Problems of Growth and Stability
New Horizons in International Business series
Edited by Pier Carlo Padoan, Paul A. Brenton and Gavin Boyd
Chapter 11: International structural cooperation and financial architecture
Gavin Boyd The international financial system is evolving with virtually priority funding for more competitive manufacturing and non-financial service firms demonstrating high short-term returns; their strong drawing effects enable them to assume greater prominence in concentration trends, and they are increasingly significant challenges for less advantaged enterprises. With the concentration of trends, large-scale structural change is under way, and the USA is at the centre of this process, attracting investment from Europe and other areas experiencing slower growth. Efficiencies are evident in the financing of the more competitive firms and in the direction of capital flows from less developed areas, but there is a perverse destabilizing dynamic: very active large-scale speculation by financial enterprises in the USA tends to bid up the stocks of the more successful manufacturing and non-financial service firms to unsustainable levels, at which losses of investor confidence cause recession that destroys much growth. This has to be regarded as a problem of market failure, and associated with it is a type of market failure that results from diversions of investment into the speculative operations, that is, away from productive use. These diversions occur because of opportunities for high profits, with reduced tax exposure. The funding of growth in real economies tends to be below potential, imbalanced and unstable; managements of productive enterprises, moreover, can be attracted by the potentially high rewards of speculative expansion that can involve risky mergers and acquisitions. The deficiencies in financial markets have effects in a larger context in which potentials for...
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