No demand, no supply

I was reading some articles from my course on banks and capital markets. I just started this module this week and the course materials provide a broad picture of the subject, I was just touching on the beginnings of the financial sector, on why banks and capital markets exist, why the divergence, its different development progress in different industrialised countries.

 

One interesting point that made an impression on me is the fact that the French financial markets were stagnated between the 1930s and 1980s. There were two theories which attempt to explain (not particularly about the stagnation of the French markets, but in general) what caused the advancement in financial markets. The first one says that it was the legal system that advance or impede the markets while the second theory suggests that there were industrial incumbents that hinder certain countries’ market development.

 

The first theory says that it was the civil legal system being the reason why the French markets did not advance as well as the anglo-saxon ones. Recall that the French uses the civil legal system which is based on laws made by thinkers/scholars who spent their whole life doing just that. The common law system, on the other hand is applied in the anglo-saxon worlds and it is collection of laws made by judges. So, the writers of the first theory found (with empirical evidence) that the financial markets in countries using the civil legal system are less developed than those that adopt the common law system. But the theory couldn’t explain why that is so.

 

The second theory proposes another reason for this phenomenon. The authors say that there are industrial incumbents who are powerful enough to manipulate policy-making in relation to financial market development. It means that the existing industry players who were already there in the first place; have interests in not making money (through the financial markets) available for financing new start-ups. These players have sufficient retained earnings to finance their new projects, so they don’t need banks’ or outsiders’ money. It’s simple economics; when there’s no demand for the product (i.e. money), there won’t be supply.

 

I ask myself, why no demand? Entrepreneurship is perhaps the driver of demand. When I first arrived in France, I have noticed almost immediately that there aren’t many small or start-up enterprises here compared to Asia. An easy example is food. If you want to do food business in France, it’s restaurant or nothing. In Asia, you can start a hawker stall and it’s relatively easier to do that than to start a restaurant from the beginning. Any business needs some kind of financing, even a small food stall. So here you are, a potential borrower.   

 

French people are also reluctant to get out of the comfort zone to venture into entrepreneurship. Those who do, are motivated, brilliant and well-rewarded. The average people are usually quite happy to be employed by big enterprises and the public service. The workforce in the public service is huge. Perhaps it’s just the culture. Or it’s just that they are not hungry enough. Or perhaps there’s just too much bureaucracy involved. What are the other hindrances to entrepreneurship in France?