Transcending Home Bias: Institutional Innovation through Cooperation and Collaboration in the Context of Financial Instability

Abstract

This paper sets out an analytical framework for understanding the nature and significance of cooperation and collaboration in beneficial financial institutions like pension funds and sovereign wealth funds. Recognising that these types of institutions rarely face competition for the flow of funds, it is also noted that these institutions and other types of financial institutions compete with one another to realise target rates of return in global financial markets. At one level, these institutions can be quite parochial, even if there is a premium on institutional innovation. It is argued that in-sourcing and/or outsourcing the production of target rates of return may not provide senior managers sufficient flexibility to respond to changing market conditions. In this respect, cooperation and collaboration between financial institutions can be seen as a way of opening-up an ‘action space’ for innovation otherwise denied by the norms and conventions of the sector. In the penultimate section of the paper, examples of cooperation and collaboration are described noting the ways in which they enable senior managers to transcend home bias (the hegemony of local practice). Implications are drawn as to the limits of cooperation and collaboration, especially as regards the authority of senior managers.

Keywords: collaboration, cooperation, financial institutions, investment management

JEL Classification: G23, J33, L24, R51