other 19 32
TOTAL 60 100
Source: Author's survey
Figure 4.1 shows the type of financial services offered within each sector. It can be
seen that 6 banks provide only offshore services (therefore cannot be used by Isle of Man
residents) and 9 banks offer both domestic (retail) and offshore services. Nine insurance
companies are offshore only, and 5 provide only domestic services. Nine accountancy firms
provide both domestic and offshore services and 3 businesses service only the domestic
market. Twelve "other" firms provide only offshore services, 6 firms provide both, and 1
firm serves only domestic clients
Each respondent was asked to provide a more detailed list of the financial services
undertaken by that company (Table 4.3).
Bank Ins Account Other
Offshore Both -] Domestic
Figure 4.1. Type of financial services offered in each sector.
Table 4.3. Specific services provided by firms.
SERVICE # FIRMS % (n =60)
Retail/domestic banking 7 12
Offshore banking 16 27
Accountancy domestic 12 20
Accountancy offshore 9 15
Fund management 5 8
Company/trust formation & admin. 11 18
Insurance captive 4 7
Insurance life/broking 12 20
Shipmanagement 4 7
Legal 5 8
Source: Author's survey.
The total number of services (85) is greater than the total number of firms (60)
because some firms offer more than one type of service. In particular, some of the larger
institutions offer a wide variety of services, for example banking, fund management, and
insurance services provided by one firm. This is a key finding as current literature
acknowledges the increasing trend of "one-stop shopping" for financial services (The
Economist, 1997b). Financial services provision is further complicated by the fact that
different types of firms offer the same type of financial services, for example, company/trust
formation services are provided by accountancy firms, banks, investment companies, and
The difference between producer services and consumer services is highlighted by
the functional roles of accounting firms. Some provide "domestic" (producer) services which
either (a) service the financial sector (for example, audit services for banks), or (b) service
the rest of the Manx economy (for example, audit services for manufacturing firms, retailers,
farmers, etc.). Others provide direct offshore financial services to expatriate clients and
HNWIs living in the island and are competing directly with other offshore financial
institutions in the Manx financial sector.
The Growth of the Manx Financial Sector
Growth of the Manx financial services sector is illustrated by: the number of years
each firm has been present in the island and the number of employees in each firm. Table
4.4 shows descriptive statistics for the first variable "years". The mean number of years all
firms have been present in the island is 29.1, the standard deviation is 41.1, and the median
is 10 years. Chi-squared testing of normality of this variable resulted in the rejection of the
null hypothesis at the 0.05 level and therefore precludes any further rigorous statistical
Table 4.4. Descriptive statistics for the variable "Years".
TYPE OF SERVICE N mean s.d. median
All' 60 29.1 41.1 10
Offshore 26 9.0b 3.6 9
Domestic 9 46.6 53.9 9
Both 25 43.7 48.9 22
Banking 15 26.6 36.8 16
Insurance 14 33.6 46.6 10
Accountancy 12 28.5 39.8 9
Other 19 28.1 40.6 10
Source: Author's survey.
Note: reject Ho: normal distribution (0.05 level).
b significantly different from Domestic & Both at 0.05 level.
The recent vibrancy of the island's finance sector is better illustrated by Figures 4.2,
4.3, and 4.4, which show the number of years firms have been doing business in the island.
Over half of the firms are less than 11 years old and more than three-quarters are less than
25 years old. A handful of firms have been present on the island for over 100 years; they
served the domestic market until recently, but now some of them have adapted to provide
offshore services in addition to domestic services although, some have not. Some of the
smaller firms are new but some or all of their personnel have been on the island working in
the financial sector for longer, but with a different firm, usually in the accountancy field.
1-5 6-10 11-15 16-20 21-25 >25
Figure 4.2. Number of years present in the island.
Figure 4.3 shows the length of time on the island by sector and shows that a large
number of insurance and "other" businesses commenced operation between 6 and 10 years
ago. This can be directly linked to the creation of specific legislation in 1986 (The Insurance
Act), which regulates those carrying on insurance business in the island (Solly, 1994). The
newest banking sector firms are actually building societies, established in Douglas after
appropriate legislation opened the door for their presence in the island (The Building
Societies Act of 1986). The relationship between U.K. legislation and Manx legislation for
some building societies in the island may be seen as a process by which the U.K. established
"enabling" legislation and the Isle of Man "sympathetic" legislation.
Some representatives of each of the service sectors have been present on the island
for over 25 years (some, in fact, for over 100 years) serving the domestic market. Regular
and stable growth of banking institutions is evident from inspection of Figure 4.3; most of
the growth in insurance companies has been within the last 15 years; and "other" businesses--
specifically investment businesses and shipmanagement companies--have seen large growth
over the past 10 years. Once again it was the passage of "enabling" legislation that caused
this growth to take place.
1-5 6-10 11-15 16-20 21-25 >25
Bank f Ins. Acct. [ Other
Figure 4.3. Number of years present in the island, by service sector.
Figure 4.4 shows the length of time present in the island by type of services offered
(domestic or offshore). It can be clearly seen that most of the offshore growth has taken
place over the past 10 years. Furthermore, the largest number of firms offering both offshore
and domestic services have been present in the island either for a long time (over 25 years),
or over the past 10 years. Few firms have been resident for an intermediate length of time
in the island.
1-5 6-10 11-15 16-20 21-25 >25
Offshore 0 Both Domestic
Figure 4.4. Number of years present in the island by type of service offered.
The other variable illustrating the growth of the sector is "employment" which refers
to the number of full-time employees within each firm surveyed. Table 4.5 shows the
descriptive statistics for this variable which is normally distributed at the 0.05 level. The
mean number of employees for all firms is 54.6, the standard deviation is 85.1, and the
median is 21.5. These statistics confirm the existence of a handful of firms employing large
numbers of people. In many instances, the number of employees grew from small to large
in a relatively short period of time, as offices were opened up by one or two individuals who
then oversaw a rapid increase in the number of employees as the volume of business grew.
Table 4.5. Descriptive statistics for the variable "Employment".
TYPE OF SERVICE n mean s.d. median
All' 60 54.6 85.1 21.5
Offshore 26 46.2 55.7 20.5
Domestic 9 4.8b 4.0 2.0
Both 25 85.9 116.6 39.5
Banking 15 98.2' 122.9 39.0
Insurance 14 46.6 67.2 11.0
Accountancy 12 22.0 22.4 12.5
Other 19 46.5 70.9 30.0
Source: author's survey.
Note:' accept Ho: normal distribution (0.05 level).
b significantly different from Offshore and Both at 0.05 level.
c significantly different from Insurance and Accountancy at 0.05 level.
Figure 4.5 shows a breakdown of survey respondents in terms of size of firm. A
fairly even distribution in firm size is found, ranging from one-employee operations to firms
employing over 200 people. This measure can be used as a crude surrogate for size of
business; most small firms are engaged in the provision of domestic producer services
whereas many large firms are part of a national, if not international, business organization.
In some instances small firms were established as "spin-offs" from larger organizations. A
typical example of this process occurs within the accountancy sector, where an individual
will have trained and obtained the necessary professional qualifications while employed at
a large firm, then subsequently leave to set up a small-scale independent operation with one
or two employees, in some cases servicing the financial sector (producer services) and, in
others, directly competing with other firms providing offshore (consumer) services. This
trend was noted by Daniels (1995).
1 2-5 6-10 11-20 21-40 41-60 61-120 >120
Figure 4.5. Firm size.
Firm size within the four specific financial sectors is shown in Figure 4.6. The
greatest range in employee size occurs within the insurance sector range from one-person
businesses to very large firms of over 120 employees. Banks and "other" range in size from
very small (2-5 employees) to very large (greater than 120 employees); accountancy firms
range from very small to moderately large. Banking and accountancy are significantly
different from each other at the 0.05 level as are banking and insurance. Furthermore, firms
offering domestic services only are significantly different from those offering offshore
services and both types of services (Table 4.4). These findings illustrate that the Manx
financial sector is diversified in both type of financial service offered and size of firm.
0 -I L f
1 2-5 6-10 11-20 21-40 41-60 61-120 >120
Bank Ins. [ Account Other
Figure 4.6. Firm size by service sector.
Figure 4.7 shows firm size by type of service offered. Those firms providing offshore
services only have a wide variety in size, as do those providing both services, ranging from
small to large. Those firms providing domestic services only are not larger than 10
employees, and are significantly different from the other two services at the 0.05 level (Table
1 2-5 6-10 11-20 21-40 41-60 61-120 >120
SOffshore E Both Domestic
Figure 4.7. Firm size by type of service offered.
Figure 4.8 and Table 4.6 show how the "local" (the Isle of Man) links into the
"global" (the rest of the world). Survey respondents were asked with which parts of the
world their offices were in contact on a daily or very regular basis. Distinct patterns
emerged, with an evident distance-decay effect illustrated by the large number of linkages
with the U.K., Ireland, and other E.U. countries. Large numbers of linkages also take place
with North America, other offshore financial centers throughout the world, South Africa, and
the Middle East. These linkages comprise every type of business communication--be it with
clients, financial markets, or other offices within the specific corporate organization. Many
of the linkages to other OFCs are with other offices in the same corporate organization,
illustrating the trend of establishment of "offshore groups" within the corporate organization.
This appears to be particularly evident within the banking sector.
In addition, firms were asked about their local linkages and several interesting
patterns emerged. Respondents were asked what kind of local linkages or connections they
performed on a daily or very frequent basis. Table 4.7 shows that the types of linkages were
classified in three ways: linkages with (1) other professionals, i.e., bankers, accountants,
lawyers, (2) government agencies, i.e., regulators, tax office, (3) clients, i.e., HNWI.
The greatest number of local linkages (22) were between the 26 firms providing
offshore services and other professionals; it was "other" firms, followed by banks, that
established most links. Those 25 firms offering both offshore and domestic services had the
second largest number of local links with clients (18) and with other professionals (16).
Almost half of the linkages (48%) were within the financial service sector itself to other
professionals. This finding tends to refute the earlier allegation of a trend toward "one-stop
shopping" for financial services and leans more toward the assertion that many firms are
involved in the provision of financial services to offshore clients. Synergistic linkages
appear particularly strong for the banking and "other" sectors and, within the latter, for law
firms, company and trust formation/administration firms, fund management companies.
Number of Links
Number of Links within the
SIsle of Man
Table 4.6. External linkages.
EXTERNAL LINKAGES # FIRMS % FIRMS
-UK 38 63
-E.U. 24 40
North America 22 37
South Africa 12 20
Middle East 11 18
-Ireland 10 17
Far East 7 12
Latin America 6 10
Eastern Europe 1 2
British Isles' OFCs 18 30
Asian OFCs 18 30
European OFCs 16 27
Caribbean OFCs 9 15
TOTAL LINKAGES 192"
Source: author's survey.
Note: a total linkages are greater than total number of firms
because some firms have several linkages.
Table 4.7 Local linkages.
Type of Service Professional Government Client
Banking 11(18%) 6(10%) 9(15%)
Insurance 8 (13%) 2 (3%) 5 (8%)
Accountancy 8 (13%) 3 (5%) 9 (15%)
Other 15(25%) 6(10%) 6(10%)
Offshore 22 (37%) 8 (13%) 2 (3%)
Domestic 4 (7%) 1(2%) 9 (15%)
Both 16(27%) 8(13%) 18(30%)
Total linkages 42(48%) 17(19%) 29(33%)
Source: author's survey.
Note: percentages rounded to the nearest whole number.
Frequent linkages with government agencies form less than 20 percent of the total
linkages. This is probably due to the fact that interaction with regulators takes place either
on a sporadic needs basis, or on the regular quarterly (3 month) basis required by the
Over one third of the local linkages are with clients which are either individuals or
other firms in the island--the latter being particularly important for accountancy firms: even
banks have to be audited.
This section analyzes further linkages in the form of network participation. Table 4.8
shows the importance of networks as perceived by survey respondents. Seventy percent of
the firms surveyed were either part of an international corporate network, or a U.K. or Irish
national network. Those networks include banking, insurance, accountancy, and
shipmanagement corporate organizations. The individuals participating in the survey were
asked if they belong to any other types of network: over 70 percent belong to a "functional"
or professional network, such as the Isle of Man Bankers Association, the Manx Insurance
Association, or the Isle of Man Fund Managers Association. Furthermore, almost 50 percent
of the respondents belong to a general business/social network with the most cited example
being the Isle of Man Chamber of Commerce. In addition, one quarter of the respondents
use their own personal business networks, and state that building trust through these
networks is a critical element in the way that they do business and a major source of new
The results of this data analysis and the fact that so many financial practitioners
participate in some form of network warranted further in-depth analysis. Because the
findings from this part of the study were drawn from open-ended subjective-type questioning,
qualitative analysis was chosen as the method of analysis (see Yeung, 1995). Qualitative
analysis has its roots in anthropology, sociology and education and seeks to resolve data
into its constituent components to reveal their characteristic themes and patterns" (Coffey
and Atkinson, 1996, p. 9). Although criticized as lacking rigor, validity and reliability,
qualitative analysis is seen by many as "structured, formal, bounded, systematic, grounded,
methodological, particular, carefully documented, and impassive" (ibid.). Indeed, within the
new field of geography of finance, such analysis appears to be an appropriate method to use
when exploring what Leyshon (1997, p. 389) calls "alternative theoretical approaches to
money." These approaches draw "inspiration from other intellectual traditions, such as
critical social theory, cultural studies, and feminism ... And emerged out of a general sense
of unease and dissatisfaction with prevailing social theory and political economy account.
. [suggesting] that the economic world is too important, and too complex, to be left to
economists" ibidd., p. 389).
Table 4.8 Network Membership
TYPE OF NETWORK # FIRMS % FIRMS
Corporate' 42 70
Functional/professionalb 43 72
Business/social' 29 48
Personal 15 25
TOTAL NUMBER OF FIRMS 60
Source: Author's survey
Note: for example international bank, b association of insurance professionals,
chamber of commerce, d individual contact networks.
Three types of financial services "actor networks" were identified and linkages to the
fourth network--the client network--were analyzed (Figure 4.9). The system of offshore
financial services networks proved to be dynamic, both in terms of the networks themselves
and the individuals comprising each network. Financial services providers belonged to
different kinds of networks (corporate, professional, and/or social) and had several reasons
for participating in those networks.
Many respondents belonging to branches or subsidiaries of large transnational
organizations used local professional and public-private "policy-driving" committees or
networks as a means of participating in the development of the island's regulatory regime
which can be seen as a way of indirectly expanding their client-base. Respondents from
smaller firms, not part of a large corporate network, used local networks for several reasons,
including information sharing and direct marketing strategies. The "social" nature of finance,
acknowledged by Leyshon (1997); Thrift (1994); Leyshon and Thrift (1997) appears to hold
true in a small place acting as an OFC. Everyone knows everyone else and ease of access
to important people was mentioned by several respondents as an advantage of the island.
Three types of networks (corporate, local, and personal) drive the successful
provision of offshore financial services and help create the formation of the fourth--the client
network. Most of the offshore practitioners in the island are part of, or connected to, large
global corporate networks. The strength (or formality) of the links to the network exhibit a
number of different dimensions. For example, banking institutions may be described as
being "wholly owned subsidiaries" of a U.K.- based parent company, which in turn may be
owned by a multinational holding company, so are part of a truly global network. Some
insurance companies are part of a multinational corporate network; others rely on indirect
links to the global economy through the use of intermediaries (brokers or independent
financial advisors (IFAs)). "Other" offshore financial providers tend to participate in global
corporate networks in a less formal or rigid structure, or have no corporate network links.
Figure 4.9. Financial services networks.
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