Corporate Governance: Fine-Tuning the Conditions for Innovation and Job Growth in a Global Economy

Abstract

There is a widely held view that Europe lacks the innovative activity and job creation that are characteristic of the United States largely because of the inability of (continental) European financial systems to provide proper funding for innovative but risky ventures. While the role of U.S. venture capitalists in fostering innovation and job creation in the U.S. has been well established (see Hellmann [2000]), there is serious concern in Europe that the lack of venture-capital markets has impaired the ability of European firms to compete with their American counterparts (European Commission [1994]). Accordingly, European Commission reports, and particularly the 1998 report on Risk Capital: A Key to Job Creation, identify the financial systems of Europe as important impediments to innovation and economic growth. Why is it that European financial systems are apparently less successful in identifying and funding innovative entrepreneurial firms and thus boosting economic activity? Are there structural reasons behind the different performance with regard to innovations, and if so, are there normative arguments in favor of public intervention? Answers to these questions are increasingly pressing. For one reason, the comparative incidence of different financial systems may guide and inform political discussion about the reform of corporate governance systems through economic arguments about innovative activity and growth rates, rather than relying on traditional legal concepts and political interests.1 Moreover, international competitiveness, economic growth, and innovation are increasingly crucial to sustain social