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CHAPTER 4 The Anglo-Saxon Market for Corporate Control The Financial System and InternationaI Competitiveness Ajit Singh This chapter was completed in 1995 at a time when there was a great deal of concern among academics as well as the business community about the international competitiveness ofU.S. corporations . The MIT Commission on Industrial Productivity had found that the u.s. corporations had abandoned a whole range of industries to foreign competitors not because u.s. wages were too high but because ofdeficiencies of the u.s. financial system (DertollZos, Lester, and Solow 1989). These deficiencies were thought to have also resulted in lower rates of investment particularly in R&D, in new product development, and in the upgrading of workers' skills compared with the corporations in Germany and Japan. With the U.S. economy enjoying at present (1998) one of its longest booms, these concerns have subsided. The catch-up by the U.S. and U.K. manufacturing industries with their German and Japanese counterparts in productivity growth has become more pronounced-early signs ofthis were noted in this chapter. The United States, however, still has a relatively large current account deficit that is likely to become more acute, partly as a consequence of large devaluations in Asian countries following their financial crisis. Further, as the U.S. economy slows down, the question of the international competitiveness ofthe U.S. corporations and the role ofthe U.S. financial systems are likely to command public attention again.1 The last decade has witnessed a growing debate on both sides of the Atlantic on the effectiveness ofthe stock market-based financial systems ofthe United States and the United Kingdom for promoting international competitiveness and industrial strength. The two countries share a broadly common framework of corporate law and possess the most advanced and complete stock 89 90 Competitiveness Matters markets in the world. As far as the corporate sector is concerned, in both countries, the financial system is more or less similar, being dominated by the stock market and a vigorously functioning market for corporate control. In principle, the latter is supposed to constitute an important additional mechanism by means of which the stock market can discipline firms and promote corporate efficiency. However, an increasing number of industrialists as well as academic economists argue that the Anglo-Saxon financial system is inferior to that of Japan and Germany and puts the United States and United Kingdom at a competitive disadvantage. There is, of course, a long history of dissatisfaction in both countries with the financial system in general and the stock market in particular, but these criticisms have usually come from a minority ofheterodox economists. Significantly, in the United States, the activities on the stock market have also often attracted popular suspicion and populist reaction. In the 1930s, the populist sentiment linked the stock market to the Great Depression. This led to the creation ofthe Securities and Exchange Commission and the passing of the Glass-Steagall Act and other measures to regulate the financial system. In the United Kingdom, academic critics have long argued that the financial system was in part responsible for the low rate ofinvestment in the economy; specifically, it is suggested that the system facilitated investment abroad of domestic savings at the expense ofinvestment at home to the detriment ofthe domestic economy. However, the financial establishment, as well as the mainstream ofthe economics profession, has traditionally maintained that the low rate of investment in the economy has not been due to the availability of finance but rather the lack of investment opportunities and that investment abroad has simply been due to the fact that the risk-adjusted rates of return on foreign investment have been greater than on home investment.2 However, today far-reaching criticisms ofthe Anglo-Saxon financial system come from the heart of the establishment itself. Thus, Michael Porter reported in the early 1990s on the results ofa large research project on various aspects ofthe U.S. financial system, "the change in nature ofcompetition and the increasing pressure of globalization make investment the most critical determinant of competitive advantage.... Yet the U.S. system of allocating investment capital both within and across companies is failing. This puts American companies at a serious disadvantage in global competition and ultimately threatens the long term growth of the U.S. economy."3 One cannot help noticing a certain irony in the fact that this skepticism about the virtues of the stock market is manifesting itself in the very citadels of these...

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