Openclusters

The corporate giants of Europe are aging elders. This column suggests financial reforms to encourage the growth of emerging
enterprises.

The recent financial turmoil will certainly lead policy-makers to reconsider existing regulations of financial markets and institutions. It would be misguided to focus exclusively on stability, however. What the European financial system lacks above all is the ability to foster the growth of emerging companies. According to Aghion, Fally and Scarpetta (2007), among others, financial development is particularly important for the entry and expansion of new businesses, possibly more so than labour market flexibility. We take this logic one step further and argue that some types of financial developments are more needed than others at this stage in the economic history of Europe.

The lack of emerging firms in Europe

Entry, exit, and the reallocation of resources among firms play a crucial role in the process of economic growth.¹Europe’s corporate landscape, however, is dominated by old, established companies. A look at the age distribution of the world’s 500 largest listed companies shows that European ‘champions’ are generally much older than American ones, let alone those from emerging markets, as illustrated by Figure 1. Europe’s corporate giants include only 12 companies born in the second half of the 20th century, against 51 in the US and 46 in emerging countries.

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