Europe Flashcards
European business characteristics (from late 19th century)
- family business
- less large corporations than in US
- large companies smaller in size than those in US
- banks /US: capital markets
- before 1950: collusive agreements (Germany)
- Pyramid groups and holdings
- state-owned enterprises (after WWII)
Family business
either runs and owns, or owns but delegates
- were not designed to disappear
- not the exception among large businesses
Family Capitalism not so important in
- Germany: important role until 1914
- UK: managerial capitalism
Netherlands
Advantages of family firms
- flexibility and lower transaction costs
- loyalty, intrinsic motivation, long-term commitments (family’s fortune, reputation)
- network of trust
- provide protection against uncertain adverse events
Disadvantages of family firms
Slow growing:
- lack of resources (capital markets and managerial talent)
- conservative (risk aversion)
- some family members might prefer short-term income to long-term growth
Short-lived because of problems of leadership succession:
-buddenbrooks effect: 3rd generation dearth of entrepreneurial skills (incapacity, ineptitude or lack of interest): startup, consolidation, decline
Pyramids
Top shareholder controls a company (listed or not), who in turn controls blocks in others listed companies,…
- control through chain of ownership relations in which they directly control a firm that owns a dominant stake in a company or companies,..
- allows diversifying risk and moving into promising new economic sectors with a limited capital investment
Holding Company
owning enough stock in other corporations to exercise control
Holding companies and their subsidiaries can establish pyramids
Banks
Universal bank: investment bank + commercial bank
In Germany universal bank: loans but also became important shareholder
- emerged to support development of railway station
- expected to provide stability
- In US, banks smaller (debt and equity market)
State-owned enterprises
Banks insufficient in countries that were late-comers to industrialization (Italy or Spain)
European public enterprise larger than in US
France
- dominance family firms until now
- holding companies (banking and capital market limitations)
- Self-financing: expanded using retained earnings of one company to found other companies
- business and the state: formation of “national champions”: french governments became a major direct player in the economy through the nationalization of large corporations
Examples France
L’Oréal: self-financing, with Nestlé established french holding company Gesparal
Peugeot: family-controlled
LMVH: french holding multinational corporation, merger of Louis Vuitton and Moet Hennessy, controls around 60 subsidiaries that each manage a small number of prestigious brands
Germany
- financed by banks
- industrial cartels in industrialization
- government did not oppose up to 1945
- mostly successful in areas such as marketing of homogenous products such as coal or steel
- in industries such as chemicals or electrical hardly relevant (because too many products)
- in 1957: prohibition of cartels
- old cartels no longer functioned but collusive agreements
- pyramids after WWII
- preferred mechanism for retaining control while also using public shareholders’ money
- modern economy: family controlled pyramidal groups and nominally widely held firms that are actually controlled by the top few banks via proxies
Italy
- beginning of 20th century: italian government little intervention in direct intervention in economy
- 1931: major italian investment banks collapsed
- fascist government took on their holdings of industrial shares (shares turned to state-controlled pyramidal groups)
- state controlled 40% of entire italian shareholding capital
- italy had become the largest industrial proprietor after SU
- large listed firms were pyramid groups controlled by either state or family
- extensive privatization program and improved legal protection for public shareholders reinvigorated the stock market. Formerly unlisted companies opted to go public , and stock market grew further
Family capitalism in Italy
- important families enjoyed both economic and political power
- majority of italian firms stayed away from stock market
- some family-controlled firms (Benetton) bought large sections of the formerly state-controlled concerns in distribution and in the iron and steel industry
- by postwar: family capitalism controlled Italian economy
- 50% of top 100 Italian corporations today family-controlled
