Productivity growth has been slow in many continental European countries over the last few decades, especially in comparison with the United States. It has been argued that lack of product market competition and poor corporate governance are two of the main reasons for this phenomenon. However, predictions from theoretical models are far from unambiguous, and empirical evidence is sparse, in particular at the level of individual firms. In this paper, we aim to close this gap with an econometric analysis of firm performance in Germany. Based on a unique panel data set with detailed information on almost 400 manufacturing firms over the 1986-94 period, we find that firms operating in industries which are characterized by more intensive product market competition experience higher rates of productivity growth. We also find weak evidence for the notion that in Germany's bank-based system of internal control, ownership concentration is harmful for productivity growth. Keywords Non-technical summaryProductivity growth has been slow in many continental European countries over the last few decades, especially in comparison with the United States. European countries such as Germany and France have low capital performance as measured by capital productivity and various rates of return. Improving productivity is important not only for shareholder value, but also from a public policy perspective: In many countries, social security systems move away from pay-as-you-go systems to more capital-funded systems, and therefore the rate of return on capital will be even more important as a determinant of future generations' welfare than in the past.It has been argued that lack of product market competition and poor corporate governance are the two main reasons for slow productivity growth in continental Europe. However, predictions from theoretical models are far from unambiguous, and empirical evidence is sparse, in particular at the level of individual firms. This study tries to close this gap with an econometric analysis of firm performance in Germany. Using a panel of almost 400 German manufacturing firms that covers the period 1986-94, we analyze how product market competition and corporate governance affect the growth of total factor productivity.Our empirical approach improves on existing empirical studies on corporate governance in Germany in two important respects. First, the data set consists of listed and non-listed firms which also differ in their legal forms. Hence, our analysis is not restricted to public companies with limited liability whose shares are listed (börsennotierte Aktiengesellschaften). Second, we recognize that product market competition and corporate governance are potentially endogenous. To avoid biased regression results, we use an instrumental variables technique.We find that firms which operate in more competitive product markets have a higher growth of total factor productivity. This suggests that an increase in the intensity of competition should result in productivity improvements. Fro...

This study investigates the impact of corporate governance and product market competition on total factor productivity growth for two large samples of German and UK firms. In poorly performing UK firms, the presence of strong outside blockholders lead to substantial increases in productivity. Contrarily, for German poorly performing and distressed firms, it is bank debt concentration which stimulates productivity growth. Whereas high bank debt concentration also supports productivity growth in German profitable firms, leverage is unrelated to productivity growth in UK firms. Weak product market competition in the UK has a negative impact on productivity growth of in both widely-held firms and concentrated firms with the exception of firms controlled insiders (directors). These seem able to generate productivity increases in firms subject to little market discipline. For profitable German firms, the relation between strong blockholder control and productivity growth is limited. Only control by banks, insurance firms and the government can somewhat reduce the negative effect of weak product market competition.

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Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0257.pdf Non-Technical SummaryThe picture of the securities exchanges and financial sectors in CEE countries is still relatively unfavorable. The CEE securities exchanges -with the only exception of the Warsaw Stock Exchange -are, in comparison with their western counterparts, underdeveloped and less important for the domestic economies in general and for corporate finance in particular. Markets for derivatives exist only in Poland and Hungary. The trade in derivatives is particularly active in Poland which emphasizes the leading role of the Polish stock market in the whole region.The analysis of the sources of corporate finance shows that the role of the stock and bond markets is currently very unimportant both compared to western countries and in absolute terms. For Poland we investigate the corporate finance using micro data for all companies listed at the Warsaw Stock Exchange. We find that listed companies differ significantly from not listed companies as the capital market plays a more important role as a source of finance.The CEE securities exchanges are under pressure for several reasons. The most severe reason for the long term is the almost negligible usage of securities exchanges as source of finance by private companies. We evaluate different possible forms of (international) organization of CEE exchanges that could ensure future success of the exchanges and improve the situation for private companies. In particular we investigate a stand-alone solution, the creation of a pan CEE-exchange and different forms of alliances with western exchanges. We find that a good strategy of CEE exchanges would be to join alliances with Western European exchanges, and at best, to join altogether the same western exchange. A stronger international integration of the exchanges would also improve the integration of CEE companies into international capital markets. The Prospects of Capital Markets in Central and Eastern EuropeJens Köke Mannheim Research Institute for the Economics of Aging (MEA) Michael Schröder Centre for European Economic Research (ZEW) AbstractThe picture of the securities exchanges and financial sectors in CEE countries is still relatively unfavorable. The CEE securities exchanges -with the only exception of the Warsaw Stock Exchange -are, in comparison with their western counterparts, underdeveloped and less important for the domestic economies in general and for corporate finance in particular. The CEE securities exc...

Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar. Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.