Introduction

Perhaps the most basic component of the view that a ‘bank-based’ system of finance for investment, such as is claimed to operate in Germany and Japan, is superior to a ‘market-based’ one is the belief that the close involvement of banks with firms in a ‘bank-based’ system reduces the agency costs of supplying debt finance. The lower cost of bank-supplied debt is seen as enabling firms to finance a higher level of investment, with a larger proportion of bank loans, than in a ‘marketbased’ system. The following statement by The Economist (1990, p. 21) highlights the common perception that the system of investment finance in Germany, together with that of Japan, involves a greater use of bank loan finance: ‘Public companies in Japan and West Germany have traditionally relied more on debt than on equity, so their gearing has typically been twice or three times as high as that of Anglo–American [companies].’

This chapter undertakes a detailed analysis of the financing of aggregate investment by non-financial enterprises in Germany in order to assess whether bank loans are a particularly important source of finance for investment. The second section discusses the problems involved in making international comparisons of the financing of investment, and argues that the most useful comparisons are those based on flows of funds. The third section discusses the German system of pension provision, because one distinctive aspect of the finance of investment in Germany is the use by enterprises of pension contributions on behalf of their employees as a source of finance for investment within the enterprise.