Working Paper
Financing the New Economy

Financial Institutions and Corporate Governance

This paper examines the financial sector preconditions for the successful development of a high technology sector. It argues that there is a close relation between types of activities undertaken in different countries and their institutional structures. A distinguishing characteristic of the financing of high technology firms is their evolving pattern of control by different investor groups. While stock markets are an important component of the development of the most successful firms, they are not the most common. Regulation is a significant influence on institutional structure. The degree of risk taking by financial institutions and the diversity of their investments are affected by trade-offs between competition and stability and the emphasis placed on minority investor protection. For the most part, Europe has opted for high levels of investor protection and low levels of diversity; if it wishes to stimulate high technology sectors, it may have to change this balance.