The Impact of Foreign Direct Investment, Financial Crises and Organizational Culture on Managers' Views as to the Finance-Growth Nexus
Tennant, David, Kirton, Claremont, Journal of Economic Issues
Numerous theoretical models argue that financial institutions can facilitate the creation of economic growth through three main channels--by mobilizing savings, by allocating savings to the most productive investments, (1) and by facilitating the smooth flow of trade needed in any market-driven economy (2) (Levine 1997, 689-701). Such models are typically rooted in neoclassical economic theory where it is assumed that managers and officers of financial institutions fill these roles because it is rational for them to do so as utility-maximizing agents. Institutional economics, suggests that viewing individual agents as utility-maximizing is inadequate, as the decisions made by individuals are affected by institutional, cultural and historical factors (Hodgson 2000, 318; Elliot and Harvey 2000, 397). Such factors are not usually accounted for in empirical studies on the finance-growth relationship, as they are not easily quantified. Their omission has led to an incomplete understanding of the finance-growth process, and to confusion as to why similar empirical tests yield completely different results in different countries. (3) More importantly, failure to understand the factors that impact and influence the direction of financial sector intermediation has led to broad policy prescriptions that may not be applicable in specific country circumstances.
This article addresses these issues by analyzing and reporting the results of a survey of views of selected financial sector managers. The Jamaican case study allows for the investigation of an interesting paradox--expansion of the financial sector, as the economy simultaneously experienced declining growth rates. (4) Analysis of the views of key stakeholders in this environment leads to some important conclusions as to the validity of the theorized functions of the financial sector; the constraints facing the sector in effectively performing those functions; and suggestions for improved performance.
Important distinctions are made between the views highlighted by managers of:
(i) indigenous and foreign financial institutions;
(ii) institutions that were positively and adversely impacted by the recent financial crisis; and
(iii) different types of financial institutions.
These distinctions allow for an assessment of how foreign direct investment (FDI), financial sector crises, and organizational culture affect managers' views of their roles in the economy, and the challenges they face in fulfilling those roles.
The article is divided into six subsequent sections. The second section summarizes the analytical and historical framework of the study. Section 3 outlines the methodology used in conducting the study. The next three sections highlight the impact of FDI, financial crises and organizational culture on managers' views as to the financial sector's theorized role in fostering economic growth, constraints faced in fulfilling these roles, and suggestions for improving the performance of the sector. The final section presents the summary and conclusion.
Analytical and Historical Framework
With the spread of financial and capital market liberalization in the developing world, current discussion is focusing on whether liberalized financial markets are effective in attracting funds to developing countries and efficient in allocating such capital, or "if in fact they add unnecessary instability to already weak economies and ... promote policies ... detrimental to the poorest members of those societies" (Harvey and Klopfenstein 2001, 439). Institutional economics suggests that the outcome of financial sector intermediation in a liberalized environment depends on numerous factors that influence decision-making in financial institutions. Such factors are integrally related to the country's culture and history, the financial sector's history, and each organization's culture and structure.
In highlighting financial sector managers' views of their roles and challenges, these factors will be considered by distinguishing between indigenous and foreign-owned institutions; institutions that were positively and adversely impacted by the financial sector crisis of the mid-1990s; and different types of financial institutions. …