National Institutions and High Tech Industries: A Varieties of Capitalism Perspective on the Failure of Germany's Neuer Markt

WZB, Markets and Political Economy Working Paper No. SP II 2005-03

41 Pages Posted: 14 Mar 2005

See all articles by Sigurt Vitols

Sigurt Vitols

WZB Berlin Social Science Center

Lutz Engelhardt

WZB Berlin Social Science Center

Date Written: February 2005

Abstract

One of the more prominent recent failures in institutional innovation in Germany was the Neuer Markt (1997-2003), a special segment of the Frankfurt stock exchange designed for high-growth companies. Based in part on insights from the law and economics approach to agency theory, which emphasizes transparency in financial reporting and shareholder rights, the Neuer Markt was an attempt to promote high-tech sectors through increasing the supply of risk capital in Germany. Proponents of the agency approach have suggested that the Neuer Markt failed because reporting requirements and shareholder protection were still inadequate, and have argued for even stricter financial regulation.

This paper offers an alternative explanation for the failure of the Neuer Markt based on the Varieties of Capitalism (VOC) approach. This explanation focuses on the complementarities between financial markets and labor markets. Successful entrepreneurial companies require both capital and experienced managers and scientists willing to take higher risks in search of higher returns. Although the supply of risk-friendly capital increased briefly in the late 1990s in Germany, labor markets did not fundamentally change. In particular, mobility in the market for mid-career scientists and managers remains quite low, making it difficult for startups to attract the experienced knowledge workers they need to succeed.

Keywords: Startups, venture capital, IPO, stock market, high tech, software

JEL Classification: L86, G30

Suggested Citation

Vitols, Sigurt and Engelhardt, Lutz, National Institutions and High Tech Industries: A Varieties of Capitalism Perspective on the Failure of Germany's Neuer Markt (February 2005). WZB, Markets and Political Economy Working Paper No. SP II 2005-03. Available at SSRN: https://ssrn.com/abstract=670764 or http://dx.doi.org/10.2139/ssrn.670764

Sigurt Vitols (Contact Author)

WZB Berlin Social Science Center ( email )

Reichpietschufer 50
D-10785 Berlin
Germany

Lutz Engelhardt

WZB Berlin Social Science Center ( email )

Reichpietschufer 50
D-10785 Berlin
Germany

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