Investment and Banking: Some International Comparisons

Sussman, Oren (1994) Investment and Banking: Some International Comparisons. Oxford Review of Economic Policy, 10 (4). pp. 79-93.


In a series of stimulating and thought provoking papers, Mayer (1988, 1990)—on the grounds of flow-of-funds data of the type presented in Table 1—has argued that: (i) retentions are usually the most important source of investment finance, which by itself is an indication of the substantial degree of imperfection of financial markets; (ii) bank finance usually comes next, which is an indication of the importance of institutions—rather than markets— in investment finance; and (iii) the 'institution-oriented' economies of Germany and Japan are less dependent on retentions relative to the 'market-oriented' economies of the United States and the United Kingdom. That is an indication of the greater effectiveness of institutions relative to markets in investment finance, and of the importance of bank-client 'close relations' which are cultivated in Germany and Japan. This paper is an extension and a refinement of this line of thought It is fair to say that the extensions do not imply a substantial modification of the conclusions. If anything, the opposite is true: I argue that banks play an even more central role in financing investment than suggested by Table 1, and provide some additional evidence on the greater effectiveness of Japanese banks. But the structure of the argument is quite different. It is wider in scope and contains a more structural view of the way banks operate. Also, I argue that the retentions evidence in Table 1 can be explained, simply, by cross-country growth rates.

Item Type: Article
Subject(s): Finance
Centre: Faculty of Finance
Date Deposited: 23 Feb 2012 11:44
Last Modified: 23 Oct 2015 14:07

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