German Banks and the Modernization of the Small Firm Sector: Long-Term Finance in Comparative Perspective

WZB Labor Market and Employment Working Paper No. FS I 95-309

31 Pages Posted: 22 Oct 2004

See all articles by Sigurt Vitols

Sigurt Vitols

WZB Berlin Social Science Center

Date Written: November 1995

Abstract

This paper analyzes the contribution of the German banking system to the modernization of small and medium-sized enterprises (SMEs) in industry. The simultaneous greater relative importance of and relatively high wages in German SMEs appear to be paradoxical in terms of dual labor market theory, which claims that lower wages and greater flexibility in the use of labor are important for helping small firms compensate for their constrained access to capital, R&D and skills resources relative to large firms.

This paper suggests that the successful modernization of the German small firm sector despite pressure from below from industry-level wage bargaining and strong job protection can be attributed to support from above in terms of an institutional infrastructure helping small firms overcome the organizational deficiencies they face relative to large firms. The decentralized provision of long-term finance and sophisticated financial services for the modernization of SMEs is enabled by a three-tiered federalist form of corporatist organization in the cooperative and savings banks sectors, in which smaller banks at the bottom tier of the organization receive access to refinancing on capital markets and specialized services -- normally only available to large banks -- through the upper tiers of the banking organization.

Keywords: Financial systems, regulation, banking

JEL Classification: G2, G3

Suggested Citation

Vitols, Sigurt, German Banks and the Modernization of the Small Firm Sector: Long-Term Finance in Comparative Perspective (November 1995). WZB Labor Market and Employment Working Paper No. FS I 95-309. Available at SSRN: https://ssrn.com/abstract=607621 or http://dx.doi.org/10.2139/ssrn.607621

Sigurt Vitols (Contact Author)

WZB Berlin Social Science Center ( email )

Reichpietschufer 50
D-10785 Berlin
Germany

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