Financial Services Cluster Luxembourg

Harvard’s Microeconomics of Competitiveness

Luxembourg’s Financial Services Cluster

Lalit Daga – ([email protected])

Habib Karam – ([email protected])

Mark Ludwinek – ([email protected])

Erik Norström – ([email protected])

Arun Rajendiran – ([email protected])

Alex Stöckl – ([email protected])

Yagmur Yaraman – ([email protected])

Microeconomics of Competitiveness with Prof. Mark Esposito

26th of April - Spring Semester 2010 – MIB 28

MOC – Cluster Analysis Luxembourg – Financial Services 26th of April 2010

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Table of Contents

INTRODUCTION ...................................................................................................................... 4

ECONOMIC ANALYSIS .......................................................................................................... 5

Economic History ................................................................................................................... 5

Economic Performance .......................................................................................................... 7

Trade Situation and Development .......................................................................................... 9

Foreign Direct Investment (FDI) ........................................................................................... 9

Luxembourg’s Role in the European Union ......................................................................... 11

THE NATIONAL BUSINESS ENVIRONMENT .................................................................. 12

Factor Conditions ................................................................................................................ 12

Context for Firm Strategy and Rivalry ................................................................................. 13

Related and Supporting Industries ....................................................................................... 13

Demand Conditions .............................................................................................................. 14

Competitiveness and other Business Environment Indicators ............................................. 14

THE FINANCIAL SERVICES CLUSTER ............................................................................. 16

History & Development of the Cluster ................................................................................. 16

Cluster Performance ............................................................................................................ 17

Banking ............................................................................................................................ 17

Investment Fund Administration ...................................................................................... 18

Insurance .......................................................................................................................... 20

Stock Exchange ................................................................................................................ 21

Islamic Finance ................................................................................................................ 22

Cluster Diamond .................................................................................................................. 23

Factor Conditions ............................................................................................................. 23

Context for Firm Strategy and Rivalry ............................................................................. 25

Related and Supporting Industries ................................................................................... 26

Demand Conditions .......................................................................................................... 26

STRATEGIC ISSUES & RECOMMENDATIONS ................................................................ 27

Bibliography ............................................................................................................................. 28


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Table of Figures

Figure 1 – Industry Sector GDP Contribution Development ..................................................... 5

Figure 2 - GDP Growth Rates (compared to selected European countries) ............................... 7

Figure 3 – GDP (PPP) per Capita Growth of Luxembourg ....................................................... 7

Figure 4 – Macroeconomic Performance Indicators – Development ........................................ 8

Figure 5 – Macroeconomic Performance Indicators – Comparison to other EU Countries in

2009 ............................................................................................................................................ 8

Figure 6 – FDI Inward (as % of GDP) in 2005 ........................................................................ 10

Figure 7 – Multinational Corporations with (regional) Headquarters in Luxembourg ............ 10

Figure 8 – Porter’s National Diamond on Luxembourg’s Business Environment .................. 12

Figure 9 – Economic Indicators of Luxembourg (2006-2009) ................................................ 15

Figure 10 – Banks in Luxembourg by Country of Origin ........................................................ 18

Figure 11 – Evolution of Assets and Number of Funds in Luxembourg ................................. 19

Figure 12 – European Fund Investment Market 2008 .............................................................. 19

Figure 13 – Cross-border Fund Registrations of UCITS in 2009 ............................................ 20

Figure 14 – Luxembourg Insurance Sector .............................................................................. 20

Figure 15 – Origins of Insurance Premiums in Luxembourg ................................................... 21

Figure 16 – International Bond Market – Market Shares ......................................................... 21

Figure 17 – Porter’s Diamond on Luxembourg’s Financial Sector ......................................... 23

Figure 18 – Science and Innovation Profile of Luxembourg (compared to EU average) ........ 24

Figure 19 – Origin of Owners of AuM for Luxembourg’s Private Banking Sector (Totalling

250 Billion) ............................................................................................................................ 26


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INTRODUCTION

The Grand Duchy of Luxembourg is a small European country at the border of Belgium,

France and Germany. The country is a democracy with a constitutional monarch, ruled by its

Grand Duke, Henri. Luxembourg is a trilingual country with German, French and

Luxembourgish as official languages. Although the state is secular, the country is primarily

Roman Catholic. The currency of Luxembourg is the Euro.

Despite its population of only slightly over half a million1, Luxembourg has managed

to become one of the biggest financial centers in the world. Founding member of the

European Union, NATO, OECD, the United Nations, Benelux and the Western European

Union2, Luxembourg has managed to rapidly increase its political and economic importance

in Europe as well as around the world. With a gross domestic product per capita of $78,000 in

2009, Luxembourg is the country with the highest GDP per capita in the world according to

the IMF3 and the World Bank4, and the third highest according to the CIA.5

Luxembourg’s financial sector has been growing for more than the past two decades.

Banking and other financial exports account for the majority of the country’s economic

output. As a result of Luxembourg’s growing financial sector, a financial cluster has emerged.

This report analyses the development of Luxembourg, its national business environment and

its financial cluster. It furthermore gives recommendations to Luxembourg’s government and

businesses on how to sustain its competitive financial cluster and increase its competitiveness

in the national business environment.


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ECONOMIC ANALYSIS

The economy of Luxembourg, while small, is highly developed and is considered a mixed

economy dominated by service and production industries. As a part of GDP, services provide

86%, industry 13.6% while agriculture only stands for 0.4%. Labor is similarly divided, with

most finding employment in the service sector at 86%, in industry 17.2% and in agriculture

only 2.2%. The service sector is driven by the financial and information technology

industries. The Industrial sector is in turn supported through iron and steel, as well as rubber

industries.6

Economic History

Luxembourg’s economy has ridden the highs and lows of different economic periods

through its history. With the introduction of metallurgy in 1876 and generous natural ore

deposits, Luxembourg became dominated by a strong steel industry. During its peak in the

1960’s, steel and iron accounted for 80% of the country’s GDP.7 With the 1970’s came the

decline of the steel industry and the government implemented different programs to diversify

the economy. Part of this diversification was the development of the financial sector which

now accounts for 28% of GDP.8 The developed financial sector increased the attractiveness of

Luxembourg as a location for investment. Hence, foreign manufactures began to open

operations in Luxembourg, diversifying the industrial base with rubber, glass, and aluminum

production.9 Figure 1 shows Luxembourg’s GDP distribution by economic sector.

Figure 1 – Industry Sector GDP Contribution Development

Source: STATEC


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More recently, the disruption in global financial markets caused the Luxembourg economy to

decline by 0.9% and the government to take measures such as injecting capital into the

banking sector, creating a 2% government deficit.10

It becomes obvious that the government is actively involved in the economic scene.

The main principle guiding government policy has been to encourage foreign investment and

foreign business. To achieve these goals, the government follows the policy of cutting

company taxes, tax credits, and no corporate capital gains taxes. Government agencies are

streamlined to remove obstacles for business and Luxembourg is ranked 21st in the Global

Competitiveness Index, showing that it is open for business.11 However, Luxembourg has

received criticism from foreign governments over its bank secrecy laws, which attract foreign

investors but cause troubles with money laundering and tax evasion.

Besides the intervention of the government, other issues were factors in the

development of Luxembourg. Foremost, its borders with Belgium, Germany and France

encouraged a flow of labor into the country, with 60% of its labor force being foreigners.12

Moreover, the close proximity to Belgium helped to foster a sense of unity and this led

to the creation of economic unions, first with Belgium and later with the Netherlands to form

the Benelux Customs Union in 1941.13 The close borders also resulted in the country

becoming trilingual, with French, German and the native Luxembourgish as official

languages. Open borders and a trilingual population helped to attract new investors and spur

growth.

As shown in Figure 2, Luxembourg’s economy is growing or declining at Europe’s extremes

and has always been over- or underperforming most of its peers.


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Figure 2 - GDP Growth Rates (compared to selected European countries)

Source: Google Public Data, http://www.google.com/publicdata?ds=wb-

wdi&met=ny_gdp_mktp_kd_zg&idim=country:LUX&dl=en&hl=en&q=GDP+growth+graph+of+luxembourg#

met=ny_gdp_mktp_kd_zg&idim=country:LUX:BEL:FRA:DEU:IRL, April 2010

This phenomenon can be explained with Luxembourg’s strong economic dependence on its

surrounding countries, so that growth as well as decline of other countries’ economies is

multiplied reflected in Luxembourg’s GDP growth rates.

Economic Performance

However, the GDP per capita income has been increasing since 1980 until 2008 by a total of

$13,329.56 to $82,440.74 respectively, whereas in 2009 it has declined to $78,000; a decrease

of 4.51%, as shown in Figure 3.

Figure 3 – GDP (PPP) per Capita Growth of Luxembourg

Source: International Monetary Fund (IMF) – World Outlook 2009


8

The reason behind this high GDP per capita can be most likely explained by the large number

of citizens who live in neighboring states but work in Luxembourg. These citizens are not

included in the total population but their income is counted as part of Luxembourg's GDP. 14

Secondly, it has very low taxation policies among EU members and attracts many and major

financial institutes and service providers from all around the world.

Luxembourg’s economic development strategy has emerged from the sound

redesigning of the country's economic structure. Through being a steel-based economy, it has

managed to advance into an international financial centre and a key business site.

As shown in Figure 4, reliably high growth, low unemployment, moderate inflation

and continuous job creations are the main factors of Luxembourg’s effective pro-business

economic policies which provide an ideal foundation for potential development and success.15

Figure 4 – Macroeconomic Performance Indicators – Development

Source: STATEC

Despite Luxembourg’s strong economic position in the past decades, the financial crisis had a

strong impact on the country’s economy, as shown in Figure 5.

Figure 5 – Macroeconomic Performance Indicators – Comparison to other EU Countries in 2009

Source: CIA – The World Factbook – Luxembourg


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While unemployment stayed at a moderate level, the country’s GDP declined by 3.9% in

2009 at an annual inflation rate of 0.5%, which can be explained through the strong

dependence on the heavily struck financial sector.

Trade Situation and Development

Despite the fact that domestic demand has increased in importance for the Luxembourg

economy, the country heavily relies on foreign trade. With the downturn of the steel industry

between 1974 and 1981, the country’s trade situation had destabilized. Imports grew by 55%

whereas exports rose only 7%, as the trade balance swung into deficit. Between 1985 and

1992, imports grew by 42% and exports rose only by 24%.

In 2000, 88.6% of imports and 88.7% of exports were from trade with European

countries. Germany was Luxembourg's primary customer, with 23% of the total exports. In

2000 Luxembourg imported more goods from Belgium (35%) than any other country.16

From the mid 1980s, transportation and communications progressed at an outstanding

speed. The number of human resources employed by these sectors in Luxembourg rose from

11,000 in 1985 to 22,000 in 2001. The Luxembourgish freight company Cargolux has attained

incredible success in the airline industry and is today a world-renowned operator. The

national carrier Luxair has also significantly provided to the economic growth of the

country.17

Foreign Direct Investment (FDI)

Luxembourg allows an extremely encouraging and welcoming approach towards Foreign

Direct Investment (FDI). Through the use of deferred corporate tax payment schedules,

capital investment subsidies and financing of equipment and start-up entities, the state lending

agency, SNCI and therefore consecutive Luxembourg governments have effectively attracted

new investment in medium, light and high-tech industries, as well as services.

In spite of the current global economic crisis, Luxembourg holds the most prominent location

for business investments in Europe, with the benefit of being a member of the European


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Union (EU).18 As shown in Figure 6 Luxembourg has the world’s second highest inward

Foreign Direct Investment as a percentage of GDP behind Hong Kong.

Figure 6 – FDI Inward (as % of GDP) in 2005

Source: LuxembourgforFinance

Successful investment relies heavily upon choosing the most suitable site. It is thus not

solely coincidental that several companies from Asia, Europe and North America have

preferred Luxembourg as a major business location over the past decades, as shown in Figure

7.

Figure 7 – Multinational Corporations with (regional) Headquarters in Luxembourg

Source: http://www.bed.public.lu/business_location/foreign_investors/index.html, April 2010


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Luxembourg’s Role in the European Union

Luxembourg is one of the six founding members of the European Union and has since then

been one of Europe’s main advocates for free trade and European integration.19 The capital

city, Luxembourg City, is the home for many of the governing institutions of the European

Union, such as the European Court of Justice, the Court of First Instance, the Court of

Auditors, the European Investment Bank and parts of the European Parliament.20

By constantly pushing for development and bringing countries together, yet managing

to stay neutral, Luxembourg is considered to be the model European country.


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THE NATIONAL BUSINESS ENVIRONMENT

Being a very small economy and geographically landlocked country with very little natural

resources, Luxembourg had no choice other than opening up to the outside world thus

providing access to the factors of production, research and technology to the procurement of

goods.

Figure 8 shows Porter’s National Diamond applied to Luxembourg, analyzing the

country’s business environment and its competitiveness.

Figure 8 – Porter’s National Diamond on Luxembourg’s Business Environment

Source: Team Analysis referred from http://www.isc.hbs.edu/pdf/Luxembourg_20050525.pdf

Factor Conditions

Luxembourg has an excellent transport system, communications network, and power supply

system which attributes to its well developed physical infrastructure. The country’s tax regime

and openness had created a strong financial market. Over the years the country had developed


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an expertise in cross border fund administration which can be well related to its ability to

attract 60% of its labor force from other countries as well the absence of any transnational

issues.

Despite this, the country needs to improve the local skill base which requires constant

focus towards education and information infrastructure. Throughout its economic

development, Luxembourg has made major use of foreign capital and workers

originating from other countries. In 2001 Luxembourg was by far the most open

economy of all the EU member states.21

Context for Firm Strategy and Rivalry

The blend of high openness to international competition and attractive tax benefits coupled

with political stability had invited more than 150 banks and various financial companies

making Luxembourg become a financial hub of Europe. With its 0% withholding tax on cross

border savings, it has been ranked 10th for Total Tax Rate22 and 31st in Trading across

borders23.

Despite these advantages, the country has managed only moderate scientific research

institutes with lackluster industry-university collaboration which has its direct implications in

the absence of innovation. Local competition has been affected with the weaker policies

which focus less on investors’ protection clearly demonstrated by its 119th position in the

protecting investors ranking.24

Related and Supporting Industries

With very less national resources, Luxembourg’s industrial environment was initially

dominated by steel later diversified and now shaped into a strong financial market supported

by banking. Despite managing an internationally competitive financial cluster, the

government had shown less progress over other emerging clusters such as steel and

telecommunications.

The inclusion of Luxembourg into the grey list of nations with questionable banking

arrangements by the G20 due to its banking secrecy laws and pressures for European wide


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harmonization of tax laws from EU25 have raised serious concerns to diminish the cluster’s

competitive advantage.

Demand Conditions

Dependency over cluster-specific business environment for the financial services sector had

created sophisticated demand from public and private buyers. The disadvantages here include

weak legal standards and demand for high level of education which is highly derived from the

foreign workers.

On an average Luxembourg asks for six procedures; 24 days and 19.9% of minimum

capital to start a new business which had pushed it to a not-so-encouraging 72nd rank in

Starting a business26 as per DoingBusiness 2010 rankings. The weaknesses also include recent

decline in the salary levels and recruitment market due to the economic turmoil. However

recovery signals come from organisations attempting to solve age pyramid issues since the

average age of their employees exceed 40 years27.

Competitiveness and other Business Environment Indicators

Luxembourg has been positioned 21st in the Global Competitiveness Index 2009–2010

rankings 28which is topped by Switzerland, United States and Singapore which had shown a

progress from last year’s 25th position. Competitiveness can be attributed not only to the

economic performance but also to the ability to resist adversities and show resilience over the

economic turmoil. This justifies Luxembourg’s position which ranked 12th in the world

competitiveness scoreboard 2009 29 after witnessing a sharp decline from 5th position earlier

in the 2008 scoreboard.

Steady progress in gross domestic product (per capita) over the years followed by a

decline in 2009 similar to that of its employment statistics and unemployment rate, as shown

in Figure 9, can be attributed to the economic downturn which had its direct implication over

the country’s strong cluster. Despite the steep increase in the inflation to 2.071% from

0.884%, still Luxembourg continues to be the highest gross domestic product per capita in the

world as per IMF and World Bank, due to its strong factor conditions.


15

Figure 9 – Economic Indicators of Luxembourg (2006-2009)

Source: International Monetary Fund, World Economic Outlook Database, April 2009 – Team analysis derived

from http://www.imf.org/external/data.htm

Furthermore Luxembourg’s competitiveness was ranked as follows by different studies:

o Ranked 10th for Total Tax Rate(pg. 218)10

o 7th for extent and effect of taxation(pg. 218)10

o 5th for prevalence of foreign ownership(pg. 218)10

o 5th for tariff barriers(pg. 218)10

o 1st in Financial Market Sophistication, Ease of access to loans(pg. 218)10

o 12th in ethical behavior of firms (pg. 218)30

From the above rankings it can be observed that, favorable tax benefits with the openness

towards financial services had strongly helped Luxembourg to maintain its competitive

national business environment.


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THE FINANCIAL SERVICES CLUSTER

In 2009 Luxembourg’s financial services cluster accounted for about 28%31 of the country’s

$38.37 billion GDP32 and is therefore Luxembourg’s key economic sector. Together with the

real estate sector and other business services, it even accounted for 47.3% of value added to

Luxembourg’s economy in 2007.33 The financial services cluster is the world’s largest fund

administration center after the USA and the Euro zone’s largest private banking center.34

Consisting of private, commercial and governmental banking as well as investment

fund administration, insurance companies, as well as financial auditing and consulting

providers, the cluster employs around 40,000 professionals as of September 2009.35

History & Development of the Cluster

The roots of Luxembourg’s successful financial sector can be traced back to 1929, when a

new fiscal legislation was implemented favoring banks and holding companies through tax

concessions.36 The history of the conditions which led to a competitive advantage of

Luxembourg as a financial market place is closely tied to the country’s political initiative in

Europe: as a founding member of BENELUX, the International Monetary Fund (IMF), the

World Bank and the European Union (EU), Luxembourg was always at the heart of

movements towards internationally decreased trade and investment barriers.37

With the Maastricht treaty in 1992 the European Union agreed on the implementation

of a single European currency and Luxembourg could finally gain full competitive advantage

of its investment favorable tax legislation: it became highly attractive for neighboring

countries’ banks to use Luxembourg in order to resell their products to their home country

investors.38

As a result of faster fund registration processes in Luxembourg and the introduction of

a 30% withholding tax in Germany in 1993, the country experienced a major boost of German

investment funds. In the case of Belgium and the Netherlands on the other side Luxembourg’s


17

government addressed investor needs through a coupon allowing Belgians and the Dutch to

avoid their local inheritance tax. Even Luxembourg’s strongest competitor in the private

banking sector, Switzerland recognized its leading position when the Swiss were looking for

an international client base and avoidance of the country’s 35% withholding tax and started

heavily investing in Luxembourg domiciled funds.39

Summarizing, the key issues in the development of Luxembourg as a financial cluster

were the country’s openness toward free trade areas and its push en route for European unity,

its geographical location and close proximity to France, Germany, Belgium and the

Netherlands, as well as high withholding taxes and strict laws and regulations within these

countries.

Cluster Performance

Today Luxembourg’s continuous success in the financial services sector can be credited to

several factors. Due to its small size the country and its population are naturally gifted with an

outward-looking mentality which combined with its strong expertise and investor protecting

legislation gives the country a well-built competitive advantage over other financial centers.

Also it’s multilingual and multicultural labor force; with 43% 40 of the population of

Luxembourg being foreigners; give the country an international perspective, which together

with its stable social, political and economic environment creates great trust in the

marketplace among investors and financial institutions.41

Banking

The banking sector is the largest sector in Luxembourg’s financial cluster. As Luxembourg’s

domestic market is relatively small, the country’s banking industry is predominantly

international. Currently there are over 145 banks from 24 different countries established in

Luxembourg, with most of them being subsidiaries of multinational banks.42 The majority of

banks are of European origin, whereas there are also several banks from Asia and the

Americas present in Luxembourg, as shown in Figure 10.


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Figure 10 – Banks in Luxembourg by Country of Origin

Source: ABBL – Banking Statistics 2009, http://www.abbl.lu/useful-information/statistics/banking-sector

The Luxembourg banks offering a wide range of services, from private banking to

capital markets and corporate finance activities, currently employ around 27,000

professionals.43 In 2009 the total Assets under Management (AuM) of banks in Luxembourg

amounted up to 793 billion, equivalent to $1,136 billion, representing 30 times the country’s

GDP.

Additionally the European Investment Bank and parts of the European Central Bank

are located in Luxembourg, making it home of private, commercial and governmental

banking at the same time.

Investment Fund Administration

Luxembourg is after the USA the world’s second largest investment fund administration

center, with 188 asset management companies for collective investments managing 3,371

investment funds, consisting of 12,325 fund units with a net worth of 1,559 billion in 2008.44

Despite the global financial crisis these numbers experienced further growth in 2009

with 3,463 funds under management as of December 2009, representing 1,841 billion under

management. Figure 11 shows the development of Luxembourg’s fund industry throughout

the past 15 years.


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Figure 11 – Evolution of Assets and Number of Funds in Luxembourg

Source: ABBL – Fund Industry Statistics 2009, http://www.abbl.lu/useful-information/statistics/fund-industry

As a result of its strong growth throughout the past years, Luxembourg holds the position as

market leader in the European fund investment market, as shown below in Figure 12.

Figure 12 – European Fund Investment Market 2008

Source: ATTF, http://www.attf.lu/about_attf_about_luxembourg.php

In terms of UCITS, Undertakings for Collective Investment in Transferable Securities, which

are investment funds meeting the investment criteria of the European Union, Luxembourg’s

position in the fund administration market is even more dominant, as shown in Figure 13.


20

Figure 13 – Cross-border Fund Registrations of UCITS in 2009

Source: PwC\Lipper Hindsight, Global Fund Distribution 2009

Insurance

Together with the banking and the fund administration sector, Luxembourg’s insurance

industry is the third major pillar of its financial cluster. In 2009 54 life insurance companies

and 37 property and casualty insurance companies, as well as 262 reinsurance captives are

based in Luxembourg.45 Together they accounted for total premiums of 13.19 billion in 2008

as shown in Figure 14.

Figure 14 – Luxembourg Insurance Sector

Source: Commissariat aux Assurances, Annual Report 2008

As a result of the freedom for insurance companies to offer cross border services within the

European Union, the demand for Luxembourg domiciled insurance vehicles within the EU is

very high, as can be seen in Figure 15.


21

Figure 15 – Origins of Insurance Premiums in Luxembourg

Source: Commissariat aux Assurances, Annual Report 2008

Stock Exchange

The Luxembourg Stock Exchange, despite not being located in a major European business

metropolis as its competitors, is one of Europe’s most important market places for investment

instruments. It is the worldwide main center for the trade of international securities with

current listings of 46,000 securities, with the majority being bonds.46 In the field of bond

trading the Luxembourg Stock Exchange established itself as international market leader, as

shown in Figure 16.

Figure 16 – International Bond Market – Market Shares

Source: LuxembourgforFinance – Luxembourg, Place Financière 2009

In addition to its dominant position in the bond trading market, the Luxembourg Stock

Exchange is furthermore holding a strong position in the quotation of GDRs, Global

Depository Receipts, being second placed behind the New York Stock Exchange (NYSE) and


22

ahead of the London Stock Exchange (LSE). These certificates signifying the ownership of a

certain number of shares of foreign companies are typically issued in Asia, most specifically

in India.

Islamic Finance

In 1983 Luxembourg was chosen as address for Europe’s first shariah compliant insurance

company and in 2002 the Luxembourg Stock Exchange was the first in Europe to enter the

sukuk market. Today 15 sukuks worth $5.5 billion are traded in the market and 39 shariah

compliant investment funds are established in Luxembourg. While Islamic finance currently

plays in the financial cluster of Luxembourg only a rather minor, could though be of strong

importance in its future. 47

Luxembourg’s government works closely together with the Islamic Financial Services

Board in order to further increase the attractiveness of the financial market for the Arab

world.


23

Cluster Diamond

In order to analyze Luxembourg’s source of competitive advantage for its financial sector,

each of the cluster diamond factors is analyzed as shown in Figure 17.

Figure 17 – Porter’s Diamond on Luxembourg’s Financial Sector

Source: Team Analysis referred from http://www.isc.hbs.edu/pdf/Luxembourg_20050525.pdf

Factor Conditions

The three major factor conditions in Luxembourg’s financial cluster are human resources and

capital resources, as well as scientific and technological infrastructure.

Human resources – Since Luxembourg is oriented towards investor protection, the

workforce allocated there from the international banks and institutions, is therefore related to

such activities that can benefit from this. The country has an expertise in information


24

intensive operations such as accounting, middle/back office and other administration. Since

the information handled by these operations is foundation for taxation, it comes naturally to

locate them in Luxembourg. Front office operations like sales and trading are mainly located

to financial centres with focus on networking possibilities for creating relations, such as

London or New York.48

Capital resources – A necessary condition for enabling a financial cluster to function

and to attract both investors, employers and other participants, is vast capital resources. The

whole purpose of a financial centre is, after all, to finance investments. At the end of 2008,

bank deposits totalled 765.9bn and SICAV net holdings were 990.8bn.49

Scientific and technological infrastructure – Although large investments were made in

developing research centres in the mid 1980’s, Luxembourg is still below their target in

government spending on R&D facilities as well as the outcome of it. There is no particular

significant specialization of research towards the financial sector. The R&D institutions

mostly focus on industrial and technological research.50 Figure 18 shows Luxembourg’s

science and innovation profile.

Figure 18 – Science and Innovation Profile of Luxembourg (compared to EU average)

Source: Stat Link, http://dx.dexi.org/10.1787/453305722035


25

Context for Firm Strategy and Rivalry

A significant condition for the success of the financial sector in Luxembourg, which has

proven itself during the financial crisis, is the regulatory bodies. The cooperation (which is

now under draft to become constitutional) between the financial supervisor (CUSS), the

insurance supervisor (COMAS’) and the Central Bank (BAL) has encouraged a limited

exposure towards high-leverage investments and activities and this has had a dampening

effect on the outcome of the financial crisis for the actors in Luxembourg.51

The regulatory framework has, as long as Luxembourg has been an important financial

centre, functioned as a modern solution with continuous updating of the regulation based on a

close interaction between the above-mentioned institutions and the private sector.

This together with a political stability and openness to the world are the foundation for

the success of Luxembourg as a financial centre.

The two main drivers, however, behind making the financial sector in Luxembourg so

attractive is, and has been the rules for bank secrecy and taxation. This has made Luxembourg

a hub for private banking in the euro zone and captive reinsurance in the European Union.

The main purpose of the two elements is investor protection, which explains the kinds of

divisions that the banks and institutions allocate to Luxembourg, fund management and

private wealth activities together with administration.52

While the regulatory body can remain modern and dynamic in its implementation, it

will encounter difficulties in maintaining Luxembourg’s competitive advantage in terms of an

“easier” and more investor friendly regulation framework. The secrecy, as in other financial

centres with a high such, in put under hard international pressure since the capital is actually

mostly originated from countries with a more negative approach to bank secrecy. The reason

behind the ambition to harmonise the secrecy levels in line with OECD standards

internationally is the information exchange between governments for taxation. 53

The challenge for the cluster is thus to develop a competitive advantage that is

compliant with international regulation policies and that focuses more on actual competence

than investor protection.

MOC – Cluster Analysis

Related and Supporting Indust

With the finance industry repr

chemicals industry, there is no

only goods used in the finance

bought elsewhere.

Demand Conditions

The local demand for the servi

for the existence of the cluster

For example, the origin

banks in Luxembourg is to 84

fairly similar in the other bran

because of almost all insuranc

Figure 19 – Origin of Owners of A

Source: STATEC

Luxembourg – Financial Services

tries

resenting 83.3 % of GDP and 16.3 % of GDP

ot much room left for supporting and/or relate

e industry are basically IT products and servic

ices provided by the financial sector is not a s

r. Most of the customers are located elsewhere

n of clients owning Assets under Managemen

% represented by foreigners, as shown in Fig

ches of the industry and even clearer in the re

e companies being foreign.

AuM for Luxembourg’s Private Banking Sector (To

26th of April 2010

26

being the steel and

ed industries. 54 The

ces and those are

specific condition

e.55

nt (AuM) by private

gure 19. This is

einsurance business

otalling 250 Billion)


27

STRATEGIC ISSUES & RECOMMENDATIONS

After an examination of the finance cluster and the government, it is possible to draw

recommendations for both parties. Beginning with the financial services cluster, it is

important to form a professional association to promote industry specific needs. While other

industries, such as steel have organized, the financial service industry has no central body

promoting its needs, attracting top talent or encouraging development of a local labor pool.

Even though Luxembourg was the first to introduce Islamic funds in Europe, the cluster

should further develop these products as well as expand its vision to the emerging markets of

Asia and Latin America.

The government, which exudes the most influence over the financial industry cluster,

has performed quite well, however there is still room for improvement. The financial crisis

has shown that Luxembourg is overly dependent on the financial service cluster. Moreover,

with the possible standardization of banking laws, Luxembourg will have to deal with a

diminished private banking sector. To remedy this, it is recommended that Luxembourg

develops its other industries, such as IT, Logistics, and Communications. By diversifying its

economy, Luxembourg should be able to avoid the sharp economic downturn it has recently

experienced.

The first major obstacle is to improve the education of the labor force. As is, there are

no 4 year universities in Luxembourg and most students travel abroad to receive higher

education. With such a prominent cluster located within the country, the government should

work to establish the newly founded Luxembourg School of Finance (LSF) as a world-class

university that taps into the knowledge of the financial industry. By doing so, Luxembourg

would help support its main cluster by providing a highly educated workforce and by creating

an education industry that can generate substantial profits. Furthermore, it would be wise for

Luxembourg to establish a university specializing in media and information technology. This

would help to support the other up and coming industries, weaning Luxembourg off its

dependence on the financial market.

Although Luxembourg is rated as one of the most globally competitive nations, it is

still plagued by bureaucracy, and stringent hiring/firing laws. To help improve their position,

the government should work on revising labor laws to create more flexibility for firms, and to

reduce the amount of paperwork required to start a business. With the combination of an

attractive tax structure as well as streamlined procedures, additional business is sure to follow.


28

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30

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Documents

Transcript of Financial Services Cluster Luxembourg