The Financial System and the Institutional Environment as Determinants of Economic Performance: Austria in Comparison

Empirical studies suggest that the Austrian economy would benefit considerably from a further integration of financial systems (Guiso et al., 2004). Against this background, this paper highlights selected aspects of the Austrian economy's financial structure and institutional environment in a cross-country comparison and evaluates the extent to which these factors are conducive to economic performance. Compared with the U.S.A. or the United Kingdom, the ownership structure of listed companies is highly concentrated in Austria and in many other euro area countries. In fact, the Austrian stock market stands out in terms of its high ownership concentration. However, empirical evidence indicates that an all too high level of ownership concentration has a negative impact on firm performance (see, for example, Gugler, 1999). Fostering investor protection is a natural lever to promote a higher degree of dispersion and hence a lower level of concentration. Although the standards of investor protection in Austria have improved substantially in recent years, they still need to be safeguarded and strengthened where necessary. Another important issue in this context is the development of venture capital markets which are key to innovation and hence to productivity. It is no coincidence that the most liquid venture capital markets are found in countries with the most developed stock exchanges — e.g. the U.S.A., the United Kingdom and the Netherlands. The Austrian venture capital market is one of the smallest by international standards. In order to promote venture capital in Austria, the local stock market, which provides exit opportunities for venture capitalists, needs to be deepened. According to several indicators (which were originally developed by Barth et al. (2004) — supervisory power, supervisory independence and private monitoring — and updated for the present purpose), the Austrian regulatory and supervisory framework seems to be fairly well designed to foster efficiency and stability in the banking sector: (1) Austria seems to be among those countries which grant a fairly high degree of power to the supervisory authority. (2) The supervisory power is complemented by adequate mechanisms to foster the reporting of reliable, comprehensive and timely information (private monitoring). (3) In comparison with other countries, the Austrian supervisory authority is quite independent from political interference and influences from the banking industry (supervisory independence).