London remains a huge draw for financial services subsidiaries from MNCs all over the world, but can it maintain this allure in the aftermath of Brexit? (Photo by Luke Dray/Getty Images)

The financial services industry is a key sector for investment globally and contributes significantly to the foreign direct investment (FDI) landscape. Investment Monitor reveals the hot spots where the top financial services multinational companies (MNCs) establish subsidiaries.

The Monitor Network’s MNCs database contains information on 2,190 of the world’s top MNCs by revenue. Of these MNCs, 451 are in the financial services industry, accounting for one-fifth of all MNCs analysed.

In total, the 451 leading financial services companies have established 35,065 subsidiaries globally.

Of these 35,065 subsidiaries, 9,873 are based in the US, accounting for 28.1% of subsidiaries established by the top financial services MNCs.

The US offers access to a large market, a talented workforce, an attractive regulatory environment, and an abundance of financial services clusters. All of these are pull factors for financial services companies that are considering establishing a subsidiary.
Select USA ranks the financial markets in the US to be the largest and most liquid in the world.

The UK ranks second as a destination for the top financial services MNCs to establish a subsidiary.

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The UK is viewed as a financial services hub globally, offering clusters and talent, with London one of the world’s leading international financial centres. However, Brexit may impact this. With the UK having left the EU, should investors want to operate in both markets they may need to set up a subsidiary in each. Regulatory harmony between the two locations – an issue that is still being worked out – will be key to any financial services companies wanting to operate across both markets.

Combined, the US and UK account for 41.1% of subsidiaries established by the top 2,000 MNCs.

Low-tax jurisdictions the Cayman Islands and Hong Kong rank fifth and ninth, respectively. The Cayman Islands demands no corporate or direct taxes from residents, while Hong Kong’s low tax rates and access to the Greater China market make it a desirable location for financial services investors.

An even split between foreign and domestic subsidiaries

Overall, the top financial services MNCs created 17,489 domestic subsidiaries (49.9%) and 17,576 foreign subsidiaries (50.1%). This suggests financial services MNCs are keen to have a foot in both local and international markets. There is, however, a regional divide.

The top financial services MNCs headquartered in the US have set up 8,053 domestic subsidiaries (58.5%) and 5,702 foreign subsidiaries. US-headquartered companies account for 86% of all subsidiaries established in the US by the top financial services MNCs, so its ranking as the top destination is in some way due to the level of domestic activity. The top foreign countries for US financial services companies to establish a subsidiary are the UK, with 1,144 subsidiaries, and the Cayman Islands with 976.

The leading Chinese financial services MNCs take a similar approach to US investors, with 610 domestic subsidiaries (66%) and 314 foreign subsidiaries (34%). These foreign subsidiaries include 167 based in Hong Kong.

In contrast, European investors take a different approach. The top financial services MNCs based in the UK are more in line with the general trend of having a footprint in both domestic and foreign markets. UK-based financial services MNCs have established 2,647 subsidiaries in the UK (45.5%) and 3,176 subsidiaries overseas (54.5%). Of these overseas subsidiaries, the most are in Ireland (340), followed by Luxembourg (286), France (270) and Germany (100).

Financial services MNCs based in Germany have set up 1,161 domestic subsidiaries (41.7%) and 1,623 foreign subsidiaries (58.3%). Of the overseas subsidiaries, 348 have been established in the US and 190 in the UK.

The top financial services MNCs based in France have established 1,203 domestic subsidiaries (44.2%) and 1,520 foreign subsidiaries (55.8%). Of the overseas subsidiaries, 160 are located in the UK, 147 in Luxembourg and 140 in the US.

Who are the big investors?

Of the top ten financial services MNCs, five are headquartered in the US and five in Europe. These companies have established 7,968 subsidiaries collectively, accounting for 23% of the total number established by the top financial services MNCs.

Like many industries, financial services MNCs have been affected by Covid-19. In Europe, Brexit has added further disruption to the landscape for financial services investors. The full impact of these events remains to be seen and while investors are recovering from the impact of Covid-19, the Brexit deal, the full outcome of which is still pending for financial services industries, may force financial investors to rethink where they establish a subsidiary depending on which market they want to prioritise.