This article examines the rise of foreign ownership in France and Germany. I argue that the firm-level institutional arrangements of workplace organization constitute the most significant variable to account for the greater attractiveness of French firms over their German counterparts to short-term, impatient capital—namely, hedge and mutual funds. I demonstrate how key notions of the Varieties of Capitalism perspective—institutional interaction, institutional latency, and the distinction between institutional framework and the mode of coordination that follows from these institutions—provide important theoretical insights to account for the different structures of foreign ownership in France and Germany.
A good overview of the causes and dynamics of recent corporate scandals in Europe and the United States is provided in John Coffee, “A Theory of Corporate Scandals: Why the USA and Europe Differ,”Oxford Review of Economic Policy21, no. 2 (Summer 2005): 198-211.
2.
and Mark Roe, “Political Preconditions to Separating Ownership from Corporate Control,”Stanford Law Review53, no. 3 (December 2000): 539-606.
3.
For a theoretical overview of the issue of convergence in corporate governance, see Ruth Aguilera and Gregory Jackson, “The Cross-National Diversity of Corporate Governance: Dimensions and Determinants,”Academy of Management Review28, no. 3 (July 2003): 432-446.
4.
John Campbell, Institutional Change and Globalization (Princeton, N.J.: Princeton University Press, 2004).
5.
and Peter Hall and David Soskice, “An Introduction to Varieties of Capitalism,” in Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, ed. Peter Hall and David Soskice (New York: Oxford University Press, 2001).
6.
and Douglass North, Understanding the Process of Economic Change (Princeton, N.J.: Princeton University Press, 2005).
7.
and Vivien Schmidt, From State to the Market? The Transformation of French Business under Mitterrand (New York: Cambridge University Press, 1996).
8.
and Kathleen Thelen, Unions of Parts: Labor Politics in Postwar Germany (Ithaca, N.Y.: Cornell University Press, 1991).
9.
The classic statement on the Varieties of Capitalism theoretical perspective is Hall and Soskice, “An Introduction to Varieties of Capitalism,”1-71.
10.
Hall and Soskice argue that two dominant clusters of interdependent institutions exist: liberal market economies and coordinated market economies. These two clusters constitute different ways to solve coordination problems faced by firms—market instruments being predominant in the former, while a greater range of institutions such as peak associations, network monitoring based on the exchange of private information, and relational contracting constitute the hallmarks of adjustment processes for the latter.
11.
and David Soskice, “Divergent Production Regimes: Coordinated and Uncoordinated Market Economies in the 1980s and 1990s,” in Continuity and Change in Contemporary Capitalism, ed. Herbert Kitschelt, Peter Lange, Gary Marks, and John Stephens (New York: Cambridge University Press, 1999).
12.
An excellent analysis of the problem of economic coordination in regard to the question of training is Pepper Culpepper, Creating Cooperation: How States Develop Human Capital in Europe (Ithaca, N.Y.: Cornell University Press, 2003).
13.
Hall and Soskice, “An Introduction to Varieties of Capitalism,”36-44.
14.
and Glenn Morgan, “Institutional Complementarities, Path Dependency, and the Dynamics of Firm,” in Changing Capitalisms? Internationalization, Institutional Change, and Systems of Economic Organization, ed. Glenn Morgan, Richard Whitley, and Eli Moen (New York: Oxford University Press, 2005).
15.
The thesis of significant transformation via incremental processes of change is best provided in Wolfgang Streeck and Kathleen Thelen, “Introduction: Institutional Change in Advanced Political Economies,” in Beyond Continuity: Institutional Change in Advanced Political Economies, ed. Wolfgang Streeck and Kathleen Thelen (New York: Oxford University Press, 2005).
16.
This theoretical perspective of institutional change constitutes an explicit criticism of punctuated equilibrium models whereby prolonged periods of institutional stability are interrupted suddenly by critical exogenous shocks that result in a conflictual period of transition until a new pattern of institutional complementarity is established, thereby resulting in a new stable equilibrium.
17.
and Kathleen Thelen, “How Institutions Evolve: Insights from Comparative Historical Analysis,” in Comparative Historical Analysis in the Social Sciences, ed. James Mahoney and Dietrich Rueschemeyer (New York: Cambridge University Press, 2003).
18.
See Marino Regini, “Between Deregulation and Social Pacts: The Responses of European Economies to Globalization,”Politics and Society28, no. 1 (March 2000): 5-33.
19.
and Peter Hall and Robert Franzese, “Mixed Signals: Central Bank Independence, Coordinated Wage Bargaining, and European Monetary Union,”International Organization52, no. 3 (Summer 1998): 505-535.
20.
and John Zysman, Governments, Markets, and Growth (Ithaca, N.Y.: Cornell University Press, 1983), 99-169, for historical analyses of the French financial system.
21.
The original thesis is Peter Hall and Kathleen Thelen, “Institutional Change and the Varieties of Capitalism” (paper presented to the APSA annual meeting, Washington, D.C., September 1-4, 2005).
22.
and Mari Sako, “Training, Productivity and Quality Control in Japanese Multinational Companies,” in The Japanese Firm, ed. Masahiko Aoki and Ronald Dore (New York: Oxford University Press, 1996).
23.
and Pepper Culpepper, “Individual Choice, Collective Action, and the Problem of Training Reform: Insights from France and Eastern Germany,” in The German Skills Machine: Comparative Perspectives on Systems of Education and Training, ed. Pepper Culpepper and David Finegold (New York: Berghahn, 1998).
24.
and Richard Whitley, “The Institutional Structuring of Organizational Capabilities: The Role of Authority Sharing and Organizational Careers,”Organization Studies24, no. 5 (June 2003): 667-695.
25.
Zysman, Governments, Markets, and Growth, 69-75.
26.
and Francois Morin, La Structure Financière du Capitalisme Français (Paris: Calmann-Levy, 1974).
27.
Julian Franks and Colin Mayer, “Corporate Ownership and Control in the U.K., Germany, and France,”Journal of Applied Corporate Finance9, no. 4 (Winter 1997): 30-45.
28.
and Jonathan Story, “Finanzplatz Deutschland: National or European Response to Internationalization?”German Politics5, no. 3 (December 1996): 371-394.
29.
Conference Board, “Equity Ownership and Investment Strategies of US and International Institutional Investors,”Institutional Investment Report4, nos. 2-3 (May 2002): 1-45.
30.
François Morin and Eric Rigamonti, “Evolution et Structure de l’Actionnariat en France,” Revue Française de Gestion 28, no. 141 (November-December 2002): 155-81.
31.
Alfred Rappaport and Mark Sirower, “Stock or Cash? The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions,”Harvard Business Review77, no. 6 (November-December 1999): 147-158.
32.
Data on the distribution of activities of French and German firms between the home base and American subsidiaries are presented in Manuel Separio and Donald Dalton, “Globalization of Industrial R&D: An Examination of Foreign Direct Investments in R&D in the United States,”Research Policy28, nos. 2-3 (March 1999): 303-316.
33.
John Coffee, “The Future as History: The Prospects for Global Convergence in Corporate Governance,”Northwestern University Law Review93, no. 3 (1999): 641-708.
34.
See Michel Goyer, “Institutional Investors in French and German Corporate Governance,” working paper (Cambridge, Mass.: Center for European Studies at Harvard University, 2006), table 2.
35.
See Goyer, “Institutional Investors in French and German Corporate Governance,” table 4.
36.
See, for example, Mark Roe, “Corporate Law’s Limits,”Journal of Legal Studies31, no. 2 (June 2002): 233-271.
37.
and Schmidt, From State to the Market?393-416.
38.
See Kathleen Thelen, Unions of Parts, 25-104.
39.
Pensions & Investments, January 26, 2004, 16-16.
40.
Robert Pozen, Mutual Fund Business (Cambridge, Mass.: MIT Press, 1998), 397-423.
41.
Hedge funds, on the other hand, are traditionally set up as limited partnerships that are limited to a restricted number of wealthy individuals (500) with personal assets of at least $5 million who are willing to adopt highly risky short-term strategies and borrow on financial markets in exchange for high return potential. Hedge funds are managed on a DC scheme with investors uncertain to recover their investment since fund managers are typically given mandates to make an absolute return target regardless of the market environment. But in contrast to mutual funds schemes, hedge funds impose initial lock-up periods of at least one year as funds are not redeemable on demand. This difference aside, hedge and mutual funds constitute two forms of short-term, impatient capital. For an overview, see Stephen Brown and William Goetzmann, “Hedge Funds with Style,” NBER working paper no. 8173 (Cambridge, Mass.: NBER, 2001).
See Daniel Bandru, Stéphanie Lavigne, and François Morin, “Les Investisseurs Institutionnels Internationaux: Une Analyse du Comportement des Investisseurs Américains,” Revue Économie Financière, no. 61 (2001): 121-37.
45.
Ibid., 125.
46.
Ibid., 126.
47.
For an overview of the investment strategies of hedge funds, see Carl Ackermann, Richard McEnally, and David Ravenscraft, “The Performance of Hedge Funds: Risk, Return, and Incentives,”Journal of Finance54, no. 3 (June 1999): 833-874.
48.
See Tracy Woidtke, “Agents Watching Agents? Evidence from Pension Fund Ownership and Value,”Journal of Financial Economics63, no. 1 (January 2002): 99-131.
49.
Robert Monks and Nell Minow, Corporate Governance (Cambridge, Mass.: Blackwell, 1995), 125-125.
50.
An excellent review of the motivations of pension fund officials is provided in Roberta Romano, “Public Pension Fund Activism in Corporate Governance Reconsidered,”Columbia Law Review93, no. 4 (May 1993): 795-853.
51.
See Edwin Elton, Martin Gruber, and Christopher Blake, “Incentives Fees and Mutual Funds,”Journal of Finance58, no. 2 (April 2003): 779-804.
52.
Mutual fund managers whose fund’s performance lags behind rivals at the midpoint of an assessment period are likely to shift the composition of their portfolio by investing in a greater number of riskier companies, thereby increasing the volatility of the fund but also the probability of increasing its performance. See Judith Chevalier and Glenn Ellison, “Risk Taking by Mutual Funds as a Response to Incentives,”Journal of Political Economy105, no. 6 (December 1997): 1167-1200.
53.
Ian McDonald, “Fidelity Managers Gets Ranked,”Wall Street Journal Europe, January 21, 2003.
54.
Brown and Goetzmann, “Hedge Funds with Style,”2-2.
55.
and Robert Pozen, “Institutional Investors: The Reluctant Activists,”Harvard Business Review72, no. 1 (January-February 1994): 140-149.
56.
See Goyer, “Institutional Investors in French and German Corporate Governance,” table 5.
57.
Hedge funds do not have to reveal the composition of their portfolio, and materials distributed to investors are often available on a restricted basis and published at irregular intervals. Their low-profile and secretive nature is designed to minimize regulatory and tax oversights. As a result, it is often impossible to acquire credible data on the holdings of hedge funds. On the other hand, however, financial regulation in the European Union obliges shareholders to disclose equity stake above the 5 percent threshold. Thus, it becomes possible to track the investment targets of hedge funds when their equity stake exceeds this threshold. Data on the presence of hedge funds in France and Germany are provided in the next section.
58.
I collected data from the two official governmental databases of the financial regulation authority of the two countries: http://www.amf-france.org and http://www.bawe.de.
59.
and Rudiger Liedtke, Wem Gehort die Republik? (Frankfurt: Eichborn, annually).
60.
A detailed and complete listing of acquisitions over the 5 percent threshold in France and Germany is provided in Goyer, “Institutional Investors in French and German Corporate Governance.”
61.
A similar divergence characterizes the investment of Anglo-Saxon institutional investors in the two countries outside the blue-chip company category. From September 1997 to May 2005, ninety-three German firms received a total of 130 instances of an investment over the 5 percent threshold by an Anglo-Saxon institutional investor. If we deduct the top eighty companies from this sample, this leaves us with sixty-five German firms recording eighty-two investments over the 5 percent threshold. For the same period, 211 French companies recorded 416 instances of an investment over the 5 percent threshold. The same figures, if we deduct the top eighty French companies from the sample, are 159 and 277.
62.
Morningstar, Morningstar Funds 500 (Hoboken, N.J.: John Wiley, annually).
63.
For a complete discussion of the link between price/earning ratio and managerial autonomy, see Goyer, “Institutional Investors in French and German Corporate Governance.”
64.
See also Goyer, “Corporate Governance, Employees, and Core Competencies in France and Germany,”191-198.
65.
and Richard Milne, “Tweedy May Review Its German links over VW Row,”Financial Times, December 2, 2005.
66.
and Hoepner, “Corporate Governance in Transition,”27-28.
67.
and Schmidt, From State to the Market?393-416.
68.
and Peter Hall, “The Politics of Adjustment in Germany,” in Ökonomische Leistungsfähigkeit und Institutionelle Innovation, ed. F. Naschold, D. Soskice, B. Hancké, and Ü. Jurgens (Berlin: Edition Sigma, 1997).
69.
See Streeck, Social Institutions and Economic Performance, 49-55.
70.
Culpepper, “Individual Choice, Collective Action, and the Problem of Training Reform,”286-286.
71.
Ibid., 301.
72.
See Marc Maurice, François Sellier, and Jean-Jacques Silvestre, The Social Foundations of Industrial Power: A Comparison of France and Germany (Cambridge, Mass.: MIT Press, 1986), 65-73.
73.
Ibid., 77.
74.
and Walter Muller-Jentsch, “Germany: From Collective Voice to Co-management,” in Works Councils: Consultation, Representation and Cooperation in Industrial Relations, ed. Joel Rogers and Wolfgang Streeck (Chicago: University of Chicago Press, 1995).
75.
and Wolfgang Streeck, “Successful Adjustment to Turbulent Markets: The Automobile Industry,” in Industry and Politics in West Germany: Toward the Third Republic, ed. Peter Katzenstein (Ithaca, N.Y.: Cornell University Press, 1989), 129-129.
76.
David Marsden, A Theory of Employment Systems (New York: Oxford University Press, 1999), 121-138.
77.
Ibid., 98.
78.
A good analysis of the reorganization of the practices of work floor organization in France is Danièle Linhart, La Modernisation des Entreprises (Paris: La Découverte, 1994).
79.
Culpepper, “Individual Choice, Collective Action, and the Problem of Training Reform,”278-278.
80.
Goyer, “The Transformation of Corporate Governance in France and Germany,”25-25.
81.
See Hancké, Large Firms and Industrial Adjustment, 57-82.
82.
Richard Whitley, Divergent Capitalisms: The Social Structuring and Change of Business Systems (New York: Oxford University Press, 1999), 38-44.
83.
and Arndt Sorge, “Strategic Fit and the Societal Effect: Interpreting Cross-National Comparisons of Technology, Organization and Human Resources,”Organization Studies12, no. 2 (1991): 161-190.
84.
and Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 60-65.
85.
See Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 59-120.
86.
and Geert Hofstede, Culture’s Consequences: International Differences in Work Related Values (London: Sage, 1980).
87.
See Linhart, La Modernisation des Entreprises, 23-47.
88.
See Danièle Linhart, “The Shortcomings of an Organizational Revolution That Is out of Step,”Economic and Industrial Democracy14, no. 1 (February 1993): 49-64.
89.
and Sorge, The Global and the Local, 180-182.
90.
The dual nature of this development—change in practices of workplace organization combined with stability in power relationships—testifies to the importance of the distinction between institutional framework and the mode of coordination that follows from these institutions. See Hall and Thelen, “Institutional Change and the Varieties of Capitalism,” for an analysis of this crucial distinction.
91.
See Whitley, “The Institutional Structuring of Organizational Capabilities,”669-679.
92.
Marsden, A Theory of Employment Systems, 38-38.
93.
Carl Kester, “Industrial Groups as Systems of Corporate Governance,”Oxford Review of Economic Policy8, no. 3 (Autumn 1992): 24-44.
94.
Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 90-100.
95.
Whitley, “The Institutional Structuring of Organizational Capabilities,”669-679.
96.
See Streeck, “Successful Adjustment to Turbulent Markets,”131-132.
97.
Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 79-84.
98.
Marsden, A Theory of Employment Systems, 133-133.
99.
and Streeck, Social Institutions and Economic Performance, 36-40.
100.
Maurice, Sellier, and Silvestre, The Social Foundations of Industrial Power, 79-84.
101.
See Sorge, “Strategic Fit and the Societal Effect,”168-176.
102.
See Whitley, “The Institutional Structuring of Organizational Capabilities,”669-679.
103.
See Streeck, Social Institutions and Economic Performance, 36-40.
104.
For a discussion of the problems engendered by the constant modification to the codes of training practices, see Gary Herrigel and Charles Sabel, “Craft Production in Crisis: Industrial Restructuring in Germany during the 1990s,” in Culpepper and Finegold, The German Skills Machine.
105.
For example, thirty-one new occupations were defined and ninety-seven were updated and modernized between 1996 and 1999. See Jill Rubery and Damian Grimshaw, The Organization of Employment: An International Perspective (London: Palgrave Macmillan, 2003), 130-130.
106.
Culpepper, Creating Cooperation, 57-57.
107.
and Hall and Soskice, “An Introduction to Varieties of Capitalism,”17-33.
108.
See Campbell, Institutional Change and Globalization, for a subtle analysis of the problem of measuring and assessing institutional change.
109.
For a discussion of the concept of latent institutions, see Kathleen Thelen and Sven Steinmo, “Institutionalism in Comparative Politics,” in Structuring Politics: Historical Institutionalism in Comparative Analysis, ed. Sven Steinmo, Kathleen Thelen, and Frank Longstreth (New York: Cambridge University Press, 1992), 16-18.
110.
See Zysman, Governments, Markets, and Growth, 99-169.
111.
See Pepper Culpepper, “Institutional Change in Contemporary Capitalism,”World Politics57, no. 2 (January 2005): 173-199, for an analysis of the stability of ownership concentration in Germany.
112.
See Hall and Thelen, “Institutional Change and the Varieties of Capitalism,”30-37.
113.
The original thesis of this argument is Kathleen Thelen, How Institutions Evolve: The Political Economy of Skills in Germany, Britain, the United States, and Japan (New York: Cambridge University Press, 2004).
