Firms, finance and innovation: Anglo-Saxon finance comes to Europe

The 'invisible' hand of the market allocates production factors according to consumer preferences and supply conditions. Allocation is also shaped by financial markets and the extent to which they allow entry. Market competition is often depicted as a blind force, but competition for innovation depends critically on how views on investment projects are shaped. Are they mainly driven by collective opinion, or does private valuation prevail? Firms that pursue identical strategies offer neither employees nor investors much choice, while diversity stimulates innovation. The financial and governance revolution of the 1980s reshaped US business by facilitating entry, which forced incumbent firms to focus. Anglo-Saxon finance spread to continental Europe in the late 1990s through a rise of private equity and securitized products. However, continental Europe has yet lacked the ascent of entrepreneurship that was characteristic of Anglo Saxon countries. Collective opinion came to prevail in financial markets, which entailed the credit crisis of the new millennium. The paper discusses how shocks caused by market sentiments affect market and bank based financial systems.