- 2. Capital Markets
- In the Anglo-Saxon model financing primarily through issue of equity and debt; start-up capital provided by private venture capitalists. In the EM:
- a) Companies finance primarily through bank lending as opposed to stock markets
- bank provides start-up capital.
- Much greater reliance on bank finances
- bank holds shares and is represented on board of directors
- b) Universal banks
- European banks perform not only traditional banking but also stock brokerage and merchant banking, such as stock sales, risk-sharing. The financial system is not divided into investment banks, commercial banks, and stockbrokers.
- Advantages of bank financing:
- Banks examine business risks carefully; if they back poorly run companies their loans will not be paid.
- Banks diversify their risks, therefore, a downturn of one sector will be offset by upturn
- Problems—limits the degree of competition and innovation in the financial sector.
- c) Dynamism
- the capital mkt and its corporate governance do not allow capital to be allocated from declining to rising industry.
- When a new industry develops old established German companies must change their profile to produce these new goods
- Siemens started to produce PCs
- Ranking of the top 20 firms changes in the US over relatively short period, the reverse is true for Germany
- 3. The Labor Market
- Labor unions
- higher share of workers are unionized than the US; strong political role (e.g. England, through the Labor Party)
- b) Much more highly regulated than that of the US
- EU directives set regulations:
- Member countries can offer even more generous provisions such as:
- two-yr maternity leave in Germany and provision in Sweden for parents to take 480 days off for each child at 80% pay;
- 35-hour work in France;
- Germany-unemployed workers qualify for unemployment insurance for 32 months and are not required to take open jobs that necessitate their moving or that offer lower wages than they had earned before.
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