Strong Firms, Weak Banks: The Financial Consequences of Germany's Export-Led Growth Model

31 Pages Posted: 12 Jun 2019

See all articles by Benjamin Braun

Benjamin Braun

Max Planck Institute for the Study of Societies

Richard Deeg

Temple University

Date Written: May 28, 2019

Abstract

The financial foundation of Germany’s manufacturing success, according to the comparative capitalism literature, is an ample supply of long-term capital, provided to firms by a three-pillar banking system and “patient” domestic shareholders. This premise also informs the recent literature on growth models, which documents a shift towards a purely exportled growth model in Germany since the 1990s. We challenge this common assumption of continuity in the German financial system. Export-led growth, characterized by aggregate wage suppression and high corporate profits, has allowed non-financial corporations to increasingly finance investment out of retained earnings, thus lowering their dependence on external finance. This paper documents this trend and shows that business lending by banks has increasingly been constrained on the demand side, reducing the power – and relevance – of banks vis-à-vis German industry. The case study suggests a need for students of growth models to pay greater attention to the dynamic interaction between institutional sectors in general, and between the financial and the non-financial sectors in particular.

Keywords: bank power, business lending, corporate finance, institutional change, non-financial corporations

JEL Classification: G21, G32, D22, P16, P52

Suggested Citation

Braun, Benjamin and Deeg, Richard, Strong Firms, Weak Banks: The Financial Consequences of Germany's Export-Led Growth Model (May 28, 2019). Available at SSRN: https://ssrn.com/abstract=3395566 or http://dx.doi.org/10.2139/ssrn.3395566

Benjamin Braun

Max Planck Institute for the Study of Societies ( email )

Paulstr. 3
50676 Koln
Germany

Richard Deeg (Contact Author)

Temple University ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://liberalarts.temple.edu/academics/faculty/deeg-richard

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