The internationalization of securities markets and the political economy of market opening.

Abstract

Capital markets play an essential role in a global economy. They provide funds for trade, investment, venture enterprises, and industrial growth. Relationships between financial markets and governments constitute the core of industrialized political-economies, affecting the very health and legitimacy of governments. Intangible commodities denominated in, and supported by, national currencies trade in such markets. Governments regulate and oversee such financial markets more intently than any other market. Securities markets are one type of financial market. In the 1970s and 1980s, the three major securities markets of New York, London, and Tokyo underwent radical regulatory shifts. Changes in price, entry, and safety regulation lowered national barriers, and the regulatory language suggests their internationalization. What explains the regulatory openings and internationalization of these markets, and also the remaining discontinuities? Explanations fit three categories: (1) systemic international pressures such as competitiveness or technological change; (2) foreign policy pressures exerted by other governments; and (3) domestic distributional and policy conflicts in the financial services industry. One and two are "outside-in" explanations, and the third is "inside-out." Looking at the outcome, and inferring a motivation that could lead to such an outcome produces "outside-in" explanations as the outcome appears international--the opening of market barriers to overseas participants. I demonstrate the limitations of such approaches and conclude that regulatory openings emerged as a solution to domestic dilemmas. Reducing the level of analysis to examine the domestic political economy produces a qualitatively different explanation. The research considers international changes in behavior relative to domestic shifts. Comparing expectations with observations, the evidence suggests that the internationalization of these markets is more limited then regulatory language suggests. After the openings, international demand did not beat a path to the markets. London emerges as a possible exception and raises questions about the insularity of large actors to international pressures. As the explanation fits an "inside-out" approach, one might expect U.S. leadership to be negligible. Yet, the changes look remarkably similar across the markets, and converge on a U.S. style of regulation. Once policy makers decided to address a domestic distributional competition, then the international environment could play a critical role by providing alternatives and a means of assigning and avoiding blame. International affairs become important when domestic policy dilemmas are resolved by appealing to the international arena. Dominant powers wield influence through an embedded influence that constrains the perceived range of alternatives of other actors. As leaders in financial instrument, market, and regulatory innovation; American regulatory and financial institutions constrain the range of alternatives. They establish examples and reduce search costs for later reformers.