The Internationalization of Asset Ownership in Europe, Harry Huizinga, Lars Jonung.Cambridge University Press, (2005).

1. Introduction

Europe has been to the forefront of financial globalization, with European countries nowclustered at the top of global rankings in terms of levels of cross-border assets and liabilities. Thecurrent phase of international financial integration is relatively recent, both in Europe and aroundthe world, with an acceleration in the level of cross-border asset trade taking place since the mid-1990s (Lane and Milesi-Ferretti, 2006). In Europe, the abolition of capital controls under the 1992Single Market programme was a landmark event; more recently, the creation of EuropeanMonetary Union has provided a further boost to financial integration. The rapid pace of financialintegration has provided relatively little time for reflection on its myriad implications for theperformance of the European economy. Accordingly, a book that examines that impact of greaterforeign ownership in Europe is extremely timely.

This volume covers a lot of ground. Three main themes are explored: the legal infrastructuresupporting financial integration; the impact of greater financial linkages on various dimensions ofmacroeconomic performance; and analysis of how individual countries have managed theintegration process.

The first part of the book consists of two chapters that examine the development of the legaland regulatory framework that underpins greater financial integration. In the first chapter, Jean-Pierre Raes reviews the abolition of capital controls in the European Union in 1990 and thesubsequent manoeuvres by various member states to seek specific exclusions from the generalpolicy of zero restrictions on foreign ownership, whether an investor from another member stateor from a ‘third country’. In particular, although foreign ownership has grown tremendously, thereremains significant resistance in sectors (such as energy and audio-visual services) that aredeemed to be of strategic national interest, with policymakers generally resorting to indirectmechanisms to discourage foreign ownership.

The second chapter, by Erik Berglof and Mike Burkart, examines the attempts by the EuropeanCommission to develop a unified approach to takeover regulation – these authors highlight thecomplexity of corporate governance systems, with individual regulations potentially having verydifferent effects across the member countries. For this reason, European-level regulation needs tobe flexible and directed at ensuring general principles of good corporate governance arerespected, rather than seeking a common system across all countries.

The second part of the book studies the impact of greater financial integration from a variety ofperspectives. Kenneth Scheve and Matthew Slaughter consider the impact of multinationals onlabour markets. This is a very comprehensive treatment, which carefully distinguishes betweenthe impact of horizontal versus vertical FDI and considers a broad range of empirical findingsregarding the impact of foreign ownership on the level, distribution and volatility of earnings,with clear evidence that foreign-owned firms treat workers differently than domestically-ownedfirms. A strength of this chapter is its exposition of how compensation policies within multi-nationals provide a channel for international risk sharing, with the earnings of workers in affiliatesfluctuating with the profitability of the parent company.

Cecile Denis, Harry Huizinga and Gaetan Nicodeme provide an interesting analysis of thedeterminants of foreign ownership of non-listed firms in Europe. In particular, these authors showthat foreign ownership is more likely, the weaker are domestic institutions - by acquiring controlrights, direct investment is a method to bypass poor protection of minority shareholders. A

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noteworthy finding of this study is that greater foreign ownership is associated with an increase inthe corporate tax rate, as countries seek to export part of the tax burden to foreign investors. Thisresult is especially striking in view of the current moves in many European countries to reducecorporation tax rates in order to attract more inward investment and deter disinvestment bydomestic firms.

Kpate Adjaoute, Jean-Pierre Danthine and Dusan Isakov provide a useful survey of portfoliodiversification in Europe. These authors highlight the changing strategies pursued by institutionalinvestors in Europe and the increased importance of sectoral factors relative to country factors inexplaining equity returns. However, this finding may not be a persistent feature of the data –morerecent studies have shown that sectoral factors have declined in importance since 2003 (Lane andWalti, 2006). These authors usefully point out that there is little evidence of greater effectiveinternational risk sharing, as captured by a higher correlation in consumption growth rates acrossEurope, despite the increase in cross-border asset holdings. This illustrates the importance of less-tradable sources of wealth in determining consumption – in particular, housing prices acrossEurope have shown divergent patterns in recent years.

A test of whether international financial integration is actively providing risk diversification isprovided by Sebnem Kalemli-Ozcan, Bent Sorensen and the late Oved Yosha who look at thebehaviour of net international investment income flows for European countries. These authorsfind some evidence of a delinking between domestic income and idiosyncratic shocks to domesticoutput. However, this is an incomplete test of international risk sharing, since the payoff fromcross-border holdings may take the form of capital gains and losses rather than investment incomepayments. More generally, a more direct test would be to examine the behaviour of the returnsearned and paid out on foreign assets and liabilities rather than confining attention to thecomovement between GDP and GNP.

The last part of the book consists of a series of country studies. This is perhaps the mostoriginal and interesting section of the book, especially since detailed country studies are nottypically found in mainstream academic journals. The Sweden chapter by Magnus Henrekson andUlf Jakobsson and the Finland chapter by Pekka Yla-Anttila, Jyrki Ali-Yrkko and Martti Nybergare especially fascinating. These studies provide interesting narratives of the transition fromdomestically-orientated financial systems to international financial integration and an analysis ofthe associated challenges for social models that historically had mandated firms to take a broaderview beyond maximization of shareholder value and discriminated between different ownershipstructures through the tax system. A particular strength of the Swedish study is its account of howthe ability of a small number of families to control a large fraction of the Swedish stock market,despite relatively low equity stakes, has been compromised by the entry of foreign investors; theFinland study stands out for its discussion of why small countries may be concerned by themigration of corporate headquarters to larger financial centers.

At the other end of the spectrum, the UK study by Forrest Capie, Geoffrey Wood and FrankSensenbrenner point to the strong protection for minority shareholders in the Anglo-Saxoncorporate governance model as an important explanation for the relaxed British attitude towardsinward direct investment – it does not matter who controls domestic corporations if the interestsof insiders and outsider shareholders are aligned. Indeed, it would have been interesting tocommission more of these country studies (for instance, analyses of France, Germany and Irelandwould have provided additional insights), in view of the variation in how countries haveembraced financial globalization. At the same time, the country studies could have been improvedby a greater uniformity in approach – in particular, the Italian study by Sergio Mariotti, FabrizioOnida and Lucia Piscitello did not address the corporate governance issues that were at the heart

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of the other chapters in this section. They instead focused on the differences in firm performancebetween domestically- and foreign-owned firms in Italian industry.

In conclusion, this book provides a very useful starting point for understanding the ‘foreignownership revolution’ in Europe, covering the issue from a wide variety of perspectives.However, reading the book also makes clear that process of integrating the European financialsystem is far from complete, with the full impact of the 1990s reforms and monetary union not yetplayed out and further progress still required in removing the regulatory barriers to a deeper levelof integration.

References

Lane, Philip R., Milesi-Ferretti, Gian Maria, 2006. The External Wealth of Nations Mark II. IIIS Discussion Paper,vol. 135.

Lane, Philip R., Walti, Sebastien, 2006. The Euro and Financial Integration. IIIS Discussion Paper, No. 139.

Philip LaneThe Sutherland Centre, Level 6, Arts Building,

Trinity College Dublin, Dublin 2, IrelandE-mail address: plane@tcd.ie.

doi:10.1016/j.jinteco.2006.09.001

266 Book reviews