One of the more prominent recent failures in institutional innovation in Germany
was the Neuer Markt (1997-2003), a special segment of the Frankfurt stock exchange
designed for high-growth companies. Based in part on insights from the law and economics
approach to agency theory, which emphasizes transparency in financial reporting and
shareholder rights, the Neuer Markt was an attempt to promote high-tech sectors through
increasing the supply of risk capital in Germany. Proponents of the agency approach
have suggested that the Neuer Markt failed because reporting requirements and shareholder
protection were still inadequate, and have argued for even stricter financial regulation.
This paper offers an alternative explanation for the failure of the Neuer Markt based
on the Varieties of Capitalism (VOC) approach. This explanation focuses on the complementarities
between financial markets and labor markets. Successful entrepreneurial companies
require both capital and experienced managers and scientists willing to take higher
risks in search of higher returns. Although the supply of risk-friendly capital increased
briefly in the late 1990s in Germany, labor markets did not fundamentally change.
In particular, mobility in the market for mid-career scientists and managers remains
quite low, making it difficult for startups to attract the experienced knowledge
workers they need to succeed.