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The regulatory ties that bind markets : the political economy of cross-border integration in the exchange… Gravelle, Matthew Joseph 2016

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      THE REGULATORY TIES THAT BIND MARKETS:  THE POLITICAL ECONOMY OF CROSS-BORDER INTEGRATION  IN THE EXCHANGE INDUSTRY   by   MATTHEW JOSEPH GRAVELLE  M.A., McMaster University, 2007 B.A. (Hons), Queen’s University, 2005    A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF  THE REQUIREMENTS FOR THE DEGREE OF   DOCTOR OF PHILOSOPHY   in   THE FACULTY OF GRADUATE AND POSTDOCTORAL STUDIES  (Political Science)    THE UNIVERSITY OF BRITISH COLUMBIA   (Vancouver)  August 2016    © Matthew Joseph Gravelle, 2016  ii  ABSTRACT This dissertation considers cross-border integration from the perspective of financial market regulators.  It analyzes market authorities’ responses to the phenomenon of cross-border merger and acquisitions in financial services, particularly involving exchanges.  In some instances, regulators have approved these proposals, but in others they have intervened, even blocking proposals in high-profile decisions.  This variation is puzzling and cannot be accounted for by standard explanations, including regime type or political pressures on regulators.  When do officials interfere in the market for corporate control of financial service firms, and why?   To explain this variation, the dissertation develops a theory of regulator dependence that focuses on the relationship between regulators and firms.   The theory considers the conditions under which regulators’ preferences are insulated from social and political pressures, where regulators can act on their own preferences regarding integration.  These preferences are a function of regulators’ dependence on firms’ cooperation and compliance to deliver on desired public policy outcomes.  Mergers are threatening where regulators depend on a merging firm, and in these contexts regulators interfere with integration proposals.  This dependence is a consequence of historical policy outcomes shaping the structure of the market and the allocation of regulatory authority.  Empirical analysis of ten cases corroborates the theory’s predictions.  The theory of regulator dependence establishes the analytical and empirical significance of considering regulators’ discrete views about market integration in order to explain certain financial market outcomes.  In doing so, the dissertation contributes to our understanding of the conditions under which cross-border market integration is more or less politically feasible, and adds nuance to the established view that the historical development of domestic markets has significant and systematic effects on international market integration.  iii   PREFACE This dissertation is original, unpublished, independent work by the author, Matthew Joseph Gravelle.    iv  TABLE OF CONTENTS     ABSTRACT……………………………………………………………………. ii . PREFACE…………………………………………………………………………. iii  TABLE OF CONTENTS……………………………………………………….…. iv  LIST OF TABLES………………………………………………………………… vii  ACKNOWLEDGMENTS………………………………………………………… viii   CHAPTER   I      INTRODUCTION: WHEN DO REGULATORS INTERVENE IN THE           MARKET FOR CORPORATE CONTROL................................................. .1   Introduction………………………………………………………………. .1  Varying merger outcomes: a puzzle beyond the reach of standard explanations……………………………………………………………… .6 A regulatory explanation for merger outcomes………………………......12  Implications of the theory………………………………………………...16 Case selection and methodology………………………………………… 22 Plan of the dissertation…………………………………………………... 27    II      THE POLITICS OF FINANCIAL EXCHANGES………………………. 29   Introduction……………………………………………………………… 29 What are exchanges? A primer on market infrastructure………………... 30 The regulation of market infrastructure…………………………………. 33 Demutualization: the move from member owned exchanges………... 40 Competition and deregulation………………………………………... 40 Understanding cross-border mergers and acquisitions in the  exchange industry………………………………………………………... 42 The political economy of the exchange industry…………………………44   III      REGULATORY POWER AND MARKET INTEGRATION IN               FINANCE………………………………………………………………...57  Introduction……………………………………………………………… 57 The nature and limits of regulatory power in finance…………………… 58 Defining regulatory power in finance…………………………………62  v  Contrasting perspectives on regulatory power in finance……………. 64 Variability of regulatory power………………………………………. 72 The tools of the trade: strategies to project or augment power………. 80 Assessing explanations financial market integration……………………. 89 Systemic explanations for public actors’ choices……………………. 92 Domestic explanations for public actors’ choices……………………. 97 Explanations for takeover and corporate governance  outcomes……………………………………………………………... 106 Explanations based on the independent preferences of  public actors…………………………………………………………. 111 Towards a theory of public preferences regarding multinational  corporations……………………………………………………………... 119   IV      THE THEORY OF REGULATOR DEPENDENCE………………..... 128  Introduction……………………………………………………………... 128 The theoretical approach………………………………………………... 129 The insulation of public sector preferences…………………………. 129 Historical institutionalism: explaining public preferences in  global finance………………………………………………………... 134 The theory of regulator dependence…………………………………...... 138 Regulatory power……………………………………………………. 138 Regulators’ incentives to maintain their power……………………… 139 Limited regulatory capacity…………………………………………. 141 Cross-border firm integration: a costs-based problem………………. 142 Mechanisms of power erosion………………………………………. 143 Regulator dependence……………………………………………… 156 The implications of regulator dependence: linking costs  and preferences………………………………………………………. 170 Observable implications of the theory…………………………………...170   V      TORONTO-LONDON: A STATIC TEST OF THE THEORY OF           REGULATOR DEPENDENCE……………………………………....... 181  Introduction……………………………………………………………... 181 The Toronto-London merger proposal……………………..................... 183 The insulation of the Canadian regulatory response………………… 183 Concerns about the costs of regulating a cross-border firm…………. 192 Dependence: how would regulators be affected on the job?................ 194 The roots of dependency: how Canadian markets got this way……... 208 The view from London………………………………………………. 220 Shadow case: SGX-ASX………………………………………………... 223 Conclusion………………………………………………………………. 229      vi  VI     THREE MERGERS INVOLVING EURONEXT: A           DYNAMIC TEST OF THE THEORY OF REGULATOR                 DEPENDENCE…………………………………………………....... 234  Introduction…………………………………………………………...234 The initial Euronext merger……………………………………...…...237 The first transatlantic tie-up: NYSE-Euronext………………………. 241 US and EU regulators’ insulation………………………………… 241 The threat of regulatory spillover and arbitrage: a cost-based  problem………………………………………………………….... 247 A dependency-based explanation for approval…………………... 255 Shadow case: NASDAQ-OMX……………………………………… 265 ICE – NYSE-EURONEXT, a merger with conditions….....................267 Conclusion.............................................................................................272   VII    DEUTSCHE BOERSE – NYSE-EURONEXT: A HARD           TEST OF THE THEORY OF REGULATOR           DEPENDENCE…………………………………………………....... 276  Introduction…………………………………………………………...276 Institutional context: the relevant actors in the European  Commission………………………………………………………….. 279 A competition authority weighs in: blocking DB-NYSE Euronext………………………………………………………………281 Assessing the EU competition authority’s insulation…………….  281 The impact on the broader EU agenda: a cost-based problem…… 291 Sources and measures of dependence: market structure and  EU authority……………………………………………………….304 Conclusion……………………………………………………………310    VIII   ASSESSING IMPLICATIONS AND PROBING FUTURE                  RESEARCH………………………………………………………….316  Introduction…………………………………………………………...316 Summary of the dissertation’s findings……………………………… 318 Beyond the theory: the implications of regulator dependence….….... 322 Beyond the dissertation: questions for future research……………… 329   WORKS CITED…………………………………………………………… 336    vii    LIST OF TABLES     1       Major approved and failed merger and acquisition proposals since           2000………………………………………………………………….……...6  2       Summary of the causal logic of the theory of regulator           dependence………………………………………………………………...15  3       Summary of case studies…………………………………………………. 23  4       The Governance Space (from Culpepper).. ……………………………...130  5       Summary of Chapter 5 empirical observations..........................................231  6       Summary of observations relating to NYSE-Euronext............................. 275  7       Summary of observations relating to DB-NYSE-Euronext.......................314               viii    ACKOWLEDGMENTS  Thanks to my supervisor, Alan Jacobs, and committee members, Yves Tiberghien and Chris Kam, for their support – and mostly for their patience.   And to my parents and sister, for more of the same.     1   CHAPTER I INTRODUCTION: WHEN DO REGULATORS INTERVENE IN THE MARKET FOR CORPORATE CONTROL? Introduction On 9 February 2011, Xavier Rolet and Tom Kloet, respectively the CEOs of the London Stock Exchange Group and Canada’s TMX Group Inc., announced a merger between their companies.  The proposed deal would have created an entity with ownership of the London, Milan, Toronto, Montreal, and Vancouver stock exchanges (as well as other key assets) – the second biggest exchange company globally, by market capitalization of their listed companies.  By June of the same year, and only four months after the deal was announced, the LSE had retreated by withdrawing its proposal in the face of an anticipated rejection by TMX shareholders, who were judged unlikely to provide the necessary two-thirds support.   It was not, however, because TMX shareholders preferred the status quo that the London bid failed.  A counterbid for TMX emerged, and shareholders instead voted to approve the potentially more lucrative (and also more complicated) purchase of TMX by the Maple Acquisition Corp., a consortium of thirteen of the largest Canadian financial institutions – including four of the six largest Canadian banks, as well as several Canadian pension funds and private equity groups.   That this deal was quickly cobbled together is testament to the long-term value those Canadian financial institutions saw in the TMX, and their ability to find the resources to build a credible counter-offer.  It is also testament to the hard work of the legal and regulatory teams on all sides, who were able to navigate the competition concerns that emerged as the major users of  2  Canada’s critical financial infrastructure – and the part-owners of its main competitor – sought to buy it.   That, at least, is a conventional account of the LSE proposal and Maple counterbid: a deal settled by a more lucrative counter-offer in the open market for corporate control, absolving politicians and officials of the need to openly pick sides and arbitrate.    As a surface level analysis it is not without merit.   As this dissertation will make clear, however, public sector concern about who owns and operates large financial infrastructure firms is a critical factor shaping outcomes in the market for corporate control of those entities.  It is a primary contention of this dissertation that the fate of these commercial proposals cannot be fully understood by reference to market forces alone.  And indeed, while the Canadian case may be somewhat unique in that the relevant political interference there operated below the surface and outside of the public spotlight, it is not unique in featuring political wrangling over the future of an exchange firm.  Since 2001 there have been several instances of both outright and subtle exercises of public interference in decisions about the ownership and operation of private exchange firms, including:  The European Commission blocking a proposed merger between Frankfurt’s Deutsche boerse and the New York Stock Exchange in 2012;  The Australian government blocking a proposed takeover of the Sydney-based ASX by SGX, the Singaporean exchange operator, in 2011;  A history of failed mergers involving the London Stock Exchange that is replete with political intrigue, including twice-failed moves between the LSE and Deutsche boerse (2001 and 2005), and between the LSE and New York-based NASDAQ and Australian bank Macquarie (2005).    3  In short, given this broader pattern of public involvement and interference in exchange mergers, it was probably not coincidental that the Canadian consortium making a counterbid for TMX opted for nationalistic symbolism and called itself “Maple”.  Indeed, given the central role of exchanges in a country’s economy, it can be asked whether failed mergers can simply be chalked up to nationalism.   At the same time, however, there are notable cases of cross-border mergers in the exchange industry that have not presented intractable issues to politicians or public officials – and the proposed mergers have received regulators’ approval as a result.  The pan-European merger creating the Euronext conglomerate in 2001, London’s purchase of Milan’s Borsa Italia, and the more politically contentious transatlantic NYSE-Euronext (2007) and NASDAQ-OMX (2007) mergers stand out as examples of this latter, successful kind of proposal, among several others.  Moreover, the deals just mentioned are notable because it was not initially obvious that politicians or regulators - particularly in Europe - were especially inclined to allow the deals to go through, as scepticism and concern on the part of officials seemed to present early obstacles to cross-border integration involving these firms.     What explains why some cross-border mergers involving countries’ financial markets infrastructure fail as a result of public interference while other mergers are approved?   What makes some types of cross-border commercial deal-making more problematic for public officials than others?   More fundamentally, when do financial market regulators allow deeper cross-border integration between firms, and when do they impede it?   To answer these questions, this dissertation considers the role of exchanges not only as private commercial entities, but also key players in a broader public policy network of actors.  The dissertation embarks from the premise that exchanges – like other large financial service  4  firms – are intimately connected not only with the public policymaking process, where they are very influential (Lindblom, 1977; Gould, 2003; Eberle and Lauter, 2011; Pagliari and Young, 2014; Young and Park, 2013), but also with the delivery and execution of a wide array of public policy goals.   Banks, exchanges, insurance providers, asset and fund managers, and a wide range of intermediaries often play crucial roles distributing credit, risk, and capital through the economy (Mugge, 2013).  These roles mean that financial firms are heavily involved not only in policy development but in each stage of the policy process, from development through to implementation and delivery.  Indeed, officials often need the compliance and cooperation of financial service firms in order to meet their domestic policy targets, with the result that public officials quite rationally seek to have influence and a significant measure of control over such firms’ private undertakings.  However, as the above cases suggest, domestic officials are often faced with the prospect of overseeing the domestic subsidiary component(s) of multinational financial service conglomerates, as a result of cross-border mergers and acquisitions.  How and when do financial service firms that operate in multiple jurisdictions complicate the delivery of domestic policy goals for domestic officials?  How do officials respond?   In recognition of this question, a literature on the political causes and consequences of cross-border ownership structures in the banking sector is beginning to emerge (Epstein, 2014a, 2014b; Goyer and Valdivielso del Real, 2014); while the exchange industry has not yet been considered, it is instructive to do so.  Notably, it is an industry which has undergone dramatic changes in the last two decades.  First, exchanges have largely “demutualized” and become publicly-traded firms with shareholder-value driven commercial incentives.  Second, the incumbent national exchanges have engaged in several waves of consolidation that have led to exchange  5  conglomerates: holding companies that own and operate multiple exchanges and trading platforms, and offer ancillary market services (like data provision, or “post-trade” services including transaction reporting, clearing and settlement).   Many of these conglomerates are multinational, meaning they operate trading venues and related infrastructure in multiple jurisdictions, and interface with multiple sets of regulatory authorities as a result.   Securities’ trading is a heavily regulated industry, and so mergers and acquisitions involving exchanges can generate significant regulatory challenges.  This is particularly true where mergers are proposed on a cross-border basis, involving the intermingling of exchange infrastructure, firm management, and public officials from multiple jurisdictions, and lessening each domestic regulator’s exclusive oversight over the firm.  Securities market transacting as well as securities regulation are often strongly embedded within national jurisdictional boundaries and localized capital markets, even though market participants and their capital can be highly mobile (Pownall et al., 2014; Wojick, 2011).  Moreover, exchanges and related facilities are often integral components of a domestic economy’s financial and even social security systems.  Cross-border integration thus presents officials with an acute dilemma, and one that is familiar to political economists: how to navigate the twin imperatives of a) international financial integration and b) the delivery of domestic policy goals (Garrett, 1999; Clift and Woll, 2012; Epstein, 2014a).   Interestingly, market authorities appear to navigate these twin pressures differently.      6  Table 1 Major approved and failed merger and acquisition proposals since 2000  Looking at this universe of cases, there are several puzzling features of the recent history of cross-border merger and acquisition proposals involving financial infrastructure firms.      Varying merger outcomes: a puzzle beyond the reach of standard explanations First and most obviously, there is variation in whether public decision-makers interfere with, block or allow cross-border mergers and acquisitions involving financial infrastructure firms.  This in itself is an interesting observation: the financial exchange industry is understudied in both international and comparative political economy scholarship to date (see Chapter 2), and knowing more about the political dynamics that underpin public governance in this large and systematically-important sector is worthwhile from an empirical perspective alone.  What makes these varying outcomes theoretically interesting is that both blocked and approved mergers have been beset by multiple public concerns, of both a policymaking and political nature, but they have not been resolved in the same way.  This becomes clear upon even  7  a cursory read of the media coverage accompanying each proposal, with headlines that point to the many regulatory and political issues as well as shareholder and stakeholder concerns that have been activated in the context of merger proposals.   Indeed, these proposals have activated a complex and overlapping mixture of concerns about national competitiveness, market development, market structure, industrial policy, and regulatory oversight – indeed, concerns that are difficult to disentangle for the purposes of making efficient and accurate causal claims.   Importantly – and confusingly – many of the same concerns that have served to derail failed proposals also became salient during merger proposals that were eventually allowed: in both successful and failed proposals, public sector stakeholders can be observed worrying about their regulatory oversight, the impact on their broader policy and supervisory efforts, and the implications for the wider domestic capital market.  And yet, in some cases these concerns have proven insurmountable and have led to impeded and failed mergers.  In other cases the opposite was true.   Adding to this puzzle is the observation that merger proposals appear to instigate regulators to take different types of steps to shore up their own control over the entities under their supervision.  Across cases there is variation in the degree to which – subsequent to the merger proposals – public officials have worked to implement measures to maintain domestic control over their piece of exchange infrastructure, in some cases blocking the merger, as is evident, but in others merely putting in place memoranda-of-understanding with foreign regulators, or writing certain conditions into the bylaws of the merging firms themselves (and in at least one case, NASDAQ-OMX, not doing much of anything at all).  In other cases, officials take steps to remediate certain perceived gaps in their control and oversight after failed merger proposals, i.e., on a forward-basis.   It is not immediately obvious why measures that are ‘good  8  enough’ in some jurisdictions are deemed insufficient in others, or why regulators take steps to change the way in which they exercise oversight even when mergers have been blocked, or failed.   Beyond the general puzzle regarding variation in merger outcomes, it is also unexpected to see public authorities interfere (in some cases rather aggressively) in the market for corporate control of financial service firms.  At a fundamental level, strong examples of public intervention are interesting because such action can be costly.  This is true both for normative reasons, because intervention contravenes beliefs about the legitimate limits of state action that have been dominant for most of the post-Cold War period (Buch-Hansen and Wigger, 2010), but also because it could be anticipated to generate material consequences, particularly if it makes private firms more reticent to invest or transact in the jurisdiction going forward (Dinc and Erel, 2013).   Additionally, it is interesting to note that regulatory authorities themselves enabled the creation of private, commercially-oriented financial infrastructure firms over the last two decades: the shift from the mutualized stock exchange utility that operated for its members benefit to today’s publicly-listed and commercially-driven exchange firm operated by holding companies was sanctioned and/or approved by national regulatory authorities.  Blocking a typical commercial transaction by such a firm after the enabling its creation is therefore unexpected.  It is more difficult to treat such an entity as a national utility once it has been fully privatized and relegated to market forces, both at the level of rhetoric and credibility as well as through the use of mechanisms of regulatory control.  Indeed, contrary to the cases observed here, it is reasonable to expect that public actors – particularly in liberal economies – would be highly reticent to develop a reputation for unpredictable interference in capital markets they have worked to build, or over the ownership of private commercial entities they have allowed to  9  proliferate.  Despite these considerations, interference in the market for corporate control of these infrastructure firms has been repeatedly observed over the last decade and a half.   This is particularly interesting because the interference does not vary as predicted by the dominant typologies in political economy that distinguish between jurisdictions in terms of their economic or institutional configurations.   For instance, there is a well-developed approach in the political economy of trade based on the Heckscher-Ohlin (HO) and Stolper-Samuelson (SS) models in economics.  These approaches consider the relative factor endowments – land, labour, and capital – of different economies and predict the distributional implications of moves to eliminate barriers to cross-border trade and the policy choices that are likely as a result (Rogowski, 1987; Hiscox, 2001).  At the most basic level, such approaches contend that the ‘natural’ endowments of an economy shape both its approach to international integration, in a manner that is not wholly dissimilar to a Wallersteinian world systems approach, and the subsequent implications of that integration.  The key inference here is that capital-scarce economies ought to respond in similar ways when confronted with the prospect of deeper financial integration with a more developed jurisdiction – indeed, there ought to be strong incentives for the less-developed or smaller market in any integrating dyad to block financial market integration in order to protect the privileged position of domestic holders of scarce capital.   Empirically, however, there is no consistent approach observed by the smaller, less-developed markets in the mergers observed in this dissertation.  It is important to note that none of the jurisdictions considered here would fit the ‘capital poor / labour rich’ economy type typically operationalized in the HO or SS models, in that they are all rich, developed, OECD states.  That said, in many of the mergers there is a clearly dominant and clearly subsidiary  10  market, particularly between the US and the European markets (where capital markets are less developed than bank-led finance), and between Canada and the UK.  In these examples the smaller, less developed jurisdictions do not respond in any dominant way to the merger, but rather can be observed supporting and blocking the proposals, respectively.  The relative factor endowments typology does not provide leverage over the observed outcomes in the market for corporate control of exchanges.  The same is true of more institutionally-derived typologies.  From a Varieties of Capitalism (VOC) perspective, or even a related legalistic perspective that emphasizes culturally-rooted differences in legal systems across capital market systems, the observed variation is hard to explain (Roe, 2003).  The small literature on the comparative politics of rules governing the market for corporate control (Callaghan and Hopner, 2005; Gourevitch and Shinn, 2005) also falls short.  Contrary to the expected systematic variation across the VOC and related corporate governance and legal system types, interference in exchange merger plans is not typically observed in coordinated or dirigiste systems where it might be more politically legitimate and/or expedient for public officials to step in (Zysman, 1983; Hall, 1986; Callaghan and Hopner, 2005; Gourevitch and Shinn, 2005; Callaghan and Lagneau-Ymonet, 2012; Callaghan, 2014).  Indeed, countries whose officials might be expected to oppose mergers and act on that opposition, particularly French officials with a track record of doing so, have generally supported or at least not impeded mergers involving the Paris bourse at some junctures (Callaghan and Lagneau-Ymonet, 2012; Callaghan, 2014) while, at other points in time, they have taken steps to re-establish a level of national control over the exchange; similarly, officials from nominally “liberal” countries including Canada, Australia, and even the UK , have both contradicted expectations by working to impede mergers, and have also approved them with little-to-no  11  fanfare, as in the US.  This suggests that something is at work beyond the type of capitalist system, or even the dominant model of financing in the economy (Zysman, 1983).   Moreover, other established political science approaches to explaining international market integration outcomes fail to predict outcomes, notably views that consider various societal pressures on decision-makers.  Interference does not appear to be an example of endogenous protectionism (Milner, 1988; Magee et al., 1989) or successful lobbying on the part of financial interest groups with preferences over integration (Mugge, 2006).  First, exchanges are negligible employers on their own, giving politicians limited incentives to interfere for electoral reasons; and where politicians have been involved, their opposition or support has been inconclusive, in that the views they express are often discordant and ultimately secondary to the efforts undertaken by veto-wielding regulators.  Second, both the direction and the impacts of interest group lobbying regarding exchange mergers are indeterminate.  Where lobbying may be observed, it either pulls policymakers in multiple directions simultaneously, as in France and Canada during notable merger cases there (Erman, 2011; Simon 2011a; Callaghan and Lagneau-Ymonet, 2012), or is ineffective in achieving its targets, as in Australia (Smith and Azhar, 2011) as well as in Europe (Barker and Grant, 2011; European Commission 2012a, p. 8).  As the case studies elaborated in this dissertation demonstrate, it is simply not possible to explain outcomes as reflecting the preferences of either electorally-motivated political actors or rent-seeking interest groups.   System-level explanations for firm and market integration and/or harmonization also fall short (Gilpin, 1975, 1976; Krasner, 1976; Andrews, 1994; Helleiner, 1994; Drezner, 2007).  The opportunity-cost incentive to integrate with a substantial foreign market did not appear to motivate Canadian or Australian authorities who blocked mergers with London and Singapore,  12  respectively, although it has some purchase in the case of French authorities allowing a tie-up with New York. In the opposite direction, the mercantilist fear of losing productive capacity and value through a link with a larger and more powerful foreign market – not dissimilar to the relative capital endowment perspective considered above – is also not observed in all decisions.  For example, while Canadians certainly worried about the future status of Canada’s primary exchange firm under the control of a more powerful London-based entity (Legislative Assembly of Ontario, 2011a), that does not explain why the French and Dutch allowed New York to take control of their bourses.  Given that existing institutional, societal, and systemic explanations are unable to account for authorities’ decisions in an efficient manner, it is worth considering the potential explanatory value in looking at the preferences and actions of market authorities themselves – what regulators independently think about firm-level integration involving exchanges, and why.    A regulatory explanation for merger outcomes: the theory of regulator dependence To account for these puzzles, this dissertation considers the political economy of cross-border mergers in the world of financial infrastructure firms from the point of view of the firms’ regulators.  It develops an explanation that focuses on regulators’ approach to these mergers as its primary analytical concern.  Regulators’ approach to mergers is modelled as a function of their impact on regulators’ power and capacity, due to the ways in which territory, jurisdictional boundaries, and statutory reach are affected – and confused – as a result of cross-border integration (cf. Newman and Posner, 2011; Brummer, 2012).  In taking regulators’ preferences as sui generis – i.e., not dependent on exogenous influences, including the influence of their political principals and/or the firms that they regulate – the  13  dissertation makes a strong analytical assumption that requires some justification.  It therefore develops in detail the conditions under which regulators may be more or less insulated from these everyday pressures: first, when politicians with electoral incentives either lack or choose not to activate powers of their own to veto a merger (that is, where regulators are institutionally privileged veto-wielding actors); and where firms’ lobbying activities are either absent or, as is more often true in the cases analysed here, multi-valent, disorganised, and/or simply ineffective.  In both these instances, the empirical observation of politicians voicing concerns about a merger and firms lobbying for an outcome they prefer is not taken as prima facie evidence of a captured regulator, or a regulator lacking in independence.  Indeed, these observations may co-exist with the broader conditions for regulatory insulation and thus a meaningful degree of autonomous regulator action.   Where regulators’ preferences are indeed sui generis due to insulation, the theory expects outcomes to be driven by the institutional context within which regulators and regulated exchange firms interact.  The theory thus proceeds through three sets of casual mechanisms.  First, for several interrelated reasons, the costs to regulators of overseeing and securing the compliance of a cross-border firm are higher than the costs of overseeing and securing the compliance of a domestic firm.  This gives regulators incentives to block cross-border consolidation involving the firms they oversee. Why, then, do regulators not block all mergers?  For authorities other than competition officials with a mandate to structure the market, interfering in the market for corporate control is a drastic and potentially costly step that is likely to be deployed only when the stakes are high (Dinc and Erel, 2013; Thatcher, 2014).  Those stakes are a function of regulator dependence, which is a both a key concept and the independent causal variable in the theory: it is defined here  14  as the degree to which market authorities require the compliance and cooperation of private firms vis-a-vis their commercial undertakings so that authorities can realize their mandates and achieve their policy goals.  There are three possible ways in which regulators can be dependent on private exchange firms: to deliver needed capital market infrastructure, to monitor and police private market conduct, and/or to deliver on some broader set of public policy commitments.   The higher the overall level of regulator dependence, the more likely authorities are to engage in regulator dependenceand block a cross-border merger.   Finally, the dissertation theorizes that the level of regulator dependence is a legacy of antecedent policy developments relating to market structure in the exchange industry and the allocation and structure of regulatory authority.  In particular, the theory links high levels of regulator dependence to antecedent market structure policy outcomes leading to a) a single-firm dominant market structure and/or b) an exchange firm that is vertically integrated across multiple business activities; and to antecedent institutional developments that have resulted in c) multiple regulatory authorities with an oversight role vis-à-vis the merging exchange firm and/or d) the delegation of self-regulatory authority to the exchange firm.   This suggests that the depth of international integration that is politically feasible in the exchange industry is not solely determined by the preferences of large and powerful market actors, or the inevitable gravity of large and powerful markets.  Instead, integration decisions can be driven by regulators’ preferences, which are in turn shaped by the domestic configuration of market structure and the oversight of the market (cf. Farrell and Newman, 2010; Spenzherova, 2014).      The dependent variable that is explained in this dissertation is regulators’ response to mergers proposals involving exchange firms.  At the most fundamental level, this is a binary variable: is the regulatory response positive (i.e., approve; stand back to allow it to go through;  15  gain comfort after initial concern) or negative (i.e., block or intervene in more tacit ways)?   The theory explains the observed values on this variable as a function of regulator dependence, as this dependence is therefore the independent variable that does the most significant causal work in the dissertation.   Dependence is itself a condition determined by existing configurations of power, which are antecedent conditions that subsequently structure – and institutionalize – certain regulator-firm relationships.   The causal linkages between these antecedent configurations and the subsequent degree of dependence are elaborated in detail in the theoretical chapter, but the basic flow of the theory – from historical policy questions to institutionalized conditions to the degree of dependence and costliness, and finally the expected response are summarized in the following table, which flows causally from left to right:   Table 2 Summary of the causal logic of the theory of regulator dependence Historical policy issue Antecedent Conditions Independent variable Costliness of merger to regulators Expected regulatory response  Overall exchange market structure Single-firm dominated market structure High degree of regulator dependence High Negative Competitive market structure Low degree of regulator dependence Low Positive  Exchange firm structure Vertically integrated exchange firm High degree of regulator dependence High Negative Non-vertically integrated exchange firm Low degree of regulator dependence Low Positive  16  Historical policy issue Antecedent Conditions Independent variable Costliness of merger to regulators Expected regulatory response  Structure of public regulatory authority Authority dispersed across multiple institutions High degree of regulator dependence High Negative Authority concentrated in single institution Low degree of regulator dependence Low Positive  Allocation of regulatory authority Authority delegated to exchange firm High degree of regulator dependence High Negative Authority retained within public institutions Low degree of regulator dependence Low Positive  Finally, it is worth noting at this juncture that there are many permutations within the broad categories of positive or negative regulatory responses – i.e., approved mergers with/without memoranda of understanding, approved mergers with/without regulators being assuaged by certain control-enhancing policy innovations, or blocked mergers with/without subsequent policy steps to increase officials’ powers vis-à-vis private firms.  These are not each dependent variables, but rather critical pieces of evidence that subject the theory to important and nuanced tests.  Furthermore, they add empirical richness to the cases and in some cases lead to additional research questions that are identified in the dissertation’s conclusion.     Implications of the theory The theory of regulator dependence yields a significant and counter-intuitive finding: contrary to perspectives that emphasize the structural power of the corporate sector over public  17  actors (Lindblom, 1977; Gould, 2003; Tsingou, 2006; Underhill and Zhang, 2008: Culpepper, 2011), large financial service firms can be loudly and publicly denied their policy preferences by public authorities.  Indeed, the more important the exchange firm is to domestic policymakers, the more likely the firm’s preferences on the issue of cross-border integration will be refused.   This runs counter to most predictions regarding the nature of financial sector power in an internationalizing economy, in particular work that describes the growing and disproportionate influence of large firms over the cross-border regulatory integration and harmonization decisions made by public officials (cf. Milner, 1988; Rogowski, 1989; Frieden, 1991; Frieden and Rogowski, 1996; Mugge, 2006; Eberle and Lauter, 2011; Pagliari and Young, 2014; Young and Park, 2013; Farrell and Newman, 2014a).   Indeed, a key inference driving this dissertation is that business decisions made by infrastructure firms – for instance around capital allocation, the distribution of market and investment activity, and the responses to downturns and/or crises – have an impact on regulators’ capacity to execute various pieces of their agenda.  As a result, regulators want to maximize their influence over those business decisions and take steps to ensure that they can shape them on a forward basis, steps which – as the empirical chapter show – may in fact enable subsequent integration.  Empowered regulators in a firm position of control are not threatened by cross-border integration, in contrast to dependent regulators. This inference in many ways flips the regulatory capture perspective on its head, in that it suggests close ties between regulators and the firms they regulate may be a source of potential power and capacity for the public side of the equation – and not uniquely a source of disproportionate influence for the private sector (Stigler, 1971).  Merger episodes bring the nature and extent of this public influence over private  18  decision-making into stark relief, and challenge regulators to consider whether that power is threatened, and if so, how to retain or buttress it.   The corollary of this counter-intuitive finding regarding regulators’ power to shape firms and markets also contains a fascinating irony: as public officials’ influence over domestic financial service firms and the markets they operate in increases (i.e., officials’ dependence on those firms to self-regulate and self-police decreases), public officials become more likely to enable international integration involving those firms.  As the case studies in this dissertation make clear, more direct public control over market outcomes can even be a predicate for higher levels of international integration involving the financial service firms (Spendzherova, 2014).   In that sense, more rules can give way to more integration.   Beyond these counter-intuitive findings, why is the phenomenon of regulator dependence of interest to political scientists?   In considering the power resources of domestic officials, the dissertation sits comfortably within a well-established line of inquiry in international and comparative political economy, particularly a literature that examines the capacity of domestic regulators to forge an independent policy trajectory under conditions of global capital mobility and international market integration (Strange, 1988; Goodman and Pauly, 1993; Garrett, 1994; Mosley, 2003; Rodrik, 2007; Cohen, 2008).   Like this scholarship, the dissertation is attuned to questions of public autonomy and power in a global economy that is shaped by private exit options, information asymmetries across the public-private divide, and normative beliefs about the appropriate limits of state action – with possible material sanctions for states and officials that breach convention.  At the same time, this dissertation contributes new elements to this research tradition, and adds nuance to some established arguments within it.    19  This dissertation is particularly focused on the consequences of private sector transactions for the power of regulators overseeing the transacting firms.  Regulatory power itself is therefore a centrally important key concept.  To date political economists have theorized regulator power in two ways:    As a function of some underlying economic conditions.  That is, regulatory power varies with: a jurisdiction’s levels of capital controls and exposure to international markets (Goodman and Pauly, 1993; Haggard and Maxfield, 1996; Mosley, 2003); the feasibility of certain policy options, which are defined by the material consequences of previous policy decisions (Helleiner, 1994; Newman and Posner, 2011); or simply market size (Hirschman, 1945; Krasner, 1976; Simmons, 2001; Drezner, 2007);   As a function of the availability and effectiveness of various policy tools in the ‘regulatory toolkit’ that officials can use to project or buttress their power.  Not all tools are equally feasible across issues areas, or time and space, because of their distributional impacts as well as the prevailing ideational framework (Abdelal et al., 2010).   That said, many policy strategies are used to augment efforts to effectively oversee private financial flows.  To date, scholars have focused on: cross-border harmonization (Singer, 2004, 2007), multilateral cooperation, suasion or persuasion (Simmons and Elkins, 2004; Bach and Newman, 2010), unilateralism (Simmons, 2001), delegation to private firms or international organizations (Buthe and Mattli, 2011), or coordination through public-private policy networks (i.e., embeddedness) (Evans, 1995).   The theory of regulator dependenceexpands upon these existing treatments of regulatory power in three ways.    20  First, this dissertation elaborates and builds predictions about the use of a policy tool that is empirically observable but not yet theorized.  Interference in the cross-border market for corporate control is not a tool that is generally considered part of the regulatory ‘toolkit’ under conditions of contemporary cross-border financial market integration.  It is a rational and predictable response by public authorities to the threat of a reduction in their power over private firms, and as such is a key dynamic in the back-and-forth between public and private entities in an era of global capital flows.  More precisely, it represents a strong move by public officials to stand in the way of cross-border integration that threatens their ability to effectively oversee and shape the capital markets they are responsible for managing.  But this strategy – what is essentially territorially-based protectionism on the part of capital market authorities – has not yet been a focus for political scientists.   Given that the choice to stand in the way of private firms’ cross-border integration efforts in many ways upsets assumptions about the imbalance between private and public power in the global political economy, not recognizing this policy option is a significant gap in political scientists’ understanding of contemporary financial regulation – and a significant addition to our understanding of the regulatory toolkit.    Second, the dissertation endogenizes the choices made by regulators at key inflection points.  Proposals for the cross-border integration of major financial infrastructure firms can reasonably be characterized as such decision-points – i.e., policymaking moments that explain the subsequent depth and extent of global capital market integration and private firms’ reach and mobility.   Understanding how open capital markets affect regulators’ capacities requires that political scientists also understand how those markets were built in the first place. Indeed, decisions about cross-border market structure subsequently shape regulators’ power and capacity.  In particular,  21  these decisions establish the extent to which regulatory jurisdictions and private markets overlap – which is important because this overlap dynamic has been convincingly theorized to have significant impacts on the distribution and exercise of regulatory power (Posner, 2009a; Newman and Posner 2011).   Observing and explaining variation in officials’ choices at these decision points therefore promises positive analytical gains, and also has clear normative implications for our understanding of the sources and limits of public power vis-à-vis private firms.    Unlike existing scholarship, which helpfully elaborates the policy decisions (regarding capital or trade liberalization, or the relaxing of certain foreign ownership restrictions) that have given rise to capital market integration across borders, the focus here is on decision-making on firm-level integration efforts.  Notably, the broad legal and regulatory barriers to cross-border ownership of financial service firms have been loosened, and yet political forces continue to shape the success or failure of proposals to integrate at the firm level across jurisdictions.  This is worth unpacking further.  Given that capital has mobility and financial services have substantially globalized, what makes some firm-level integration efforts too much for public sector officials to bear?   This dissertation begins to answer that question from the perspective of market authorities, with a focus on their power and capacity.     In this way the dissertation follows scholarship that sees see existing levels of global capital market integration as a puzzle to unpack rather than an exogenous variable that can explain subsequent political dynamics (Haggard and Maxfield, 1996; Best, 2005; Watson, 2007; Chwieroth, 2007; Chwieroth and Sinclair, 2013).   Private and public decision-making about the cross-border integration of private financial services firms gives shape to markets, and this dissertation adds a new dimension to understanding those decision-making processes at important junctures in the integration process.    22  Third and finally, the dissertation unpacks the role of private firms – and particularly the commercial choices of large financial infrastructure firms – in shaping regulatory power and capacity.  At a basic level, the dissertation thus has common ground with now-dated neo-mercantilist scholarship (Gilpin, 1975; Katzenstein, 1976), which viewed multinational corporations as appendages of national (predominantly American) officials who sought to project their free-market preferences abroad, in an apparent Trojan Horse manner.  This dissertation, however, does not observe a positive monotonic relationship between firm internationalization and the power of public actors – indeed, it argues that in many circumstances the emergence of a multinational firm may weaken the capacity of domestic regulators to effectively oversee it.   To understand when and why this is the case, the dissertation considers the relationship between regulators and the firms they oversee on the basis of historically-rooted institutional allocations of both regulatory and market power.    Case selection and methodology  To test the theory and provide these analytical gains, the dissertation contains three empirical chapters that consider a total of seven merger cases:    The failed merger between the London Stock Exchange and the Toronto-based TMX Group in 2011, with a shadow examination of the merger between Australia’s ASX and Singapore’s SGX over 2010-2011 that was blocked by the Australian government;   The history of mergers involving Euronext, including its founding in 2000 (Amsterdam, Brussels, and Paris), its merger in 2007 with the New York Stock Exchange, and the subsequent takeover of NYSE-Euronext by the US-based Intercontinental Exchange in  23  2013-2014, with a shadow examination of the approved merger between Sweden-based OMX and US-based NASDAQ in 2007-2008.    The merger between NYSE-Euronext and Germany’s Deutsche boerse in 2011-2012 that was blocked by the European Commission.    Table 3 Summary of case studies  These cases provide variation on several key sets of variables. First and most obviously, there is considerable variation on the dependent variable, i.e., whether the mergers are blocked or allowed, as the cases include blocked, informally interfered-with, and approved mergers.  Two cases featuring official vetoes are examined (in Europe and Australia), as well as an example of behind-the-scenes interference leading to commercial failure (Canada).  These are counterpoised against four distinct mergers that received approval, three of which were transatlantic in nature.   Primary cases Type of regulatory response Outcome Blocked by regulator   TMX-LSE Negative Failed (interference) No NYSE-Euronext Positive Approved Yes NYSE-Euronext – Deutsche Boerse Negative Blocked Partly Secondary cases ASX-SGX Negative Blocked Yes Euronext Positive Approved No ICE- NYSE-Euronext  Positive Approved (with key conditions) No NASDAQ-OMX Positive Approved No  24  Moreover, within groupings of approved or failed cases there is interesting variation in the types of conditions imposed by authorities, variation that provides additional tests of the logic of the theory.   Second, the cases are selected in order to subject the theory to different types of tests.  In the Canadian and Australian cases the mergers are considered as one-off episodes and the level of regulator dependence is tested on a static basis.  The chapter on Euronext subsequently considers the effects on mergers as the exogenous level of dependence changes over time, a dynamic test that is applied against three mergers.  Finally, the chapter on the DB-NYSE-Euronext merger subjects the theory to hard tests, not least of which is that the deal was not blocked by a market regulator, but by a competition authority.   Third, the case selection controls for the potential impact of the financial crisis on regulators’ decision-making, by considering mergers before the crisis as well as both blocked and successful cases after the crisis.   The general observation of successful and blocked mergers on both sides of the crisis suggests that it is not an efficient explanation of the outcomes observed.   Finally, the types of jurisdictions involved span many of the typologies contained within the VOC and related approaches.  Mergers involving liberal states as well as dirigiste systems are considered.  As described above, institutionalist explanations that differentiate by domestic regime types do not appear able to account for the observed outcomes, and the case selection allows for that to be demonstrated.  That said, the case involving a coordinated market economy (CME) – i.e., the Deutsche Boerse proposal to merge with NYSE-Euronext – is not investigated at the national level in this dissertation, but is instead analyzed as a “hard test” of the theory at the level of European Union institutions.  Furthermore, there are no cases involving Japan or  25  indeed other Asian jurisdictions, where the applicability of the VOC approach has been increasingly tested and scrutinized in recent scholarship.  This presents potential limitations on the boundaries of the theory, i.e., its external validity beyond the cases and types of economies contained in the dissertation.  The impact is discussed briefly in the concluding chapter, in the discussion on the theory’s external validity.    The dissertation deploys a qualitative methodology to test its theoretical claims.   In order to do so effectively, four distinct sets of expected observations of the theory are identified – two of them presenting scope conditions, two of them presenting hypotheses – and the types of tests that each presents to the theory are considered.  The empirical chapters subject the theory to tests on the basis of those observable implications through the use of a triangulation strategy that considers primary source material, secondary journalistic and academic analysis, and confidential interview data combed from interviews with more than 50 individuals involved in the mergers.  These interviews took place in seven jurisdictions between 2012 and 2014.   This strategy is used to process-trace the outcomes in each of the mergers to establish whether not only the outcomes, but the underlying causal processes match the expectations of the theory at a detailed empirical level.   The choice of a process tracing methodology is appropriate for small-n research efforts such as this one, because it enables the testing of causal claims that might otherwise be confounded by the absence of observed outcomes across a large number of cases.  This is because process tracing considers not only whether predicted values on the dependent variable align with the expectations of the theory, but also whether those predicted values emerged through the causal mechanisms and transmission channels embedded within the theory itself – and indeed, this methodology can even demonstrate the partial validity of the theory in cases  26  where observed outcomes do not entirely align with their predicted values.  The use of process tracing to test a theory draws leverage from within-case observations of predicted empirical phenomena rather than just cross-case variation of outcomes.  In short, process tracing allows researchers to demonstrate that events unfolded the way a theory predicts they would – not just that outcomes took some predicted ultimate shape.   This dissertation’s theoretical explanation for merger outcomes relies on a single independent variable – regulator dependence – and it is therefore not inferentially problematic to only test the theory against observations in a small number of cases, as long as those cases demonstrate significant variation in the level of regulator dependence (which they do).  The impact – or indeed, the provenance – of different types of regulator dependence are neither theorized nor tested in this dissertation.  What is more, the dissertation is not set up to as a test of different theoretical explanations by assessing co-variation across cases.  In this way, the number of cases ought to be sufficient to provide leverage for the causal claim that regulator dependence shapes merger outcomes.   However, even where multiple possible causal mechanisms are being assessed – i.e., across different theories or within a single theoretical apparatus with multiple independent variables – as to their causal impact on observed outcomes, process tracing would still enable researchers to differentiate between the causal effect of those different potential explanations and draw leverage from empirical process observations.  Furthermore, where the number of theories competing for leverage and/or variables theorized to have causal impacts outnumber the number of cases, process tracing can usefully mitigate the challenges relating to a “degrees of freedom” problem – i.e., the concern that it is not possible to identify and measure the causal impact of each independent explanation or variable because the cases cannot (numerically) feature  27  sufficient variation on each one, leading to confounded causal claims.  Process tracing can show independent variables – and related causal mechanisms – at work even in the absence of sufficient degrees of freedom.  In this sense, the use of a process tracing methodology allows for confidence that a more complex chain of causal claims than the one presented in this dissertation has empirical validity.  For a theory with just a single independent variable (like the theory of regulator dependence), the confidence-enhancing impact of process tracing is equally strong, if not necessarily stronger.    Plan of the dissertation  The next chapter elaborates the financial exchange industry from a political economy perspective, providing the needed context as well as background to familiarize the reader with important terms, concepts, and dynamics.  In addition, it considers the limited literature on the exchange industry in political science to date to highlight many of the key political considerations that are relevant for the empirical analysis that follows.   The subsequent, third chapter develops the concept of “regulatory power” in more detail.  It assesses the treatment of regulatory power in the literature and draws out important inferences and implications upon which the theory is subsequently grounded.   The chapter then assesses in detail existing political explanations for integration decisions in global finance.  It notes how these explanations cannot account for scenarios in which insulated market officials make decisions on the basis of their autonomous preferences, which opens the way for an alternative theoretical approach to such scenarios.  Chapter four presents the theory of regulator dependence, considering first the interaction between corporations’ multinational business activities for regulators’ power and autonomy,  28  before proceeding through the assumptions and mechanisms of the theory, and detailing the observable implications that follow.   Chapters five through seven present the empirical case studies.  They process-trace decisions in seven merger episodes since 2007 to establish the degree to which the observable evidence corroborates or adds nuance to the expectations of the theory.   Finally, the dissertation concludes by considering its findings, and presenting some additional research questions that may frame future efforts regarding the regulatory politics of cross-border integration in finance (and beyond).        29   CHAPTER II THE POLITICS OF FINANCIAL EXCHANGES Introduction Why are exchanges merging, and how is the exchange industry politically salient?  In the last decade the stock exchange industry has undergone significant changes.  Exchanges have become for-profit firms with widely-held shares, a change which complicates their status as utilities and as self-regulating organizations.  The emergence of algorithmic high-frequency trading has increased the prevalence of arbitrage activities on exchanges at the possible expense of uses for end-users, including price discovery and capital formation.  Many exchanges are vertically integrated to offer post-trading services such as clearing and settlement, as well as data provision and IT infrastructure: this has further extended their business interests into for-profit financial services.  And as deregulation has lowered the barriers to entry in the exchange industry, incumbent firms have lost market-share to low-cost electronic upstarts.  Cross border integration has been one of the ways in which exchange firms have sought economies of scale and synergies to respond to their declining revenues and market share.   This chapter first grounds the phenomenon of exchange M&A in an overview of the exchange industry – focusing on the key institutions, the regulatory environment, market structure, and the drivers of exchange M&A.  It then moves on to consider the political implications of capital market activity generally, and looks at existing political science scholarship of relevance to the exchange industry.       30  What are exchanges?  A primer on market infrastructure There are two basic types of exchange infrastructure that are relevant for this dissertation: trading and post-trading facilities.  Within each of these categories there are several types of institutions.   Trading venues – or markets – include both stock and derivative exchanges.  Stock exchanges (such as NYSE, the Toronto Stock Exchange, or the London Stock Exchange) bring together buyers and sellers of equities, or stocks in a listed company, but such markets may also offer corporate debt products as well as some equity-based derivative products, such as options or index-based products.   Stock exchanges retain primary responsibility for offering a listing service for firms to make a public offering, and also maintain the primary market infrastructure and trading venue for those firms – including trading technology as well information and data services that help communicate the company’s financial fundamentals to investors.  As such stock exchanges often have certain regulatory responsibilities, particularly for listing standards (including disclosure, capital, and transparency rules), trading and execution standards, and monitoring obligations.     Derivative exchanges (like Eurex, the Chicago Mercantile Exchange, the Montreal Bourse, or the London International Financial Futures and Options Exchange, now called ICE Futures Europe) similarly bring together buyers and sellers of a financial instrument.  Rather than trading in equities (i.e., an equity position in a public company), derivative exchanges offer contracts such as futures and options, which establish some type of commitment or position – for instance to buy or sell, or an option to buy or sell, or to pay a counterparty a variable amount of money – based on the future valuation of an underlying good (such as foreign currency, cattle, oil, cash, etc.) or benchmark price.  Buyers and sellers of a contract take on obligations to one  31  another based on their desire to manage their exposure to some underlying commodity, rate, or benchmark – enabling them to hedge against foreseeable risks they face as producers and consumers, as investors, or as money managers..  Exchange users go through intermediaries to trade in contracts relating to wheat prices, interest rates, corporate or sovereign defaults, and other underlying values.  These contracts come with standardized terms and references that are pre-packaged and offered by the derivatives exchange firm.  Many users, like hedge funds, frequently use the contracts for speculative purposes.  Often, the two counterparties to a derivatives contract will be making opposing bets on the future price movement of the underlying product, whether it is because they have access to different data, are hedging different risks, or have unequal financing capacity for positions they would like to take.  Importantly, the exchange-traded derivative contracts they enter into are developed and owned by the exchange itself, quite unlike an equity, the latter of which is the property first of the firm and then the buyer of the stock.  As such, a particular exchange-traded derivative contract can only be offered under license from that exchange.  For instance, a Eurobond future traded on the Eurex exchange in Germany is a proprietary contract that can only be bought or sold on Eurex (or a venue licensed by Eurex).   New regulations and changes in the market across many industrialized economies have encouraged a third type of electronic trading venue, like Alternative Trading Systems in the US or Multilateral Trading Facilities in Europe.  While stock and derivative exchanges also run fully-automated trading systems, the electronic exchanges are different in that they often have lower regulatory and compliance burdens, and can offer matching services for products that are listed and maintained elsewhere.  A NYSE-listed blue-chip trade can be executed on an alternative electronic venue – and in fact is more often than not traded on an exchange other than  32  the NYSE.   This competition has had profound effects on the equities trading industry (see below); this is not yet true of the derivatives market, where electronic trading is limited by the proprietary nature of exchange-traded derivative contracts, making it very difficult to break the monopoly on trading of any particular contract.  That said, off-venue electronic trading in derivatives takes place, as over-the-counter (OTC) derivatives are sold by dealer banks to clients, and are often frequently matched on electronic venues operated by banks or broker-dealers – some of which are large and profitable companies.  Post-crisis reforms are mandating that the execution of many OTC derivatives trades takes place on new and more transparent exchanges, called Swap Execution Facilities in the US or Organised Trading Facilities in the EU.    The second major type of trading infrastructure is post-trading: clearing, settlement, and payment facilities.  Settlement and payment systems for exchanges are beyond the purview of this dissertation, and are linked into the broader payment system in place in a jurisdiction (i.e., for bank transfers, and debit and credit card systems).  They ensure that accounts are settled between financial institutions, at some regular interval.  In the trading industry, the settlement system ensures that the buyers and sellers of a security receive/pay accordingly.   More important to this dissertation is the clearing function, particularly as it is executed through central counterparties or CCPs.  A CCP stands between the counterparties to a contract  and “clears” it by becoming both the buyer and the seller of that contract and/or security.  While technically complex, at root CCPs serve to minimize counterparty risk – that is, the risk that one party to a bilateral transaction will default before the transaction is completed or, in the case of derivatives, the contract matures and comes due, thereby leaving the other party to absorb the loss. Given the multiyear maturity of many derivative contracts, as well as the complex web of outstanding counterparty obligations at any given time, the counterparty risk in derivative  33  markets is particularly high, and the risk of contagion is also very high.  CCPs concentrate and minimize those counterparty risks; they have in place financial resources and protocols that can be used to offset exposures in the event of a large counterparty default.  These tools were, for instance, used to great effect in the orderly winding-down of Lehman Brothers’ outstanding positions, ensuring that the various counterparty losses were minimized and the knock-on impact on its trading partners was not so extensive that it generated additional insolvencies.   CCPs are often vertically-integrated into exchange firms, meaning that counterparties to a contract can trade that contract and clear it within the same firm – for instance, major exchange firms like Eurex and CME both offer clearing services as well as trading venues for their derivative contracts (although this ‘vertical silo’ model is currently the subject of review and change, particularly in Europe).  As a result, CCPs may generate efficiencies, enabling trading counterparties to net their obligations and rationalize their collateral requirements.  This system has the ancillary benefit of giving prudential regulators a look-through at the positions and exposures of key firms – and it may contain systemic risk to single CCPs rather than spreading it across a network of interlinked clearing houses.  Indeed, CCPs have gained prominence in the post-crisis period as a means to both increase transparency and lower risk to OTC market participants, as well as taxpayers.    The regulation of market infrastructure  The regulation of stock markets is complex and multifaceted – not least because it has been the site of substantial change in the past two decades.  Among the most important of these changes are the following:   exchanges have received approval to demutualize;  34   regulatory agencies have taken a relatively standardized form and become arms-length, depoliticized bodies across most developed markets;  regulators have introduced competition into the exchange marketplace, particularly for equities;  the breadth of exchanges’ self-regulatory capacities and responsibilities has shrunk;  and a host of multilateral organizations and MOUs have been developed to coordinate an increasingly-globalized exchange marketplace.   Despite the complexity wrought by these changes, exchange regulation in general can be distilled down to a few key elements.  As will be made evident in later chapters of this dissertation, each of these elements comes into play during mergers and acquisitions.   The first is investor protection.   In order to ensure that markets are efficient and liquid it is paramount that regulators minimize fraudulent or unfair trading practices – otherwise, investors will be wary of committing their resources to equities markets, and the capital-raising activity of firms will become costlier.  Similarly, fraudulent activities on derivatives exchanges can hurt investors who use those exchanges to hedge against various exposures, for instance group investment plans such as mutual and pension funds.  Furthermore, regulators have a strong incentive to minimize cases of investor fraud because such cases tend to attract the attention of their political bosses, for whom letters and phone calls from defrauded households are an unwanted source of political aggravation.  As a result, regulators of equities markets take steps to ensure that publicly-traded companies are as transparent about their financial resources and fiscal position as is possible.   Regulatory standards impose strict disclosure and auditing requirements to ensure that listed firms are of a certain calibre – enabling investors to make informed decisions about the value and prospects of those firms.    35  In the US, many of these rules have become even more extensive in the post-Enron era, as the Sarbanes Oxley corporate governance reforms reached well into the business firm to mandate certain accountability and auditing procedures for public firms.  This compliance burden is costly for firms, but it often has the corollary effect of minimizing the various premia they must pay investors; indeed, studies have shown that firms listing in the US, and therefore complying with SEC rules that are considered more onerous than their global counterparts, pay less for their capital than do overseas firms facing laxer standards – particularly smaller firms historically considered to have looser internal controls (Stephen and de Jong, 2012).  Many of these regulatory requirements have historically been the purview of the exchanges themselves, but since demutualization public concern about exchanges’ skewed incentives – i.e., to gain listings rather than vet prospective firms carefully – has led to either a re-nationalization of those powers, or their delegation to private self-regulatory bodies that are funded but not controlled by the exchanges, including the Financial Industry Regulatory Authority (FINRA) in the US and the Investment Industry Regulatory Organization of Canada (IIROC).   This is tightly bound up with a second regulatory priority, which is ensuring market integrity.  The words “market integrity” are actually built into the mandates of many key regulators, including the SEC in the US, and the Ontario Securities Commission.  This part of the regulatory mandate has several components, but perhaps the most central ones are the trading and execution rules.  Access to trading is the first pillar – who may offer and execute trades?  In many countries access is determined by professional qualifications and association membership, as well as jurisdiction and location (i.e., to ensure regulators’ access in the event of malfeasance).   Traders, brokers and advisors are heavily regulated and self-regulated actors, and while lapses are frequent they are nominally held to high ethical and professional standards.  The second  36  pillar is trading execution rules, particularly the manner in which brokers must execute on behalf of their clients.  These rules as they relate to equities markets have been radically altered in recent years, and now brokers must provide what is called ‘best execution’ for their clients.  This is part of a broader effort to force competition into the marketplace.  Best execution may either be by stock price (in the US) or some other set of calculations (in the EU, where ‘best execution’ may be based on the provision of anonymity, price, and services demanded by the client) (Gadinis, 2008a).  A third component relates to strict rules around insider trading, designed to ensure that market outcomes are fairly balanced between insiders and outsiders – again, crucial for ensuring that investors have faith in the market as a place to generate returns on investment, and therefore ensuring that markets are liquid and efficient.   This has the additional benefit of maintaining the efficiency of the pricing mechanism – where trades are executed frequently and by a large group of informed participants, the quality and rationality of stock pricing is theorized to increase and the utility of the market as a mechanism for pricing equities and assets increases in kind.  This, of course, is subject to large caveats relating to investor exuberance and irrational herd behaviour, beyond the purview of this discussion.    The third priority relates to market structure.  The introduction of competition into the exchange marketplace is discussed below, but the crucial concerns for regulators here are twofold: the pricing mechanism and cost structure.  In fact, there may be a trade-off between these two agenda items.  Introducing competition into the exchange market, like in most sectors, has the effect of introducing downward pricing pressure on the exchanges, and results in lower trading and listing fees as well as cheaper ancillary services.  Competition is therefore a lobbying victory for exchange clients (namely banks and other brokers) rather than the exchanges.  However, regulators need to balance those efficiency gains against the costs of splitting liquidity  37  across multiple venues.  Fragmented liquidity, as it is often called, may result in a reduction in the quality of pricing, as trades are executed across venues and that information does not immediately scale up to a single pricing output.   Fourth, many regulators are interested in the employment and market competitiveness impacts of exchange governance.  That is, they pursue not only a market-quality mandate but also an industrial policy mandate.  In jurisdictions where this is the case, it is likely to be an informal consideration (in fact, it is likely to be an informal consideration in nearly every jurisdiction, not least because market regulators are generally accountable to politicians who care deeply about such things).  As a result, regulators will at least implicitly balance the gains of stricter regulation in terms of market integrity against the potential losses resulting from stricter requirements, leading to potential exit by firms engaging in regulatory arbitrage (Singer, 2004).  Such exit not only hurts regulators from an industrial policy perspective, but also reduces their power, by reducing the number of real market transactions being executed in the jurisdiction.   Fifth, regulators often consider systemic risk effects and implications related to the management and use of exchange infrastructure firms.  This has been increasingly salient since the financial crisis, which many authorities at least partly ascribed to the use of complex financial instruments called credit default swaps (CDS), a type of OTC derivative that is traded on a bilateral, off-exchange basis, and was implicated in market participants’ uncertainty about their exposures, losses, and overall cash positions as key counterparties – namely Lehman Brothers – went bankrupt.  In 2009, the G20’s ‘Pittsburgh declaration’ compelled member states to fundamentally re-regulate these over-the-counter derivative markets, mandating in particular that certain OTC derivatives be traded on exchange-like platforms, reported to authorities, and centrally cleared to reduce the risk and impact of a counterparty default like Lehman’s (G20,  38  2009).  The technical details of this agenda and its implementation remain unsettled in many key jurisdictions, but exchange firms have an increased role to play in bringing transparency and stability to derivative markets and providing the infrastructure that regulators needed in their efforts to do so.   Finally, regulators are increasingly dealing with issues relating to the internationalization of capital markets – particularly the need to address the mobility of both exchanges and their clients.  First, cross-border market activity involves the extensive use of MOUs between regulatory authorities in order to share resources (particularly relating to the tracking and punishment of fraudulent activity).  It also involves key decision-points for authorities determining when to allow foreign brokers and dealers access to the domestic marketplace.  Because firms seeking access to a foreign market may find it difficult to comply with both their home regulations as well as the requirements of the foreign regulator – in many cases, they are unable to comply with both rulesets if they are not identical – authorities have experimented with varying degrees of mutual recognition or “substituted compliance” (Tafara and Peterson, 2007).  Under such a regime, a firm may operate in a foreign market while only complying with its domestic rules.  At present, many exchanges and exchange clients make use of such permissions, particularly in Europe but also in the derivatives exchange sector, as – for example – the US Commodity Futures Trading Commission (CFTC) has licensed many foreign venues and brokers to operate in the US under their home rules only.  This is a means of ensuring that cross-border market operations are held to a standard that two sets of authorities agree is equivalently strict and effective, while also ensuring that the compliance burden on private actors does not unnecessarily impede the efficiency gains of cross-border capital market activity (Nicolaidis and Shaffer, 2005).    39   It is important to flag that these priorities are not equally salient across jurisdictions.  For instance, it has traditionally been the case that the SEC has been more rigorous on investor protection than its European counterparts.  This is because US capital markets have more retail investor users – that is, small scale, household-based investors without the resources or capacity for in-depth research and analysis.  These investors require greater protection, in theory, than institutional investors’ including investment plans, pension and fund managers, banks and proprietary trading firms – actors who have traditionally dominated Europe’s capital markets.    Similarly, responsibility for market regulation is not necessarily divided in an even or standardized way across jurisdictions.  For instance, in most countries derivatives and equities regulation is undertaken by a single regulator.  In the US, the SEC handles equities (and derivatives based on ‘single name’ equities) and the CFTC is responsible for derivative markets.  They report to different Congressional committees.   Furthermore, the Federal Reserve and Treasury also have stakes in systemic infrastructure like CCPs.  This leads to turf wars and political challenges, as well as logistical and cultural difficulties across the institutions.  Canadian markets are regulated at the provincial level, leading to difficulty in both domestic and international coordination exercises (although this is changing, as increasingly Canadian regulators are speaking with a single voice and even coordinating their efforts).  In Europe, the challenge in market regulation is similar to that in other issue areas, as the multi-level process of building a single market with single rulebooks is a slow and politically complicated process. Each of these parochial differences is highlighted and explained where necessary, in the empirical chapters.   This overview of the regulatory landscape has necessarily left out many key issues and dynamics, but it serves as a contextual effort for the theoretical and empirical work that follows.   40  However, two of these regulatory developments are worth exploring in a bit more detail, as they are central drivers of M&A.     Demutualization: the move from member owned exchanges Beginning in the mid-1990s most exchanges demutualized.  Prior to this change, exchanges were owned and managed by their principal users, who controlled access to and the benefits of the exchange.  Those owners, largely large brokerages and securities dealers (like banks), increasingly saw benefit to demutualization as capital markets became more globalized and frictionless.  These changing interests and incentives on the part of exchanges’ financial firm owner-membership – particularly to lower trading, regulatory, and management costs – pointed to a commercially-focused, publicly-traded firm model, which among other things was seen to enable innovation, efficiency, and liberalization in the exchange industry (The Economist, 2005; Aggarwal and Dahiya, 2006; Fleckner, 2006; Ramos, 2010). Exchanges thus moved to a different and more explicitly commercial structure so that they could more effectively raise capital and execute innovative business strategies that would keep up with both the shifting demands of their users and the changing, more competitive market structure brought in by new regulations.   Competition and deregulation The exchange industry has seen a significant increase in competition in the last ten to fifteen years.  On a typical trading day in jurisdictions across North America and Europe, volumes (both overall, and for any given equity) are split between the big incumbent exchanges and upstart electronic venues.  This is the result of regulations in the US (Regulation NMS) and  41  the EU (MiFID) that have encouraged competition in the exchange industry by licensing alternative venues, and then mandating their use by requiring that brokers offer their customers best execution – which will frequently mean that they must execute on one of the non-incumbent exchanges.   As exchange users have pushed for ever more competition in the industry, and regulators have provided it, exchanges have subsequently had to respond to increasing competition from upstart electronic trading systems (including Alternative Trading Systems /ATS or Electronic Communication Systems /ECN).  These so-called ‘dark pools’ of liquidity operate as off-exchange matching engines, frequently operated by large investment banks, with lower transparency requirements – particularly around pre-trade pricing (Chesini, 2010).  These low-cost alternatives offer buy-side firms an alternative venue for trading exchange-listed equities as well as derivative products, and debt instruments like bonds.  Because they do not have the administrative and enforcement burdens facing the incumbent and self-regulated exchanges they can pass along those cost savings to their users, sometimes even offering exceptional rebates to high-volume “liquidity makers” who are essentially compensated for executing trades (Pan, 2007; Chesini, 2010).  They can also provide trading anonymity so that investors can make large-scale moves in or out of a particular position without algorithmic trading systems picking up on that movement and moving prices by ‘front-running’ the initial investor.    This has translated into two trends: the incumbent exchanges have experienced a shrinking share of trading volume in their listed equities, and listing fees have been shrinking as an overall source of revenue for those exchanges (Lee, 2010, pp. 35-37).  Incumbent exchanges have responded to these regulatory changes by becoming for-profit firms, which has allowed them to more effectively raise capital to continue to upgrade their technological capacity, as well  42  as diversify their product and service ranges.  For example, many exchanges have entered the ATS business by buying upstart competitors (The Economist, 2005); others, like NASDAQ-OMX, have become leaders in developing and selling off-the-shelf trading technology to exchanges around the world.   Because of the particular economic features of derivatives contracts – particularly their proprietary nature, but also the margining efficiencies that are generated by trading and then clearing on single venues – it has proven much more difficult to encourage competition in this industry.  Post-crisis regulatory reforms have aimed at introducing new venues for OTC derivatives (SEFs in the US and OTFs in the EU), and have introduced some levels of vertical-silo busting ‘open access’ policies.  Still, competition in the world of futures is limited – as evidenced by the DB-NYSE-Euronext merger case.      Understanding cross-border mergers and acquisitions in the exchange industry Exchange firms have engaged in cross-border M&A as a response to these market and regulatory pressures, which are coming from both the demand and supply side. On the demand side, exchange operators must meet the consumer preferences of mobile and discriminating users – both investors and listing firms – meaning that they must offer a broad suite of services, including data services and high-performance technology, in order to stay competitive. Prospective clients can and do select trading venues for their technological advantages (like low “latency” or execution time, and co-location for high-frequency algorithmic traders), the availability of margining efficiencies through vertically-integrated in-house clearing and settlement infrastructure, or the regulatory environment in which an exchange is located.   43  On the supply side, exchange clients have increasing numbers of options. First, there are increasing numbers of liquid markets globally where prospective exchange clients can do business. The US and UK no longer hold an effective monopoly over deep, liquid, secure, and attractive capital markets (Brummer, 2012, pp. 49-51). And second, as mentioned, there are increasing numbers of alternative and electronic exchange venues populating those capital markets.  Incumbent markets, like the US and UK, and the large and nationally-dominant incumbent exchange firms, like NYSE, TMX, or the LSE, are facing a new world of competition both within and beyond their borders.  Regulation has contributed to this supply-side pressure, by creating competition that often favours the exchanges’ users over the incumbent infrastructure firms.   Cross-border mergers are a partial solution to these combined demand and supply side pressures in that they may help exchange firms realize both economies of scale and economies of scope.  Economies of scale can be in the form of revenue synergies: as the exchange industry is both high-fixed cost and volume driven, a bigger firm can decrease the relative per-unit costs of maintaining trading infrastructure, upgrading technological systems, or subsidizing its enforcement, service-provision, and administrative systems. Potential synergies in trading technology and infrastructure are frequently cited as part of merger proposals, and merged exchanges have downsized their operations through staff layoffs, making the ‘backroom’ case for merging (Enderlein, 2011, pp. 48-9).  Moreover, the best merger candidate for a particular exchange to realize these synergies is frequently an overseas exchange – either despite or because of regulatory differences across jurisdictions (Miller and Pagano, 2007; cf. Lees, 2011).    Mergers also generate economies of scope by allowing incumbent exchanges to diversify into new product ranges without investing in their development. This is especially important  44  because trading in equities now represents less than half of total revenues for many exchange firms, and mergers may allow a firm to diversify into technology and systems development, trading of particular proprietary derivative products, post-trading clearing and settlement, and other products (Lee, 2010, pp. 35-37).   This is particularly the case if an exchange in one jurisdiction is prohibited by regulations or market forces from entering into a particular market activity, an impediment it can get around by buying a firm with operations in that segment in another jurisdiction. More broadly, regulatory differences and market forces across jurisdictions can lead to revenue opportunities in one jurisdiction that are unavailable in another (Valiante, 2011, p. 2).    In sum, cross-border mergers can help exchanges cut costs while boosting their revenues from diverse sources.  In contributing to the firms’ bottom line, and helping them realize shareholder value as public companies, global industry consolidation is a logical response to a competitive market environment.  But regulators are not agnostic about the impacts of these market transactions on their ability to promote particular public goals in the sector.  The next chapter offers a theory that explains the varying responses to cross-border proposals involving these infrastructure firms.  Before that theory is introduced, this chapter concludes by considering the many political implications of this exchange activity, in order to ground both the theory and exchange consolidation in a broader political-economic context.    The political economy of the exchange industry Why are exchanges of relevance to political scientists?  What is the political impact of exchange governance and capital market regulation?    45  At a broad level, the political implications of various forms of capital market activity have been investigated in political science, particularly the distributional impacts of different financial systems and market policies.      Well-established institutional accounts (Zysman, 1983; Hall 1986) have noted the centrality of credit creation and capital allocation within processes of industrial coordination and production.  How capital is allocated – to whom and by which actors, with what incentives – will shape winners and losers as production strategies and levels of global integration change (Frieden, 1991; Keohane and Milner, 1996).   The ability to adjust to new incentive and opportunity structures will be a partial function of what kind of capital is available and on what terms.   These differences across national systems of finance are also a key component of the Varieties of Capitalism (VOC) literature.  VOC scholars note that the types of economic activity incentivized by different systems of corporate finance have resulted in both different production profiles as well as differently-distributed benefits of those activities.  Capitalist systems share profits and generate opportunity across the labour force differently, with greater or lesser degrees of inclusion and exclusion, in ways that are tightly bound up with the financing mechanisms institutionalized in the political economy, along with complementary systems of training, collective bargaining, corporate governance, and others (Hall and Soskice, 2001).   Studies of cross-national variations in corporate governance rules have also noted the political causes and distributional consequences of rules relating to management structures, reporting standards, and mechanisms for holding corporate managers to account – rules that are often tightly bound up with listing and disclosure rules policed by stock exchanges (Gourevitch and Shinn, 2005, Cioffi and Hopner, 2005, Cioffi, 2010).  For instance, Gourevitch and Shinn  46  (2005) test how the preferences of managers, owners, and labour across different systems of capitalism result in different mixtures of minority shareholder protections, transparency and disclosure requirements, and takeover rules – and how changing preferences lead to changing outcomes, for instance as labour groups increasingly hold securities through their mutual fund and pension portfolios.  Interestingly, the entry of new groups into capital markets has the potential to upset traditional left-right divisions and coalitions within a dimension of financial policy, such as the proper role of the state in regulating corporate governance; the development of the rigorous Sarbannes-Oxley rules in the US is an example of these complex coalition politics in action (Cioffi, 2006, 2010).  These contributions note that the governance of capital market flows and actors is distributional, in that it establishes privileged insiders as well as outsiders, and can allocate risk and opportunity differently.   It clearly matters how transactions and the firms that take part in them are financed and governed, because the impacts of these rules are felt across the political economy, at elite corporate levels as well as within the household (Seabrooke, 2006).  As such, the interaction between the regulation of high finance and the material preferences of the median voter is a dynamic with consequences for both policy outcomes and social distribution (Rosenbluth and Schaap, 2003; Clift and Woll, 2012; Kleibl, 2013).  Indeed, and as Mugge has recently argued (2013), the nomenclature of "financial services" occludes the fact that financial service firms are not like garbage collectors, hairstylists, or telecommunications service providers.  They do not merely provide services in response to demand, but shape lifestyle opportunities, access to capital and social mobility for many members of society - they shape demand itself.   Who lends credit, and to whom they lend it; how corporations are managed and in whose interests; and what public policy goals are addressed or impeded by the investment  47  activities of institutional investors and mutual funds – these are questions of obvious political significance.  This significance is at both a causal level (why do these outcomes vary?) as well as a normative and distributional level (what kinds of social outcomes are desirable, and what role do financial systems play in shaping those outcomes?).   In general, then, financial services firms’ activities reverberate beyond their own sector – gains and losses are not contained to the financial sphere but generate externalities, both positive and negative, that have broader social implications.  This is true of many industries, particularly heavily regulated ones (in this sense, regulation is endogenous).  In finance, regulation may have its most direct impacts on firms’ business activities, but it is clearly not the case that regulation is only aimed at redistribution along the Pareto frontier, affecting the gains and losses of participants in the financial service economy alone.  It also gives shape to the distribution of capital and risk across the economy, with more or less Pareto optimizing effects.  Crucially, these causes and consequences of financial regulation are not only of interest when regulation has a high level of political salience, for instance in a post-crisis period (Blyth, 2002; Pagliari, 2013).  The regulation of capital markets need not be an election issue to have impacts on the household, and in fact appears only to gain that level of broad public salience in exceptional periods.  Regulatory decisions are frequently influenced and shaped by ‘quiet politics’ (Culpepper, 2011); that is, lobbying, and coalition and consensus-building through informal processes occluded from public view.  At the same time, these ‘backroom’ politics remain interesting because a) they, too, have social effects beyond the parties involved in those processes, making preferences and outcomes important to understand; and b) even within the financial service industry, preferences and incentives are often quite disparate and it is not always ex ante obvious who wants what, and which sectors or firms will get what they want (Mugge, 2010).  In short,  48  relatively quiet politics – which characterizes much of the subject matter of this dissertation – are as analytically interesting and normatively significant as regulations that are publicly developed and aimed at the median voter.   This discussion leads to an inference that is at the heart of this dissertation: the business strategies and actions of private firms are a critical determinant of the realization of public policy goals in capital markets.  This is perhaps obvious, inasmuch as private compliance with public rules clearly determines regulatory outcomes as much as the content of those rules.  However, the significance of this claim is worth stressing.  Financial services firms are quite powerful in terms of their ability to shape the financial fortunes of individuals and households, as well as businesses and other market participants.  As such, the public sector’s ability to realize some ‘social purpose’ through financial markets means that regulators need private firms to do – or not do – certain things.   What is meant by ‘social purpose’ is the set of broader societal outcomes, including but not limited to distributional goals and the provision of public goods, that are desired by public officials.    For instance, in banking, regulators have preferences about access to credit, to mortgages, or bank accounts to promote some desired level of savings and/or investment; in corporate governance, officials push for some set of rules governing class-action litigation, or articulate the rights of insiders and outsiders in hostile takeover efforts because of the impact on employees and shareholders; in the investment community, some politicians or regulators may require publicly-backed institutional investors (such as pension funds) to prioritize domestic investment qua industrial policy.   The politics of some of these financial sectors and transactions have been more closely studied than others in the IPE and CPE literatures to date, including the regulation of the banking  49  and insurance industries; the distributional impacts of trade and the endogeneity of tariffs; the determinants and benefits of foreign investment, and the link to regimes and rules; and the connections between international financial institutions like the World Bank and IMF and private financial service firms – and the implications for development.   However, the oversight and actions of financial infrastructure firms has not been in focus to date.   What kinds of social outcomes are these firms implicated in contributing to?  There are at least five:  Exchanges partner in the provision of efficient and transparent marketplaces for savers to turn present-day capital into future returns, and for firms to turn future profits into present-day capital.  Exchanges match investors with capital today with firms who hope to create capital tomorrow.  In doing so they facilitate economic growth by giving innovative and well-managed firms access to much-needed capital, and contribute to household savings activities.    Exchanges can specialize and thus target this activity at different categories of firms: this could include upstart or small-and-medium-sized enterprises (SMEs), technology or resource firms that require bespoke regulatory arrangements to promote liquidity (because of their risk profiles), etc.  In doing so, exchanges can help distribute capital-raising opportunities across a broad spectrum of the economy, which may generate opportunity and growth in different sectors and geographic regions, and contribute to a public good by facilitating growth.    By deploying stringent listing, disclosure, and trading rules (among others) as part of their self-regulatory activities, exchanges can increase the transparency of traded firms to investors and augment the overall quality of publicly-traded firms – and markets more  50  generally.   This promotes the integrity of capital markets, which is a key part of most capital-market regulators’ mandates.  Where retail investors' investments are significant portions of the domestic system of social security, this self-regulating and quality-controlling capacity can also contribute to the stability of market-based welfare state arrangements.    Exchanges anchor a dense ecosystem of financial and ancillary service firms, and can therefore provide jobs and encourage the stability and growth of a geographically-fixed financial service cluster.  While exchanges are not major employers, the jobs that develop around an exchange, including registered traders and brokers, lawyers, accountants, IT professionals, etc. – are good-quality professional jobs that policymakers want to attract.    Finally – and particularly true for post-trading facilities like CCPs – exchange firms can be market-side partners for public authorities for the management of systemic risk.  They do so in terms of data collection and provision, giving what is sometimes called a ‘clear look-through’ on the outstanding positions and obligations of any one financial service firm at any given time, and so can help regulators to locate hot-button risks.  CCPs are also able to give shape to default management processes in a crisis.  This lessens the need for a public lender-of-last resort backup for a too-big-to-fail firm by ensuring that any single firm's counterparty obligations, in the event of a default, are managed in a way that enable liquidity and credit to continue to flow through the economy.  This lessens risk to taxpayers, lowers the regulatory oversight burden, and contributes to market stability and confidence in both good times and bad.   This indicates that there are several ways in which exchange firms’ commercial undertakings can contribute to or work against public officials’ pursuit of various social goals.  As is true in  51  many areas of finance, the exchange industry is tied up in the delivery of public policy outcomes – outcomes that have more substantial distributional and political implications than may initially seem obvious.  Exchanges are worthy of investigation by political scientists, and deserve greater understanding and focus than has been the case to date.    That being said, financial exchanges have not been entirely overlooked by political scientists, as both exchanges and securities regulation have featured in a small number of interesting studies over the last two decades.    These studies have typically focused on one of two things: first, changes in the delivery and content of securities regulation, at both the domestic and global levels; and second, the role of financial exchanges themselves within broader processes of change in domestic institutions and systems of capitalism.  Each of these lines of argumentation helpfully contributes to this dissertation, although each is also in need of being expanding upon.   On the delivery of securities regulation, Coleman and Underhill (1995) and Underhill (1995) look at the worldwide emergence of arms-length securities agencies in the 1980s and 1990s, and their increasingly technocratic delivery of domestic regulation and transnational policy harmonization. They echo Michael Moran’s (1991) finding that by “keeping governments out of politics”, these institutional changes allowed for a rapid implementation of rules deemed necessary for the development of efficient global capital markets – changes, for instance, to disclosure and corporate governance requirements, and insider trading rules.  Such changes would have been more laborious and contentious if undertaken by politicians concerned about the consequences of those changes for key constituencies (cf. Epstein and O’Halloran, 1999).  Lutz (1998) notes that the internationalization of capital markets has led to the breakdown of traditional exchange governance practices, including self-regulation by stock markets and  52  private-sector led policy coordination at the domestic level.  Her study of the German system of regional stock exchanges highlights the increasing role of arms-length public officials in the governance of that system, a finding that resonates with contemporaries who identified the emergence of a “regulatory state” in response to globalization (cf. Levy, 2006), or Vogel’s view that freer markets sometimes require “more rules” and greater public involvement in regulation (Vogel, 1996).    Other studies focus more on the content of global capital market regulation, and how those decisions are reached.  For instance, Bach and Newman (2010b) focus on the global dissemination of new, US-style regulations for insider-trading.  They theorize the mechanisms through which the US Securities and Exchange Commission has been able to bring foreign regulatory outputs closer to its preferences – i.e., by using both carrots and sticks that include memoranda-of-understanding, capacity-sharing, and the provision of access to US market resources for foreign private actors (cf. Gadinis, 2008b).  Their investigation yields precise claims about how power is exercised between regulatory agencies, and explains where on the Pareto frontier regulatory outcomes end up, and whose preferences are realized as global regulations converge (cf. Krasner, 1991; Drezner, 2007).  Work on the global regulation of hedge funds (Helleiner and Pagliari, 2009; Fioretos, 2010) has theorized the domestic sources of preferences regarding how major investors operate – how much risk they may assume, how leveraged their investments may be, what level of transparency they must offer investors and outsiders – in ways that are consistent with liberal IR theory (Moravscik 1997) and historical institutionalism in comparative politics (Thelen, 2004; Thelen and Mahoney, 2009; Farrell and Newman, 2010).  Davis and Marquis (2005) offer a sociological explanation for the diffusion and development of stock markets and convergence of corporate governance regulations.     53  These dynamics are important to the cases investigated here, which can only be fully understood in a broader context, including: changes to the delivery of securities regulation (particularly changes to the self-regulatory role of exchanges); the development of new rules (such as the introduction of competition to the exchange landscape); as well as the international relationships between key regulators.  Unlike these studies, however, which focus on processes of institutional and regulatory change as well as inter-regulator politics, this dissertation focuses on the relationship between public officials and the infrastructure firms themselves, which are a particularly significant – and underappreciated – locus of regulatory politics that is worth examining in its own right.   As a result, this dissertation is better equipped to explain varying outcomes at the level of regulatory decision-making on the specific issue of cross-border market integration, rather than existing scholarship that effectively explains the broader institutional and legal context within which those decisions are taking place.   Indeed, another small body of scholarship looks in greater detail at exchanges themselves, and the interface between these private institutions and public actors.  Two unpublished conference papers (Callaghan, 2010; Botzem, 2012) trace the emergence of for-profit stock exchanges through demutualization, and the impact of that structural change on the broader political economy in which exchanges are embedded.  These studies add nuance to the theorization of institutional change, highlighting (as many such studies do) the role of changing material conditions as well as endogenous sources of change, particularly key actors’ changing preferences and incentives as markets globalize (cf. Thelen and Streek, 2005).  This dissertation is carefully attuned to these contributions: the theory of regulator dependence presented here considers the powers and preferences of both public and private actors in the exchange sector, especially given the introduction of competition in the industry (both within and across  54  jurisdictions, as capital market activity has globalized) and new commercial incentives.  As argued above, these changes are the primary drivers of cross-border mergers and acquisitions.    Beyond political science, legal scholars have considered the implications of these changes in the exchange industry in greater detail than political scientists, and have effectively elaborated many of the political and policy dilemmas that these changes present to officials.  Fleckner (2006) and Dombalagian (2007) examine how the demutualization of exchanges – their shift from member-owned to for-profit, publically-traded companies – has upset established divisions of regulatory duties across the public and private sectors.  The appropriate division-of-labour between public and private actors has shifted as private exchanges’ incentives to adequately police their markets has (arguably) changed (Fleckner, 2006; Dombalagian, 2007).  Many legal scholars (Fleckner et al., 2006; Pan, 2007; Karmel, 2007; Brummer, 2008; Dombalagian, 2012) have studied the impacts of cross-border trading and multinational exchange ownership on the capacity of regulators to independently assert their statutory authority – and have considered the implications for domestic systems of exchange regulation, both positive and negative.  However, while these studies helpfully describe many of the political dilemmas facing officials (indeed, dilemmas that are central to this research project), they are not placed to offer predictions about how existing political institutions and political processes will mediate the pressures of a changing exchange market.  Neither can they explain why observed decisions happen to vary across markets.  That is where careful process-tracing can make a key contribution.     Two recent studies present scholarship that is close to the purpose in this dissertation.  Callaghan and Lagneau-Ymonet’s study (2012) on the sale of the Paris stock exchange to NYSE, in 2006-2007, takes that event as a puzzle to explain, not least because of the French inclination  55  to interfere in the market for corporate control of important French firms – non-intervention by Paris is surprising.  They develop an answer based on the availability of a discursive appeals to “economic nationalism” which is a helpful framework for studying the causes of outcomes in this single case, but of limited utility in studying variation across cases, as it focuses on a set of discursive variables that do not have explanatory power across all the cases studies in this dissertation.     Posner, too, has looked at the emergence of “new exchanges” in Europe (2009a).  These exchanges have been set up to support the capital requirements of small and medium sized enterprises, on the early American NASDAQ model, an outcome that has been the target of policymaking efforts for decades – particularly as some European economies experiment with shifting from a bank-financing to market-financing model for companies.  According to Posner, the development of these exchanges after years of failed attempts by domestic policymakers is an outcome that can only be explained if the independent policymaking role of the EU’s institutions is understood.  He thus contributes to debates in International Relations scholarship about the power and purpose of international organizations, particularly in Europe.  At the same time Posner notes that exchanges serve a particular public purpose that is of great interest to policymakers at any level (national or supranational) – an analytical focus that is shared in this dissertation.   His empirical focus aside, however, Posner’s theoretical interest does not much overlap with this dissertation, which is less concerned with the dynamics of multi-level policymaking (although it plays a part in the DB-NYX case study) and is instead focused on the dynamics that take place between regulators and regulated entities.    To sum up, a small number of existing studies examine both the regulation of market-based exchange (including standards and trading rules, etc.) as well as developments within the  56  exchange industry – including regulatory and business strategy changes in that industry.   This dissertation builds on this existing work by emphasizing two things.  First, it looks at the consequences of many of these regulatory and market-structure changes more than their causes, examining in particular the increasing pressure on exchanges to develop cross-border business strategies.  It then explains why public officials respond to those strategies in the ways that have been observed over the past decade.  Second, and as mentioned, the dissertation emphasizes the dyadic relationship between public authorities and regulated firms, and demonstrates that this is a particularly important site of regulatory politics – and that public decision-making vis-à-vis financial markets can sometimes be boiled down to the dynamics that take place between officials and important market infrastructure firms, rather than between voters, politicians, or lobbying groups.                57   CHAPTER III REGULATORY POWER AND MARKET INTEGRATION IN FINANCE Introduction This chapter contains two broad discussions, first on the nature and limits of regulatory power in finance, and second on public officials’ decision-making with regards to cross-border market integration.  In both circumstances the existing political science literature is assessed for the extent to which the endogenous preferences of regulators have been taken seriously on a causal level – that is, the extent to which political science has put regulators in the driver’s seat as decision-makers with regards to market integration.  In both cases the answer is that regulators have not generally been given that kind of causal role.  Why does this matter?  The first discussion on regulatory power in finance establishes the important analytical point that integration can have significant impacts on the relative power resources of public officials overseeing firms and markets.  What is more, it argues that certain ‘tools of the trade’ (such as coordination or unilateralism) that regulators can use to address cross-border market dynamics are not equally available and/or effective in all circumstances.  Given the potential – and, crucially, knowable – impacts of integration on public sector power, the discussion therefore makes the case for taking regulators’ preferences about integration seriously, particularly from the perspective of their capacity and autonomy to do their jobs.    The second discussion reviews the literature to assess the extent to which existing approaches to market integration in political science have, indeed, taken the preferences and concerns of market authorities seriously, and finds that with some important exceptions, this is an analytical gap in the literature to date.  At the broadest level, the chapter argues that it is  58  curious that the predictable and knowable impacts of integration on regulatory power have not generally been positioned as things that regulators care about when making decisions about integration.  This gap begins to be filled by the theory of regulator dependence, which is developed in the subsequent chapter.    The nature and limits of regulatory power in finance This discussion assesses the problems that global financial integration generates for public actors and their power over financial market participants.  While it notes that the severity of those problems varies in important and interesting ways, depending on the product market and jurisdiction in question, it is also true that the negative consequences of global market integration for public power begs a fundamental question: why do public actors enable or allow global market integration in the first place?    The last chapter emphasized that exchange governance is an important site of political inquiry because of the distributional impacts and the potentially positive and negative social externalities generated by transactions that take place in the exchange industry.  These outcomes are politically consequential.  The discussion also noted the small literature that examines the distributional causes and consequences of exchange governance.  For instance, the corporate governance literature has tackled the distributional issues related to the oversight of securities trading, and there is small literature that considers how regulators decide which public objectives to pursue for the securities sector, and why those objectives and preferences differ across jurisdictions (cf. Roe, 2003; Pagano and Volpin, 2005, Pinto et al., 2010; Lee, 2010).     Of course, a market authority’s ability to achieve these outcomes through the regulation of private exchange and post-trading facilities, and thereby ensure that infrastructure firms fulfil  59  some set of broader public purposes, is also a complex issue.  This question of public capacity has certainly become more acute as exchanges have demutualized and become publicly-traded, for-profit firms in the last two decades, rendering them less likely to behave as utilities and more likely to pursue a profit and shareholder value focused bottom line.  In a general sense, the overlap between public and private incentives in the exchange sector may have decreased, as the provision of deep, liquid, well-regulated, transparent and fair markets is now only one of the many sets of priorities that demutualized exchange firms are motivated to pursue (Fleckner, 2006).   More significantly, the changed incentive structure facing exchanges has also led to pressures for those firms to integrate on a cross-border basis, as was also explained in the previous chapter.   The cross-border integration of financial market infrastructures opens up a host of questions that have been robustly debated in international and comparative political economy to date – questions about the impacts of financial market integration on the autonomy of domestic policymakers, and the convergence of national economic systems and economic policymaking.  According to this literature, it is probable that where a) exchange firms are private, b) capital is mobile, c) firms and capital straddle borders, and d) regulatory authority remains domestic, such a system is likely to have an impact on national market authorities’ power over the market and its participants.  Where markets are integrated as just described, a key question must therefore be asked: how did they get that way (cf. Helleiner, 1994)?  It is indeed probable that authorities’ ability to deploy their power and shape private undertakings on a cross-border basis is less than equal to their capacity to do so in the domestic space.  The integration of market infrastructure firms is therefore a significant phenomenon in terms of the ability of  60  national market authorities to oversee and shape those markets, and their decision-making at such junctures is therefore rather important to consider.    Indeed, the ability of market authorities to deliver the policy outcomes they seek in the exchange industry is highly dependent on their ability to direct and compel for-profit exchange firms to develop and undertake private business strategies that complement (or at the least, do not undercut) broader political and policy goals.  For public authorities to ensure that exchange firms deliver on those desired undertakings, they are likely to require significant levels of power and capacity – not least because the endogenous incentives of exchange firms to provide public goods may weaken in a cross-border commercial context.  Power is thus crucial for public actors to oversee the exchange industry – indeed, to oversee any subsector of financial markets in which domestic public authorities have policy preferences that require complementary private sector undertakings, i.e., things that authorities must ensure firms actually do.   This discussion therefore elaborates a perspective on the scope of regulatory power and its sources, and notes that as it is often endogenous to important policy decisions, such policy decision should be scrutinized through the lens of regulatory power.  The discussion therefore sets the stage, in the subsequent chapter, for the theory of regulator dependence which is, above all else, a theory based on regulators’ power to get things done in the financial markets.  In pointing to these public sector-based dynamics, the current discussion also makes a case for a more statist approach to the issue of integration in global markets (Kitschelt et al., 1999; Schmidt, 2002).   The value of a more statist approach is reinforced in the second discussion, where the inability of existing approaches to explain specific integration outcomes in the exchange industry points clearly to the need for an alternative explanatory framework.    61  This discussion on regulatory power proceeds in four parts.  First it provides a working definition of regulatory power in finance, borrowing from Cohen and proposing that the most significant components of regulatory power are capacity (defined as the capacity to control actors’ behaviour) and autonomy (defined as insulation from external influence).  Second, the discussion assesses existing scholarship and draws out the varying perspectives on the extent of regulatory power in the transnational financial markets, and focuses in particular the challenges that cross-border market integration cause for public actors.   Third, the discussion analyses in depth how and why regulatory power in finance varies across markets and jurisdictions, noting that this variation makes it critically important to understand how differently integrated markets and jurisdictions got that way in the first place; and, finally, the discussion considers the limits to the effectiveness of some policy tools that public actors use to protect or augment their power over footloose market actors.  The purpose of these linked discussions is to establish that the impacts of cross-border integration on regulatory power are not uniform, but may vary significantly across markets, market authorities, and issue areas.  Integration poses different problems for different authorities at different times. As such, the problems for public officials that are caused by global integration – namely the negative impacts on their capacity, and autonomy – ought to be re-positioned analytically.  These policy dilemmas are not simply the consequences of integration: they may in fact shape the choices made by public authorities about cross-border market integration.   Importantly, and as demonstrated by the literature surveyed in this discussion, those policy dilemmas can be more or less severe.  The challenge, then, is to tie theory severity of these dilemmas to officials’ revealed choices about integration in finance.        62  Defining regulatory power in finance Cohen (2006, 2008) has provided a workable understanding of power in finance that underpins the analysis in this and subsequent chapters.  While Cohen’s definition of power relates to the realm of monetary policy and politics (cf. Kirschner, 1995), it is both appropriate and useful to adapt it to the regulation of exchange infrastructure and exchange-based transactions.  As Cohen writes,  Power may be understood to comprise two critical dimensions, autonomy and influence.  The more familiar of the two is the dimension of influence, defined as the ability to shape events or outcomes.  In operational terms, this dimension naturally equates with a capacity to control the behaviour of actors – ‘letting others have your way’, as diplomacy has jokingly been defined.  An actor, in this sense, is powerful to the extent that it can exercise leverage or managerial authority.  As a dimension of power, influence is the essential sine qua non of systemic leadership.   The second dimension, autonomy, corresponds to the dictionary definition of power as a capacity for action.  An actor is also powerful to the extent that it is able to exercise operational independence: to act freely, insulated from outside pressure.  In this sense, power does not mean influencing others; rather, it means not allowing others to influence you – others letting you have your way. (Cohen, 2008, p. 456)     While these two elements of power form the basis of both this discussion and the theory that follows, some minor clarifications and adjustments are necessary.  First, unlike Cohen’s research, the focus on power in the dissertation is primarily (although not exclusively) on the exercise of regulatory power within the framework of domestic jurisdictional boundaries rather than across jurisdictions and between different market authorities  63  in the global system.  That is, the focus here is on regulators’ ability to get the domestic policy outcomes that they want out of the financial markets that they oversee, rather than the exercise of influence over foreign monetary policy decisions.  It is certainly true that the exercise of power in the domestic economy can often involve coordination with outside actors or even efforts to apply rules and regulations on an extra-territorial basis, as is discussed below.  However, the perspective advanced here sees the degree of influence and control in these cross-border contexts as an inherent problem that marks cross-border markets and market entities (even for powerful countries’ regulators) rather than a dependent variable to consider – i.e., in this dissertation cross-border influence is the issue for authorities to consider.   For definitional purposes, it is therefore more useful and more appropriate to focus here on the “capacity to control the behaviour of actors” as a critical measure of regulatory power.  Through this lens, the actors being controlled are domestic market participants, primarily (but not exclusively) private firms, and the measure of power on this scale is the degree to which those market participants undertake transactions, and investment and conduct activities that are consistent with the regulatory and policy objectives of the market authority.  Regulatory capacity to shape market undertakings is the first measure of regulatory power, and here the focus is on the market undertakings of private firms.     The second measure of regulatory power is autonomy, and Cohen’s understanding of the concept as freedom from external influence is entirely appropriate.  In order to meaningfully pursue domestic policy goals, those goals must not be driven by the preferences or political activities of external agents seeking to extract rents from the resulting market outcomes.   Defining regulatory power as capacity over private actors plus freedom from external influence has several implications.  It means that for regulators to have power, they must have:   64   Sufficient resources (material and statutory) to compel regulated private actors to engage in wanted activities and adhere to regulations, principles, and rules - and to monitor that they do so;   The ability to develop those regulations, principles, and rules with an emphasis on their domestic impact, in the context of broader domestic political and policy objectives;   A significant level of private transacting and business activity taking place within the jurisdiction, giving regulators actual and not just nominal/statutory power over private sector activity.   It follows from this definition that any market or policy event that a) reduces regulators’ relative or available resources, b) introduces foreign influence into their strategic calculus, and/or c) reduces the absolute level of private activity that they have the capacity and autonomy to control, also d) necessarily reduces their regulatory power.    Contrasting perspectives on regulatory power in finance The capacity of domestic officials to regulate and control global capital flows is the subject of an important empirical and theoretical debate in political economy scholarship.  When capital markets and capital flows are significantly transnational in nature, how do policymakers and regulators ensure that they a) retain or attract desired business activity and b) direct it towards domestic distributional ends, without simultaneously eroding their power to achieve other domestic policy goals? What resources do public officials have when it comes to managing the private flows of global capitalism?   One answer is that domestic resources are fundamentally limited and constrained. The fact of international capital mobility has often been modelled as a structural constraint on the  65  autonomy and power of domestic policymakers (Haggard and Maxfield, 1996; Strange, 1996; Cerny, 1997; cf. Chwieroth and Sinclair, 2013).  Under such conditions, the ability of policymakers to make independent domestic policy choices in the realms of both monetary policy and the setting of exchange rates has been theorized – and empirically observed – to be constrained (Obstfeld et al., 2005).  What is more, regulatory and legislative decisions may be increasingly made with an eye to their impact on the relative attractiveness of the jurisdiction to footloose capital (Gill and Law, 1989; Goodman and Pauly, 1993; Haggard and Maxfield, 1996; Cerny, 1997).  The key mechanism here is the private exit option, giving investment firms, banks, institutional investors and others with extensive capital resources a kind of 'structural power' over policymakers – ensuring that policy outputs do not even test the willingness of private firms to direct their business activities elsewhere.  Domestic policy priorities that do not reflect private policy preferences are likely to lose out as the preferences of global financial players take on greater weight; the state's responsiveness to domestic distributional demands may subsequently be reduced.  Domestic institutions may even come under pressure to change and converge in order to attract capital resources (Swank, 2002; Simmons and Elkins, 2004; Tiberghien, 2007).   This capital-as-constraint perspective frequently predicts a race-to-the-bottom across jurisdictions as they compete with one another for capital.  More broadly, the literature emphasizes the incapacity of domestic public actors to establish independent policy trajectories.  Domestic policymaking autonomy is weakened because of private firms’ increased ability to exit the jurisdiction as a result of decreasing regulatory and technological transaction costs (Frieden and Rogowski, 1996), efficiencies that have been made possible in part by deregulatory and liberalization policy strategies undertaken in some (generally powerful) states (Helleiner, 1994;  66  Drezner, 2007).  As the independence of domestic decision-making is eroded and inter-jurisdictional regulatory competition sets in, domestic policy tools like redistribution through taxation to fund social security, patronage-based public sector procurement, and monetary expansion become less feasible (cf. Garrett, 2000; Swank, 2002).   However, as Simmons has identified, this prediction does not match the empirical observation of "a general tightening of regulatory standards in a number of areas" relating to finance (Simmons, 2001, pp. 590).  Indeed, another set of scholarship (as well as a significant universe of empirical cases) argues that the state’s capacity to make differentiated, locally-relevant policy is very much intact (Garrett, 1998; Oatley, 1999).  Domestic policymaking continues to result in variable outputs across jurisdictions, suggesting that states retain considerable freedom to act differently or to act on differing policy priorities (Kitschelt et al., 1999; Schmidt, 2002; Culpepper and Reinke, 2014).  State power may simply be transforming in nature, and the tools state actors use may be evolving from a Fordian, social programme logic to a more regulatory logic (Ruggie, 1982; Vogel, 1996; Levy, 2006).   Indeed, even where state actors face pressures emanating from global markets, they are not powerless.   As financial markets have internationalized over the past 30 years, public authorities have taken substantial measures to institutionalize oversight over those transactions and flows. Internationally coordinated efforts at overseeing financial markets are feasible, although the depth and degree of coordination at an international level has differed substantially from one issue area to another (Kapstein, 1989; Simmons, 2001; Singer, 2004, 2007; Gadinis, 2008b), as the feasibility of coordination depends on the incentives and power resources of the players involved; international outcomes may be characterized by power politics with distributional implications across the various parties participating in the harmonized regime (see  67  below) (Krasner, 1991; Simmons, 2001; Drezner, 2007; Leblond, 2011).  Kapstein (1989), Pauly (1997), and Singer (2004, 2007) thus assert that state actors can use international policy coordination to jointly tackle policy problems beyond the remit of their territorially-bound authority and jurisdiction, and even use harmonization to avoid races-to-the-bottom, regulatory arbitrage, and other Pareto-suboptimal outcomes.  Leading regulators may even lock-in the regulatory and market advantages of their home markets, and thus the competitiveness of the domestic markets that they oversee (Singer, 2004, 2007).   Particularly powerful states may be able to project their preferences over both harmonization processes as well as exercise power unilaterally in order to achieve the outcomes they seek (Oatley and Nabors, 1998; Simmons, 2001; Drezner, 2007).   Observed here, then, are contrasting high-level perspectives on the power relationship between public officials and private parties in global finance.  The predicted impacts of global financial integration on domestic policymakers’ autonomy and capacity are also different, with both deeply pessimistic as well as more sanguine predictions being observable.  It is worth nothing that which one of these two perspectives more accurately describes the public-private power relationship in global finance may well vary across issue areas, across jurisdictions, and across time (see below).  For instance, the re-assertion of public demands for regulation and oversight in the immediate post-Crisis period could be read as a changing balance of power – or at least normative resources – between regulators and the firms they regulate, although final judgement on this is ripe for debate (Helleiner and Pagliari, 2011).  What does seem more unambiguous is that financial firms with mobile assets and activities extending across borders present a set of challenges for regulators.  At the very least such mobility appears to compel new forms of cooperative and coordinated governance efforts across borders, always a difficult  68  undertaking in itself.  At the other extreme, that same mobility may handcuff officials into offering domestic policy concessions to footloose firms.     Further complicating the effort to measure the extent of public sector power over financial service firms is the increasing prominence of private governance and authority in global finance.   The delegation of standardization and coordination activities to quasi-private bodies like the International Accounting Standards Board and Financial Accounting Standards Board for accounting standards, or the International Swaps and Derivatives Association for OTC derivative regulation, and to public international standards setters like the International Organization of Securities Commissions (IOSCO), adds a layer of partly public and partly private authority to the international financial market policymaking landscape.      These arrangements have political histories that explain their development, and also have distributional impacts that political actors may have to subsequently manage (Perry and Nolke, 2006).   Buthe and Mattli (2011) argue persuasively that this system of privatized global regulation generates winners and losers, empowering some domestic standard-setters (and the firms they represent) more than others.  They observe that producer groups in states where regulatory authority is consolidated are particularly well-positioned, because the existing domestic centralization of authority enables regulators to more effectively upload both their preferred standards and those of domestic firms to a private international standards body.   Underhill and Zhang (2008) see more fundamental issues of accountability and legitimacy at stake in the privatization of global governance, and worry about the power imbalances that emerge from the asymmetrical distribution of technical knowledge and financial resources – both across jurisdictions as well as across the public and private sectors (see also Mugge, 2011).  For Underhill and Zhang, private governance is a manifestation of a broader problem of regulatory  69  capture, where for a variety of reasons including issue complexity and organizational advantages, private interests are able to assert and lock-in their preferences for the management of the global economy.    Private governance, however, poses a challenge to public authority even where the epithet of ‘capture’ does not apply.  It is important to observe that the development of private governance arrangements can represent a strategic public sector choice about the benefits of delegating governing power to non-state entities (cf. Epstein and O’Hallaran, 1999), and so private authority is not obviously and only a source of weakness for the public actors making those initial delegation decisions.  At the same time, such arrangements both legitimize and institutionalize the exercise of private decision-making and the influence of private preferences in the development of public policies and market rules.  Moreover, in many cases, authority is not ever delegated – material and substantial policy decisions are made via self-regulation because their technical complexity means that private bodies are the first and only ones to tackle them, even if later those rules have implications that resonate beyond the industry that is standardizing them in-house.  Self-regulation in the OTC derivatives and hedge fund industries have historically fit this latter characterization, which has since led to significant political battles across jurisdictions, through global regulatory bodies, and between public and private actors, pitting those seeking to re-establish public authority over the OTC markets in the wake of the financial crisis against those wishing to maintain a light-touch regime (Helleiner and Pagliari, 2009).   The entrenchment of private capacity and interests in the global regime that governs the OTC and hedge fund industries is a clear challenge for the domestic authorities who have subsequently tried to bring transparency and stability to those markets.  It is important to  70  observe, too, that the private entities backing global regimes of this type are overwhelmingly multinational rather than domestic firms.   Furthermore, the outputs of private regulatory systems are not only shaped by domestic institutional arrangements, as Buthe and Matli argue (2011), but are also likely to have impacts on the subsequent operation of domestic regulatory systems – and on the ability of public actors to effectively monitor and oversee domestic markets and manage the markets’ knock-on impacts on taxpayers, pension holders and other domestic stakeholders.  This impact may be felt where private market rules provide insufficient cover against risk-taking or opaque transacting, thereby working against public regulatory goals – as in the OTC and hedge fund cases above.   But more generically, internationally harmonized private standards produced by international financial market actors may simply hamper the ability of domestic authorities to shape policies and regulations to the particular needs of the domestic environment – for example, the development of particular securitized products that serve a domestic niche but fall afoul of global best practices around disclosure or collateral management.  The private governance network provides a source of power and coordination for private firms seeking the coordination and standardization of rules rather than domestically-tailored ones (Farrell and Newman, 2014a). This also suggests that where private firms possess some measure of regulatory, standard-setting, or monitoring authority, the international expansion of their private activities may complicate the exercise of public oversight over how those self-regulatory activities proceed.    In sum, private international standard-setting, and the increasing interpenetration of jurisdictions and expanding market activity by firms whose activities are governed by private standards, is a challenge for domestic policymakers. Managing the material impacts of private financial standards and reregulating those domains, or ensuring that global market actors develop  71  standards that are appropriate for the domestic economy, are far from straightforward exercises for domestic policymakers.   These perspectives point to the significant power of private interests, to both press for and then lock-in processes of international market integration and liberalization.  Most observers agree that regulators are, if not simply captured, at least highly influenced and structurally constrained by the preferences of global producers of financial services.  Foreign exchange traders move capital effortlessly in response to policy decisions, sharpening the relative costs of those decisions; financial service producers locate their investment and management activities where regulatory and political models best contribute to their bottom line, weakening public actors’ freedom to design those models; and private actors build globally harmonized regulatory systems that reflect their interest in lower transaction costs and profit-making over domestic distributional priorities, in ways that are very difficult for public actors to counteract and undo.  This suggests that market authorities wishing to preserve their autonomous capacity to make policy should have at least some incentives to prevent the emergence of cross-border flows and globally-active firms – such as market infrastructure firms – which may limit or constrain the future exercise of public power in the market.     But in this vein, it is again important to balance these pessimistic accounts of the capacity of public authorities to autonomously govern private flows against the more sanguine views on the public-private relationship in finance.  To paraphrase Polyani, global finance was planned (1944).  Indeed, the emergence of an integrated global economy is also the result of a series of discrete policy interventions by actors with ideas and preferences about how best to position their economies, enable economic growth and generate efficiencies, and respond to exogenous developments like technological change.   Part of the story of global finance is surely about  72  private lobbying, information asymmetries, and coercion by both powerful states and corporations – but it should not be missed that policy choices can often remain choices in at least some sense, and that transatlantic market integration, capital mobility, and cross-border firms are all allowed and allowable under some set of rules and regulations that enable those market transactions (Helleiner, 1994; McNamara, 1998; Abdelal, 2007; Watson, 2007; Chwieroth, 2010).   These contrasting perspectives on the power of the public sector relative to global market actors and firms lead to important empirical questions.  What power resources do public actors have in this system, and how do they use that power to shape the emergence of global markets?  If global finance is ‘planned,’ do public actors ever block the emergence of global financial markets and firms because of the negative impacts on their domestic autonomy and capacity – i.e., the potential impacts just detailed?   Why choose integration, and/or why stop it?    Variability of regulatory power To more accurately describe the nature of the dilemma facing market authorities making these decisions about integration, it is helpful to add nuance to this discussion about the extent of their capacity and autonomy.  Market authorities’ power is not simply a matter of perspective on the macro-structural impacts of globalization.  Empirically, public power varies, and it varies not only with obvious correlates like market size, but also with jurisdictional boundaries and with policy choices relating to market structure – i.e., whether a given product market is domestic or cross-border in nature.  Power varies with policy decisions about the structure of market and its oversight.  This observation is crucial for setting up the theory of regulator dependence to explain varying public responses to mergers.     73  With regards to the power of public actors to shape outcomes in private financial markets, one perspective with intellectual roots in the realist tradition in IR points to the market power of individual states, particularly over trade regime outcomes (Hirschman, 1945; Krasner, 1976).  A dominant or hegemonic market can build an international regime that suits its preferences, particularly in a context where other states are highly dependent on products only available through trade (i.e., in contexts where the fungibility of hegemonic exports and the elasticity of foreign demand are both low, and the fungibility of foreign imports into the dominant market is high).   As in trade there are good theoretical reasons to expect a power advantage for hegemonic states in global capital markets, especially as the liquidity and depth of financial hegemons’ markets are very difficult to replicate (Kirschner, 1995). This is true in their relations with authorities in foreign markets (Drezner, 2007; Bach and Newman, 2010b) but also in how they are able to influence both the incentive structures and opportunity costs that motivate foreign firms.  In this perspective, both policy outcomes and global regulatory regimes are shaped by the policy choices of market authorities in hegemonic states, due to the subsequent activities of domestic interest groups in both the hegemonic states and in other markets (Frieden, 1991; Frieden and Rogowski, 1996; Moravscik, 1997; Mugge, 2006; Drezner, 2007; Posner, 2009b).   Where one state – or, as has historically been true in finance, two states, the US and UK – have a distinct market-power advantage in terms of the depth and liquidity of their capital markets, foreign firms will seek access to those markets in order to enjoy the liquidity and ancillary service benefits they offer, including lower capital and transaction costs as well as profit opportunities (Simmons, 2001; Gadinis, 2008b).   Policy convergence towards the hegemonic markets’ will result, as firms seeking access to the large market will often unilaterally adopt the  74  large market's standards as a precondition of gaining access.  On the public side, foreign regulators will come under pressure from their domestic firms to adopt standards similar to those demanded in the large market.   Similarly, the interests of domestic firms in the dominant markets will be exported abroad during liberalization negotiations or other interactions involving the dominant market's officials.  This mechanism may lead to either more or less stringent regulatory standards – it does not predict the direction of regulatory change.  In what has been called the 'California effect', it can indeed lead to a 'race to the top', as global standards converge on the higher standards of the dominant market (Vogel, 2000).   This is a debate of particular relevance with regards to the convergence of global securities markets and regulations.  As mentioned in the previous chapter, in American capital markets, studies frequently show that issuing firms pay a lower risk premium to their investors than do firms in other equities markets around the world – this is due at least partially to the American SEC’s reputation for high standards and rigorous implementation of investor protection strategies (Coffee Jr., 2007).  This dynamic suggests that as securities regulation has harmonized worldwide it has not followed a race-to-the-bottom logic but instead has often featured convergence towards the more stringent and costlier American standards (Bach and Newman, 2010b).  A similar story is observed in the ongoing US-EU conflict over their mismatched accounting standards, a conflict which has been driven by the interests of private users of those standards and the investors who depend on them (Eberle and Lauter, 2011; Leblond, 2011).  It is also observable in the more recent debates about the implementation of the latest Basel III regulatory capital requirements for banks, and the EU’s bank capital rules in particular.  In this latter case French policymakers have reportedly sought an upper-bound cap on regulatory capital ratios so that relatively well-capitalized British banks will  75  not have a structural and reputational advantage over their French counterparts, demonstrating a fear of a British-led race to the top that French banks cannot compete in (Howarth and Quaglia, 2015).    These power-based analyses suggest that regulatory power in global finance is a privilege of large states possessing deep and liquid capital markets.  It therefore follows that the structural power of mobile capital has a more profound impact on the power resources of officials in small markets than those in large markets - that is, the autonomy and authority of small market officials is eroded more quickly and severely than that of large states, because the preferences of foreign market authorities and large financial service producers trickle in and interfere with the discrete policymaking powers of the small market officials (Andrews, 1994; Haggard and Maxfield, 1996; Mosley, 2003).  The attractiveness of large markets to private actors – due to their depth and liquidity, as well as knock-on advantages in services, expertise, and fees – enables authorities overseeing those markets to dictate where on the Pareto frontier international regulatory outcomes converge (Krasner, 1991; Bach and Newman, 2010b).   In addition, this market depth makes the threat and the impact of firm exit less significant for large markets than small.   The effect here is that deep and liquid market regulators can pursue at least some unilateral regulatory change without the fear of capital flight (Culpepper and Reinke, 2014).  It can even be argued that at a certain degree of depth - after an unspecified "tipping point" – capital markets are more like natural resources or commodities that reside in the ground than the electronic marketplaces of "spaceless flows" that they are so often characterized as, flows that can move anywhere instantaneously (Castells, 1996).  The logic here is that the opportunity costs for private financial firms of exiting a large and liquid market are often greater than the transaction and compliance costs of staying and complying with newly-imposed and  76  onerous regulatory obligations; the opportunity costs of exiting a small market are unlikely to be as large.  The effect is that small state regulators must be responsive to the potential migration en masse of financial service firms and their market transactions: attracting and maintaining liquidity is a different game in small markets than it is in large markets.  However, markets like New York, London, and Hong Kong offer substantial liquidity benefits as well as direct access to competitive ancillary services in legal, accounting, and other professional industries.  Exit is simply a costlier option for firms operating in these locations, particularly when defined as opportunity costs.   This is a network effect with substantial positive externalities for large and liquid markets, and potentially negative externalities for small ones (Lee, 2010, pp. 15-18).   The overall outcome is, again, that international capital mobility is more of a constraint on the policy autonomy of some domestic authorities than others (cf. Andrews, 1994).   These variable impacts of capital mobility on the autonomy of state actors are noted in a second and more recent perspective, one that is focused more on the impact of institutions on incentives than on the effect of differential market power.  In this perspective regulatory power – defined as the capacity to bring global regulatory outputs towards one’s ideal point – is a function of a) jurisdictional boundaries and b) market structure.  Power can clearly vary with market size, but it does so in a non-linear fashion, and how it varies is shaped by institutional factors that go beyond simply market power measured by size, breadth, and depth (Posner, 2009b; Bach and Newman, 2010a; Farrell and Newman 2014b).  More specifically, changes in a) the degree to which markets are internationalized and b) the jurisdictional scope of regulatory authority (i.e., transnational or domestic in scope) inform how regulators interact across borders, as well as the incentives that shape private firm decision-making.  The boundaries of markets and jurisdictions thus shape who wields power in both state-firm and state-state relationships.   77  Indeed, shifts in jurisdictional boundaries and market structures can make it more or less possible for regulators to influence firm-level decision making and investment activities.   Newman and Posner (2011) have built a typology that demonstrates exactly how these market and jurisdictional variables affect regulator power (see also Gadinis, 2008b), and they argue convincingly that under conditions of economic interdependence the regulatory power resources of various market authorities will be a function of those variables.  So, where both markets and jurisdictions are contained within contiguous sovereign borders, market power is indeed the determinant of regulatory power – this scenario gives rise to the market power-based mechanism discussed above.  Where authority is national but markets have liberalized and are transnational, however, market power ceases to predict who will have regulatory power.  In such a situation, mobile and footloose firms may engage in arbitrage activity, moving business away from the dominant centre towards a less stringent location, where compliance costs are lower, sometimes known as the ‘Delaware effect’.  This explains, for instance, the out-sized capacity of policymakers in micro-state tax havens Liechtenstein, the Cayman Islands, and the Channel Islands to shape corporate and capital gains tax policy in the world’s biggest economies (Palan et al., 2010).  Both collective action problems and first-mover advantages are more pronounced in such a market, as the content of regulations rather than market size determines the winners and losers among jurisdictions.  In such a context, regulators with carrots (attractive regulations) also hold sticks (power over business taking place in their jurisdictions, particularly enforcement capacity over real transactions).   A key example illustrating the importance of both market and jurisdictional boundaries is the increasing consolidation of regulatory authority over European capital markets in Brussels, and particularly in the European Commission and related rulemaking and supervisory agencies  78  like the European Securities Markets Authority, European Banking Authority, and the European Central Bank.  Bach and Newman (2007), Posner (2009b), and Posner and Veron (2010) have argued convincingly that changing jurisdictional boundaries in Europe and the expansion of European regulatory capacity explain the EC’s increasing ability to influence global financial regulation, rather than an increase Europe's market power through the Single Market or even any changes to the policy content of European financial regulation.  For Posner (2009b) the mechanism behind this claim is quite simple.  As more Member State jurisdictions are regulated and overseen by Brussels-based institutions, more and more firms are implicated in EU policy outputs.  Importantly, this includes not only European but also global (American, Japanese) firms with operations in Europe.  These firms then lobby their home market supervisors to cooperate with European authorities, not only as a more credible partner who is accountable for a large percentage of the world's capital market activity, but also as a single-point authority with the potential to enact broad-reaching reforms that have impacts on the profitability of their entire European operations.   What, then, emerges from these perspectives on the variable nature of regulatory power in global finance – one perspective focused on market power, and the other based on a more dynamic set of variables?  The central point here is that regulatory power in finance is fluid rather than static, and that the power available to public actors is shaped by three sets of variables:   Market size, depth, and liquidity (i.e., which markets pull on participants?)  Market structure (i.e., are flows – production and consumption – national or transnational?)   79   Jurisdictional boundaries (i.e., is the implementation and enforcement of regulation domestic or extraterritorial?  National or supranational?).   As discussed, these variables determine regulatory power largely because they structure the transaction and opportunity costs of private firms.  Where firms want to do business is central to the conception of regulatory power offered here.  Private firms’ ability or inability to avoid unwanted compliance costs and choose alternative regimes with which to comply is critical to determining whether or not regulators’ have actual (and not just nominal and/or statutory) power to attract market activity and shape the capital markets in ways that address domestic political and policy goals (Singer, 2004, 2007).   The degree of private firms’ structural power over the decision-making of public market authorities is, as a result, driven by policy decisions about the overall shape of that market and the structure of oversight over it.   It is therefore potentially valuable to view these policy decisions as endogenous – each may represent a political choice rather than a given feature of the political and economic environment.  As Newman and Posner (2011) rightly observe, there are degrees of product market and firm internationalization.  At one end markets may be completely transnational, in which ownership and the market for corporate control are unrestricted by nationality and where goods and capital flows across boundaries with minimal frictions.  At the opposite end may be a domestic requirement for corporate ownership and management, and the delimitation of certain categories of market transactions to within a jurisdictional boundary.   However, where Newman and Posner examine the impacts of change in the scope of markets and market authority on regulators’ power, this dissertation proposes to more fully endogenize the varying types of market and jurisdictional structures that can be observed in the financial markets.  As a result, differing degrees of alignment between the boundaries of product markets, service-providing  80  firms and regulatory authority are not an independent variable in this dissertation, but represent political choices.  The transnational scope of capital market activity is shaped not only by private decisions about where to do business once they are allowed to make those decisions freely, but also by earlier public decisions about a) the regulation of capital flows, b) the ownership, control, and governance of systematically important firms, and c) the types of transactions that those firms are allowed to facilitate, execute, and participate in.       The endogeneity of market structure described here is particularly significant given its relationship to regulator power.  If market structure – and the corporate structure of important firms – is considered to be endogenous, and if that structure shapes the power resources of the regulators who oversee those markets, then interesting questions emerge.  How do regulators make decisions about firms seeking to integrate across borders and stretch their production patterns or product markets into new jurisdictions?  What makes the choice to allow (block) such a private integration effort more or less rational, or more or less probable?  If levels of domestic regulatory power are at least partially endogenous in these ways, when is it protected?  The tools of the trade: strategies to project or augment power A final discussion argues, again, for the view that public power over global financial markets is variable – and points, again, to the value of looking at the level of market integration as a policy choice that is endogenous, rather than exogenous policy structure with impacts on public power.    This discussion unpacks three of the ‘tools’ that domestic policymakers have been theorized to deploy in order to manage global capital flows – those tools being cross-border coordination, domestic network-based coordination, and unilateralism.  The section shows that  81  these tools are not universally a) applicable, b) functional, or c) rational for authorities to depend upon.  In short, they may not work for everyone.  Given this lack of fit between the ‘tools of the trade’ and the interests of the market authorities who might use them, it is again interesting to ask – when will these tools enable the management of an integrated market environment, and when might an alternative approach that avoids integration altogether be desirable?  Cross-border regulatory coordination between multiple domestic authorities can be rational where a unilateral approach is likely to result in comparative disadvantages and hence disproportionate costs to domestic producers, but where a failure to enact regulatory or policy change is also likely to result in costs that are borne by domestic groups, in the form of instability or unemployment (Kapstein, 1989; Webb, 1995).   One key component of this approach is to encourage policy convergence across several jurisdictions and therefore minimize firm-side regulatory arbitrage opportunities.  Singer's work (2004, 2007) on the domestic political economy of regulators’ incentives to coordinate (or not) with foreign regulators is a recent and widely-cited example of this perspective.  Because of a crisis or exogenous material shock in the financial markets, a regulator can come under domestic pressure from their legislative principles to re-regulate and bring more stability and transparency to the markets.  However, doing so has to potential to erode the relative competitiveness of the market – which will also result in legislative pressure on regulators, due to the probably impacts of greater regulatory stringency on economic growth and job creation.   In such circumstances, international coordination that brings all major regulators closer to the new and more stringent regulatory standards may be a rational pursuit, because it leaves firms without an attractive exit option, and makes them more willing to bear the increased costs of a re-regulated domestic  82  environment.  Under the right conditions, coordination is a better choice for many regulators than a potentially-costly unilateral policy change, one that could result in firm exit.   This is not, however, equally true across policy domains or across markets.  Variations in the ex ante competitiveness of jurisdictions as well as the content of proposed policy changes may make such collective action highly unattractive and improbably difficult.  Highly competitive markets – or jurisdictions whose firms are well-positioned because of existing rules and standards – can be reticent to fully adopt more stringent rules.  As a result, many issue areas continue to resemble the distributional power game elaborated by Krasner (1991), Oatley and Nabors (1998), Simmons (2001), and Drezner (2007), in which incentives to cooperate on the part of key regulators remain quite limited.  Moreover, even where coordination is more rational than unilateralism, it is far from obvious that small markets are able to secure harmonized policy outcomes that reflect their interests.  Harmonized policy outcomes are unlikely to be free from power politicking.  An alternative to coordination that carries a greater likelihood of delivering policy outcomes proximate to regulators' preferences and that does not negatively affect a market's international competitiveness is thus highly rational and attractive – particularly to small-state regulators likely to lose in a global coordination exercise.    This hypothesized small-market-regulator distrust in cross-border regulatory cooperation is exacerbated by some probable firm-level incentives.  Where product markets stretch across jurisdictions due to liberalization and producer firms similarly operate across jurisdictional boundaries, and the integrated jurisdictions feature markets of different sizes or levels of competitiveness, it is reasonable to expect that the smaller or less-competitive member of the dyad will be uncertain about sharing power with the regulator of the larger market.   This is because the merging firm will likely have incentives to concentrate its business activity in the  83  larger market, and as a result will be more responsive to – and more connected with – the regulator of that large market.  As a result, the regulator of the smaller market may rationally associate the merger with a gravitation of regulatory power abroad, even with (or indeed because of) a promise of policy coordination.   Coordination is, in short, only desirable for a regulator who believes that the policy outcomes it generates will be advantageous relative to the status quo or at least better than a failure to engage in collective action.   Avoiding the need to coordinate altogether – i.e., by keeping some key policy area as isolated as possible from international flows and foreign influence, or by not allowing a product market to stretch across jurisdictions – is, if possible, an attractive alternative in some instances. The second mechanism, network-based coordination, describes a domestic system through which the comparative advantages of the productive economy are locked-in by the private undertakings of firms.  Firms possess incentives to reinforce and buttress those domestic comparative advantages in a particular type of production or sector because their own viability is tied to the ongoing provision of collective goods (Hall and Soskice, 2001).  Firms and their stakeholders can use the stability of long-term expectations, centred around joint investments in particular systems of production, to ensure the viability of their business models even where the relevant product markets are expanding across borders. Even short of such endogenous coordination by firms in particular types of coordinated economies, public officials may be able to use informal network resources to influence and shape the preferences of major domestic financial service producer groups in ways that push those groups towards private undertakings that are consistent with broader political and policy goals (Hall, 1986; Evans, 1995).     84  This tool may weaken or break down.  Economy-wide coordination is clearly only effective as a power resource if the network through which it takes place remains in place, enabling coordination between domestic actors and providing them with the autonomy to make policy decisions that meet the challenges of openness and integration (Katzenstein, 1985).  A breakdown in the network may indeed be a costly side-effect of integration – or even an ex ante reason to oppose cross-border integration (cf. Callaghan, 2014).   The mechanisms of influence and power within a domestic policy network may be twofold – one ideational and one institutional, but mutually reinforcing (Farrell, 2009):  Cultural and epistemic effects: power is transmitted through shared definitions of problems, consistent views and expectations about policy solutions, personal relationships and social activities, and mutual understandings of legitimate levels of state regulation and market oversight (Gerlach, 1992; Campbell, 1998; Abdelal, 2007; Farrell, 2009; Fligstein and McAdam, 2012)  Equilibrium dynamics: Increasing returns to scale can be enjoyed by private actors who have a) expectations of stability in the regulatory environment, b) incentives to make investments in business activities that produce positive social externalities (such as economic growth) as well as private rents; and c) lack exogenous incentives to defect from this equilibrium (Hall and Soskice, 2001).   In rationalist analyses these equilibria are often modelled as the result of atomistic actors pursuing their self-interest within a stable institutional context, which may lead them to enact changes when those institutions no longer suit their preferences (Thelen and Streek, 2005). However, the stability of these arrangements – that is, their self-reinforcing nature – may also be augmented by  85  commitments, social ties, expectations, and trust, thereby helping to deliver actors to coordinated outcomes (Farrell 2009).  These networks are substantially material and face-to-face in nature.  Geography and proximity, far from being irrelevant in transnational finance, can in fact lead to public-private networks with strong socio-spatial characteristics (Fligstein, 2001; Wojick, 2011).  Common cultural, epistemic, and ideological perspectives on regulation and business activity, shared across the public and private sectors, can shape the development and trajectory of particular financial markets (Sinclair, 2000).  Personal relationships are a key element of this system, as are shared beliefs about the appropriateness of various goals and tactics, and the desirability of outcomes.  Business activity is also often highly parochial, as expertise and knowledge builds up around certain business strategies (like an emphasis on certain specializations or sub-markets), and expectations align around certain processes of doing business, leading to highly-ingrained expectations.  This takes place via informal institutions like regular meetings, common language and shared social activities, as well as the development of formal expertise, such as familiarity with disclosure rules, bankruptcy laws, and other legal conventions.  For these reasons there is a robust "home bias" in investor cultures (Strong and Xu, 2003) – to give just one example with clear significance within the exchange industry.   These spatially-bound characteristics of financial market governance may be eroded by cross-border market and firm integration, representing the loss of a key resource for public officials seeking influence over private outcomes in general, and a specific firm’s private undertakings.    Cross-border mergers of private financial service firms, particularly at the level of management, is especially likely to reduce the effectiveness of domestic systems of  86  coordination, especially if it results in changes to the corporate governance and oversight structure of the firm.    Each of these network-based mechanisms of influence and power can be undercut.  The use of domestic coordinative strategies to augment or protect existing comparative advantages, existing policy programs, or desired market outcomes may not be as effective or even plausible under conditions of integrated markets or market infrastructures.  Even in a rationalist equilibrium-based perspective, opening a private firm to new incentives can lead to broader pressures to change.  An authority that depends on informal network-based resources to drive its policy agenda would be highly rational if it tried to impede cross-border integration, i.e., avoid the loss of those resources.   Finally, policy unilateralism is an option, especially for regulators of large markets.  The result may be a convergence towards the policies of the dominant market (Krasner, 1991; Vogel 2000), for market-based reasons that were elaborated above.  However, it is not always the case that a unilateral move is effective.  It can lead to negative externalities that reduce future bargaining power and a declining utility curve for the unilateral mover (Simmons, 2001).  This is especially true where opportunities for exit and alternative investment opportunities exist or are emerging, as is the case in contemporary finance with the emergence of alternative European and East Asian capital markets.  Unilateralism can also harm the reputational resources available to a market authority in a system in which interactions between parties are repeated and iterative (Brummer, 2012, pp. 150-160).    In fact, unilateralism is largely effective only if the domestic marketplace is a ‘draw’ to firms: i.e., that any negative externalities associated with regulatory changes are lesser than the opportunity costs and transaction costs associated with exit.    87  In terms of opportunity costs, this means that the depth and liquidity of a marketplace attracts private actors more than inefficient or costly regulations in the same marketplace repel them.  In terms of transaction costs, this means that the frictions for business associated with unwinding operations in one jurisdiction to set up elsewhere, or moving transactions (and thereby management and administrative capacity) abroad, remain greater than the costs associated with adjusting to regulatory change in the domestic market.   Logically, this is more likely to be true if the costs of exit remain relatively high.  As discussed above, however, changes in market structure have an impact on the relative power resources of market authorities precisely because they can have an impact on firms’ relative pricing of the exit option (Newman and Posner, 2011).  Where the cost of exit is low, even highly competitive markets can be undercut by upstart jurisdictions offering a cheaper regulatory burden.  This cheap exit dynamic is, of course, even more likely if the market structure is cross-border in nature, i.e., because of integration through regulatory liberalization and/or integration of private financial service firms.   Short of an equilibrium where the costs of exiting the unilaterally-reregulating market outweigh the costs of staying in the unilaterally-reregulating market, capital flight and/or the migration of substantial levels of business activities abroad are plausible outcomes (even for large-markets with deep and attractive capital pools).  This is especially true once a financial service firm has integrated across borders and is therefore highly capable of offering services and making profit in multiple jurisdictions.  This increases its ability to redeploy capital and business energy in foreign jurisdictions but within the same business firm, i.e., to its branches or subsidiary units.  It may even encourage its users and clients to do the same by allowing them to transact across borders with fewer costs – thereby "selling" different regulatory environments through a single corporate window (Brummer, 2008).  The loss of the unilateral policy option –  88  or even its degradation as a viable and effective choice – suggests a reason to look more closely at decisions enabling the integration of financial product markets and financial service firms.   This discussion suggests that the problems that public officials face as a result of cross-border financial integration will not necessarily be practically or effectively managed with the tools that they have at their disposal, which can be expected to make officials hesitant about integration.  What is more, and as this discussion has made clear, these difficulties are predictable ex ante, given that a) the probable incentives of firms with international operations as well as b) the power dynamics between large and small state regulators jointly overseeing an integrated product market and/or firm ought to be at least partially foreseeable to policymakers.  In short, the unavailability of these tools after integration has taken place can certainly be seen as a predictable loss of power for domestic authorities.   As a result, it is worth considering the conditions under which policymakers seek to avoid that loss of power, which is precisely what the theory of regulator dependencesets out to do.     Indeed, the manifold challenges to public power that have been discussed here are in fact the basis for the strategic calculation made by public officials confronted with a discrete (yes or no) integration decision.   In fact, perhaps the most important inference generated by this discussion is that this decision point is indeed a strategic calculation for public officials.  This is because the impact of financial market integration on regulatory power is not uniform in all circumstances: public power is not always eroded by financial market integration to the same extent and degree, and it may evenbe offset by gains in some circumstances.  The capacity and autonomy of public actors varies with their market size, with policy choices about market  89  structure and extent of integration; and with the choice and effectiveness of the policy tools used to manage the externalities caused by integration.   These findings suggest that policy choices about integration ought to be theorized and endogenized in ways that capture the varying and dynamic impacts of integration on the power of public officials.  The chapter now moves to review the existing literature on integration – particularly but not exclusively financial market integration – to determine the extent to which political scientists have endogenized the impacts of integration on public power and autonomy in their models of public decision-making, and indeed the extent to which they have considered public officials’ autonomy preferences at all.  Assessing explanations for financial market integration The chapter now moves to assess the degree to which the existing literature takes account of the issues raised in the previous discussion on regulatory power.  It examines the treatment of cross-border market integration in the existing literature, particularly the mechanisms through which public authorities are theorized to enable or impede the international integration of market flows.   It shows that, with some important exceptions, the phenomenon of cross-border integration is not generally explained in a way that takes account of the dilemmas that public authorities face when confronting integration proposals – not least the potential impacts of integration on their autonomous capacity to govern their domestic markets as they see fit.   These dominant approaches are certainly empirically grounded in many instances, i.e., where lobbying, power relations, or neo-classical ideology explains the genesis of a cross-border market.   However, in other markets and policy areas, and particularly in the discrete decision-points where integration is an all-or-nothing proposal – including the exchange issue area at the core of  90  this dissertation – public decision making may, in fact, be driven by regulators’ sui generis considerations about power, autonomy, and the realization of domestic policy goals.   This argues clearly for a theoretical approach that goes beyond existing treatments of public policymaking vis-à-vis market integration, treatments that emphasize the lobbying power of firms, the effects of institutions on the aggregation of preferences, the opportunity costs of autarky, or the normative power of ideas, rather than the interests and preferences of market authorities who want to do their jobs well.   The chapter concludes with a review of studies that consider the linkages between public officials’ policymaking efforts and the private initiatives undertaken by multinational corporations, finding important inferences in that literature that point to the need for a tighter theoretical link between firms’ commercial undertakings and the regulatory response to these commercial activities.  These discussions set up the theory of regulator dependence proposed in the subsequent chapter, a theory that takes the independent policy concerns and policy preferences of state actors vis-à-vis integration seriously.   Explanations for the international integration of markets tend to be either systemic or domestic in nature – that is, the mechanisms driving policymakers’ integration decisions emanate from either the global system or from within the domestic political system.  As is demonstrated in this analysis, only very few perspectives on integration consider statist or public sector variables as causally independent.  Public responses to the impacts of integration on national policy autonomy and the realization of domestic policy goals – i.e., considerations made by domestic authorities about their power in an integrated environment – are not analyzed causal factors shaping the degree of integration that is allowed by policymakers.    91  A recent study drives home the value of considering these ex ante dilemmas.  Epstein (2014b) studies the interaction between firm-level business incentives and international public policy outcomes.  Her puzzle is, why didn’t western European banks flee central and eastern Europe during the Eurozone crisis, and repatriate their capital from their host markets to their home markets?  Previous crises (in Argentina and Turkey) have seen exactly this behaviour by foreign banks.  As she puts it, ‘European bailouts were nationally oriented’ and so there was a concomitant expectation that the crisis and response would result in a repatriation of capital to the banks’ home markets.  National regulators and even the European Commission contributed to this pressure to repatriate capital by ring-fencing economies from one another through nationally-delivered bailouts and pushing hard for domestically-focused liquidity and lending activities on the part of the banks.   The Vienna Initiative – a multilateral, public-private condominium brokered by European supervisory institutions – is generally credited with preventing the ‘cut and run’ outcome by coordinating a ‘soft landing’ in the central and eastern European banking sector.  Epstein argues instead that the banks stayed put because of the business model they had adopted, which was a ‘second home market’ subsidiary-based model rather than a foreign branch model.  She calls this effect the ‘stabilizing role of subsidiaries’, which ensured that the banks had strong business incentives not to abandon their secondary markets of operation.  In fact, the Vienna Initiative was epiphenomenal, and was used as a signal by the banks – i.e., to publicly communicate their interest in remaining in the Eastern European economies, and so to signal that commitment to investors and to regulators (from whom they could extract subsequent concessions once their commitment was detailed).    In this case study, public sector ‘power’ over the banks is entirely illusory, and the stable outcomes that regulators sought were achieved purely by a coincident overlap of firm incentives  92  and publicly desired outcomes.  Such an outcome speaks, clearly, to the importance of public decision making regarding the structure of firms and their operations (cf. Newman and Posner, 2011), because that structure has such clear implications for the subsequent execution of policy goals and the capacity of domestic authorities to shape the private undertakings that determine whether those policy goals are met.   The case that Epstein analyses begs the question: given their potentially negative effects on subsequent public efforts to regulate them, and the variety of domestic policy goals that they are implicated in contributed to, why are cross-national financial institutions allowed to develop in the first place (cf. Goyer and Valdivielso, 2014; Epstein, 2014a)?  What forces and mechanisms drive the emergence of cross-border financial markets and firms? The purpose of this discussion is not to disprove or disavow the findings of these many well-established accounts of the politics driving integration (or protectionism) in global finance.  The chapter proposes the straightforward analytical point that, with very few exceptions, the potential impacts of global financial market integration on public power are not also considered to be the causes of specific policy outcomes with regards to that integration.  Where regulators sui generis preferences are salient – as in the empirical chapters below – these existing studies are unable to provide explanatory guidance.    Systemic explanations for public actors’ choices As was discussed above, international capital mobility is often presented as a constraint on the policy choices that are open to domestic policymakers.  Indeed, the mobility of capital has been modelled as a structural component of the international system, similar causally to the role of anarchy in neorealist IR theory (Andrews 1994, Webb 1995).  The impacts of domestic policy  93  decisions and the opportunity costs of autarky are given by this structure.   Scholars working from a Marxist-materialist ontology have also been inclined to see mobile capital as a coercive structure, one that generates hegemonic pressures to adapt and converge (Gill and Law, 1989).   Several well-known studies have analysed the role of powerful states in generating the pressures for integration.  In particular, scholarly work in the realist tradition in IPE points to statist reasons for the emergence of an integrated international economic system.  Where a hegemon has an (exogenous) interest in global openness, it is able to build that regime and enforce it – short of gunboat diplomacy – through its influence on the preferences of others states, as discussed in the previous chapter.  This is because the hegemon’s market power allows it to have an impact on global prices, wherein the opportunity costs of remaining outside the regime become intolerable for smaller states (Hirschman, 1945; Krasner, 1976; Lake and James, 1989).  While there is debate about whether the hegemonic power may use its influence over global outcomes to promote an integrated or closed system (Gowa and Mansfield, 1993), the implication is clear – one state (or a small group of states) leads, and the preferences of others regarding their integration into the global economy follow a subsequent economic logic under which it is less costly for foreign market authorities to join that system than to pursue autarky.   In the financial markets, Heilleiner’s (1994) seminal explanation for the emergence of a post-Bretton Woods regime marked by mobile capital is similar in that it positions states, and particularly powerful states as the drivers of global financial integration, and also posits an opportunity cost logic behind most states’ decision to integrate.  The US, as a hegemon, led the push for capital mobility, but the UK, even though on a downward trajectory, and Japan, an ascendant hegemonic actor, also propelled action on liberalization in order to consolidate their markets’ leading positions as financial centres.    94  Helleiner proposes a cost-based explanation for the subsequent bandwagoning seen in global financial liberalization and integration.   Powerful states ushered in the liberalization process by encouraging the formation of the Euromarket offshore in the 1960s and 1970s (cf. Goodman and Pauly, 1993), which changed the material conditions under which domestic policymakers made decisions going forward.   A regulatory competition effect then took hold, due to the particular (and suboptimal) collective action dynamics in finance that made liberalization increasingly-rational for all states to pursue, due to the rising opportunity costs of remaining outside the regime.  Unlike trade, actors’ utility functions are not interdependent in capital markets – only one actor need liberalize its economy in order to consume the benefits of increased transactions (in this case, transactions in the growing offshore private equity markets), benefits that take the form of increased FDI, capital assets, and thus growth.  Indeed, there is an argument to be made that a sole or early mover on liberalization enjoys a significant advantage, as limitations on FDI mobility increase the amount of FDI into those few liberal economies.  This is Heilleiner’s point when he argues that the collective action problems are mirror images of each other in trade and finance – for trade, only one state need defect for liberalization to fail, but in finance the collective action dilemma is not in the pursuit of liberalization but in avoiding liberalization, i.e., preventing any one actor from reaping the rewards of defecting and liberalization.  Once one actor has liberalized, there are clearly incentives for other actors to liberalize and keep up (cf. Elkins et al., 2006 – whereby a first mover on a BIT changes the calculus for everyone else).   Through this realist and statist lens, echoed by Krazner (1977) and Drezner (2007), the power and preferences of some key state actors are taken into account and identified as having an initial causal role in shaping the degree of market integration in a particular product market or  95  sector.  However, this approach does fully allow for an independent role for state policymakers in making integration decisions.  First, the capacity for autonomous influence is imbalanced across the international system and is a privilege exercised by only a few policymakers.  Indeed, once capital markets are liberalized by some, the opportunity costs of staying outside the system are too great to avoid – hardly presenting subsequent policymakers with an autonomous, up-down decision-point (Haggard and Maxfield, 1996).  In this way the causal arrow emanates more from the power dynamics contained within the international system of states rather than any state policymakers’ independent preferences (Andrews, 1994).  Second, the source of the powerful-state preferences is underdetermined and frequently exogenous.  In Helleiner’s (1994) account private sector transactions (such as the Eurodollar markets) play a significant role in influencing and then structuring public decision-making and regulatory choices.  Krasner makes this underlying societal and interest group explanation clear, as he notes that the ‘external power’ of the US state only explains the systemic application of its power, not the domestic sources of the policy choices it makes –which are explained by domestic state ‘weakness’ in the face of organized social groups (Krasner, 1977).      Furthermore, Helleiner notes that while the process of capital liberalization took place through diplomatic channels and the application of coercive power, it also took place through the top-down and conditional policies disseminated by international organizations like the IMF and World Bank – another systemic pressure on the autonomous decision making of state actors.  The independent power of the international financial institutions in advocating for, tying their choice of development or funding projects to, and then locking in regulations and rules that encourage global integration is well established (Nooruddin and Simmons, 2006; Goldstein et al., 2007; Stone, 2008), as is the ability of those supranational power centres to become divorced  96  from the interests of states on a strict principal-agent basis (Barnett and Finnemore, 1999).  Furthermore, the relationship between large global producers of financial services and the IFIs has also been established, leading to a complex picture of the public and private sources of ‘conditionality’ clauses in international financial policymaking that have historically increased the pressure to liberalize rules around capital and investment – a picture that accords both international organizations and private supranational interests a considerable role in determining state policymaking outputs.   Many scholars, including Helleiner (1994) and Chwieroth and Sinclair (2013), also note the important constitutive effect of ideas on policymakers, particularly an emerging neoliberal consensus that emerged in the wake of the 1970s oil crisis, the insolvency and unproductivity of the European welfare states, and the resultant search for new ideas about how structural economic policy challenges ought to be navigated (McNamara, 1998; Blyth, 2002; Abdelal, 2007; Chwieroth and Sinclair, 2013).  Echoing Haas, Helleiner argues that the emergence of an epistemic community of central bankers and economists in international organizations were able to deploy neo-classical economic ideas to help coordinate action and encourage the adoption of a neoliberal policy template across states with diverse interests (cf. Ruggie, 1982).  The emergence of this epistemic community is demonstrated to be causally significant by its relative absence in the trading sphere, leading to different liberalization results in trade and finance.     More generally, the power of international organizations and the causal significance of ideas circulating through transnational epistemic communities are both important sources of pressure upon domestic decision-makers, and point to the constraints that those policymakers operate under.  However, it is precisely these and the other systemic forces noted here – including the coercive preferences of leading states, the structural effects of capital mobility, and  97  the efforts of global actors with substantial material and normative resources – that argue for an approach to integration that takes stock of how domestic policymakers attempt to shore up their autonomy and capacity to resist external pressures.  These transnational or systemic constraints on domestic policymaking autonomy are real and they augur poorly for state actors’ capacity to avoid integration – but where those domestic actors have an interest in avoiding integration and, more importantly, prove that they are able to prevent it, these systemic explanations are clearly not up to the task of either analysing or explaining public decision-making regarding integration, which ought to be uni-directional (towards integration) except where large states and the ideas and international organizations that support them push against it.    Domestic explanations for public actors’ choices On top of these systemic explanations, there are a host of mechanisms within the domestic system that explain why political and regulatory authorities may support greater or lesser degrees of financial market integration.  As is the case with the systemic explanations just discussed, these domestic explanations generally fail to position the independent preferences of public authorities in a causal role, except inasmuch as their power is theorized generally to be far lesser than that of private financial interests (i.e., due to capture).    Societal interests. International integration is often a function of societal preferences for some degree of openness.  Integration outcomes have been modelled in the Open Economy Politics (OEP) approach in International Political Economy (IPE), particularly through a preference aggregation process that follows a linear sequence: domestic interest groups have preferences, organize more or less effectively to press their agenda, and use the avenues afforded by institutional designs to do so (see the next section) (Lake, 2009).  Indeed, the conventional  98  approach in OEP is analytically similar to that in Liberal International Relations theory.  Firm preferences are largely derived from the position of the firm in both the domestic and global economies (Frieden, 1991; Moravscik, 1997), and the political preferences and coalitions that firms pursue will be endogenous to policies that determine the mobility of factors and the prices of inputs – capital and labour – into the productive process (Hiscox, 2001).  In this perspective firm preferences over policy outputs, such as the monetary regime or trade negotiations, are a function of the relative scarcity of its productive inputs, its vulnerability to adjustment costs or external shocks, and/or its status quo productivity and competitiveness.  The extent to which firms are able to organize and jointly influence public policy is determined by several factors including their geographic concentration, particularly in electoral districts, their degree of existing coordination, and the distribution of costs that will result from particular policy decisions– where those costs will be borne by a concentrated constituency they will have an organization advantage over more disparate parties positioned to benefit from the policy change (Olson, 1965).   Once markets have been integrated to some degree – and the costs of transacting on a cross border basis have “exogenously eased” – then the winners and losers of that existing level of integration are likely to establish policy positions and advocate for the subsequent deepening or lessening of market openness.  IPE and CPE scholars have thus observed a feedback loop between the deregulation of capital flows and the evolving preferences of financial service firms, similar to a "second image reversed" causal arrow (Gourevitch, 1978; Milner, 1988; Rogowski, 1989; Frieden, 1991; Frieden and Rogowski, 1996; Keohane and Milner, 1996) – and some scholars have criticized the OEP approach for failing to account for this endogeneity of domestic interests under existing levels of economic integration (Lake, 2009; Oatley, 2011).  In this  99  dynamic an integrated global system changes the constellation of interests at the domestic level, and empowers those ‘winning’ firms who are internationally active and positioned to profit from further internationalization, i.e., groups likely to prefer ever further integration and an acceleration of the opening process (Goodman and Pauly, 1993).  Indeed, empirically, as the deregulation of financial transactions and the internationalization of capital markets has increased, the interests and incentives of financial service firms has changed in kind.   In many cases international market actors with interests in deeper integration form networks, trade associations, and other avenues through which they apply pressure on domestic policymakers on multiple fronts (Farrell and Newman, 2014a).   Mugge (2006, 2009) thus argues that changing preferences on the part of major European financial service firms are a driving force giving momentum to ever-deeper European capital market integration.  Intra-European interest group cleavages were historically national, and incumbent domestic firms sought protection from foreign competitors through their national governments, who thus stymied deep integration under the partially-successful Investment Services Directive.  As piecemeal steps towards integration proceeded through the 2000s, however, and many large firms moved into the growing European market space, this cleavage – and the inter-state protectionist politics it had given rise to – changed.  State-state cleavages gave way to competition between firms on the basis of their business models, with, for example, large cross-border German banks opposing the protectionist impulses of small German banks but agreeing with similarly-structured large cross-border French banks.   This coalition of like-minded European financial interests pushed the benefits of competition and access and managed to convince some of their smaller counterparts, as well as officials in small capital markets like Frankfurt and Paris who sought to siphon business activity away from the City of London.    100  A similar logic can be observed in the City of London, which lobbies both privately through associations and publicly through the City Corporation to advocate for the interests of the UK financial sector, but does so frequently on behalf of large, globally-operating financial service firms rather than British banks in particular (Talani, 2011; Morgan, 2012).  The British Bankers Association similarly advocates for the interests of global wholesale banking and securities dealing firms with UK operations.  Finally, Woll notes that many business leaders have generated momentum for liberalization out of a fear of the opportunity costs of inaction and non-participation in globalization (Woll, 2008) – acting on the belief in liberalization rather than a clear bottom-line driven logic of accumulation.  The transformation of many business elites into transnational market liberalizers seeking to reduce transaction costs, rather than protectionists seeking to avoid adjustment costs, is an important structural implication of some initial set of deregulatory and/or liberalizing policy moves, with a clear sequential logic (Fioretos, 2001).   As was also noted above, this discussion further illustrates how the emergence of an integrated global economy creates and reinforces its own private financial service constituency with an interest in maintaining and even deepening integration –which can certainly make it harder for public officials to make independent decisions about the appropriate scale, depth, and pace of integration.   A related social interest based explanation for the public sector choice to integrate financial markets is the phenomenon of regulatory capture in global finance (Stigler, 1971).    The outputs of public regulatory bodies may systematically favour large producers of financial services, for a number of reasons – including informational advantages that privilege practitioners, regulatory complexity that favours insiders, the effective organization of producers and their lobbying activities relative to diffuse constituencies, and even normative/ideational  101  framing effects (Rosenbluth and Schaap, 2003; Hardy, 2006; Woll 2014).  This relationship is not limited to the domestic space, as Tsingou (2003) elaborates how private interests developed their authority and legitimacy using these asymmetrical resources during discussions about the regulation of OTC derivatives in the Group of 30.  Hertig's (2012) analysis of the European regulatory response to the financial crisis notes that even where regulators have an opening and opportunity to reregulate in the public interest, the uncertainty and imperfect information that clouds the policymaking environment provides opportunities for lobbyists and industry specialists to define the terms of the debate.  In particular, uncertainty exists about a) the technical operation of the marketplace, b) the alternatives to the status quo that are feasible and available, and c) the impacts of the various alternatives.  This context enables private interests to define the tradeoffs at stake in a policy decision in a manner that increases their chances of gaining rents in the subsequent system (see also Pagliari and Young, 2014).   Again, all of these dynamics are underpinned by the well-documented organizational and collective action advantages that producers have over consumers (Olson, 1965; Stigler, 1971).   These perspectives points to business power as a societal determinant of integration decisions.  It is worth noting an alternative societal basis of pressure on policymakers in the small “economic patriotism” literature, which has identified the ways in which global integration can make it problematic for domestic authorities to pursue various domestic and democratic political imperatives – for instance around employment, social justice, and public health (Clift and Woll, 2012).  The economic patriotism literature thus explains the ex post management by state actors of the tensions arising from a democratic domestic space co-existing with integrated global economy, where political authority over markets is largely retained within the domestic confines of the territorial state, and cross border integration is incremental and partial.  The  102  approach is helpful because it is largely agnostic about the precise source of the pressures upon policymakers to pursue their domestic distributional goals – although those pressures are largely presumed to emanate from the institutions of democratic governance and public sentiments about integration.  The broad question these scholars ask is, given some level of integration, how are subsequent decisions about further integration managed, especially in the context of domestic distributional pressures?  The answers show that where there are a variety of domestic policy challenges as a result of partial integration, including lost jobs, lost influence, and lost revenues, there are also a variety of responses to those pressures.  However, with the exception of Callaghan and Lagneau-Ymonet (2012, addressed below), the explanations proposed in economic patriotism approach do not offer clear predictions about the direction and scale of the public backlash to global integration and thus the likely trajectory of subsequent integration choices – they simply demonstrate that distributional demands emanating within the domestic political space may, under certain circumstances, be prioritized by officials over the various pressures of international economic integration.   Clift and Woll (2012) outline a series of mechanisms that policymakers may use to be “economic patriots” but do not broadly theorize when or under what conditions those patriotic, domestically-oriented actions are more or less likely.  As an analytical starting point this is promising and indeed motivates this research project– and this thesis fits neatly within the ‘economic patriotism’ category by tracing examples of domestic management of global economic flows for domestic purposes.  The economic nationalism/patriotism approach provides a bundle of analytical frameworks and explanations that explain micro-level approaches to regulation and public policymaking in particular cases.   However, to adequately explain comparative policymaking episodes regarding integration, a novel theory-building effort is  103  necessary, as the economic nationalist approaches do not offer enough by way of precise predictions about the content of the nationalist response to integration, or about how economic nationalism influences integration decisions at the front end of the process. Indeed, all of the approaches noted here are only able to explain the degree of international economic integration where a) there are clear social preferences over that integration, b) those social actors can be demonstrated to have access and power over decision-makers, and c) outcomes align with their preferences.   Where the preferences of groups are unclear or there is reason to infer that their influence over the decision-making process is minimal, it is also reasonable to infer that autonomous decision-making by public officials – i.e., on their own account and following their own preferences – may be a significant causal factor that determines outcomes.   Domestic institutions.  As just noted, the preferences of major domestic interest groups translate into policy outputs more efficiently when there is an institutional configuration in place that enables those groups to gain access to and exert leverage over domestic policymakers.  For instance, institutional factors such as the nature of the electoral system (Mansfield and Busch, 1995; Grossman and Helpman, 2004) and the number of veto players or access points to public actors (Tsebelis, 2002; Mansfield et al., 2007; Ehrlich, 2011) determine whether public actors are open to private influence – and hence the extent to which private preferences regarding the integration or protection of a sector or segment of producers are reflected in policy decisions.  Institutional design may significantly determine the policies that national officials deem it rational to pursue, and can substantially undercut the degree to which those officials choose and then pursue policies with the “national interest” in mind rather than the preferences of more narrow rent-seeking interests (Krasner, 1977; Katzenstein, 1978).  Studies making use of this  104  institutional logic describe greater or lesser degrees of regulatory insulation or openness, and firm preferences are often treated as comparative statics – i.e., as inputs into the policy process with greater or lesser degrees of influence over outcomes (although see Krasner, 1977; Henisz and Mansfield 2006).    The institutional basis of production and investment patterns highlighted in the Varieties of Capitalism (VOC) literature foregrounds an important, additional point: employers’ preferences for economic integration are not simply derived from the relative and changing prices of the inputs into their production processes and then aggregated through institutions, but are also derived from the broader institutional framework within which employers are embedded (Hall and Soskice, 2001).  Where integration poses a threat to the sunk costs that employers have invested in a given business strategy – as well as complementary institutions such as wage bargaining or vocational training institutions – then those producers are likely to seek outcomes that protect their investments, including outcomes short of the economic integration of their sectors (Berger and Dore, 1996; Culpepper, 2005; Fioretos, 2011).   The significance of these institutional approaches is that they outline how and why societal preferences are aggregated into particular outcomes and, in the case of the VOC, they are also able to precisely identify the basis for those societal preferences – i.e., they are derived from more than simply a firm’s ledger or balance sheet.  In identifying these important causal variables, institutional approaches simultaneously describe greater or lesser degrees of autonomy for state actors in making integration decisions.  In OEP, where firm influence is high it is likely that, as a corollary, public officials’ autonomy over integration decisions is compromised.  In the VOC-framed approach, it is not always clear whether state actors and institutions have an  105  independent causal role at all (with exceptions, for instance – Lutz, 2011; Fioretos, 2011; Culpepper and Reinke, 2014).    It is certainly the case that the preferences of large producer groups frequently determine how financial markets are regulated and the degree to which those markets are integrated on a cross-border basis.  In such circumstances public sector decision-making regarding integration is heavily circumscribed, either via societal pressure that is mediated through institutions, or by the stickiness of economic institutions due to private incentives to protect existing comparative advantages and resist change (Thelen and Mahoney, 2009).   Institutions can empower societal interests at the expense of state policymakers’ autonomy and their capacity to be policy-seekers – that is, policymakers’ capacity to make choices and undertake reforms without being forced to internalize the distributed costs of their policy efforts.   But it is worth nothing that policymakers may also be empowered to make autonomous decisions by a given institutional environment, and in that way may be empowered to be independent policy-seekers and thus pursue their conception of the “best” public policy choice demanded by a given policy challenge.  On a broad level, policymakers will be empowered vis-à-vis societal interests if they are isolated from them, that is if they operate at an arms-length from officials with office-seeking incentives that make them more readily open to the influence of interest groups – i.e., the agency model of policymaking.  Certain electoral or legislative arrangements may also be more given to this kind of autonomous policymaking.   Moreover, certain institutional configurations have been shown to increase policymakers’ ability to shape private undertakings and steer private activity towards broader social goals, either by giving them levers over the allocation of credit or resources to coordinate a broad swath  106  of private activity towards desired productive investment and activity (Johnson, 1982; Hall, 1986; Evans, 1995; Hall and Soskice, 2001).   Furthermore, the institutional environment within which policies governing the market are made may itself be variable, even within a single jurisdiction at a single juncture.  An important recent contribution from Culpepper (2011) suggests that different “governance spaces” (each with its own institutional dynamics) will be activated and relevant depending on the salience of the issue at hand.  In some issue areas an interest group-vs.-interest group dynamic will play out in a partisan manner, with parties on the left and right trying to form winning coalitions from employer groups and voters; but other issue areas – particularly complex, technical, and low-salience issues such as many of the agenda items in financial market governance – will be decided within bureaucratic networks, wherein private groups may or may not have both access and persuasive arguments that counter the ideas and preferences already contained within the professional bureaucracy.  In such circumstances, decisions about financial market governance are certainly better understood if focus is cast upon the preferences and incentives of bureaucratic actors such as regulators and senior officials, with those actors being analyzed as independent and empowered interest groups in their own right.   That is an analytical strategy that has only very infrequently been deployed in scholarship that focuses on the integration of market economies, but Culpepper’s framework pushes us to consider where and when such a strategy may be appropriate.     Explanations for takeover and corporate governance outcomes A final set of explanations for the extent of integration in the financial service sector can be found in the literature on the political economy of corporate takeovers and the market for  107  corporate control – explanations that focus at a much more micro-level on the frameworks that govern firm-level integration.    It is evident that market integration is often a function of market rules, and so firm-level mergers and acquisitions that lead to multinational firms are by no means the sole determinants of the overall level of integration across markets.  A multinational corporation may follow a multiple home markets model, or a branch-plant model that does not meaningfully result in an internationalization of production, transacting, or management; conversely, a multinational corporation may implement measures to streamline its production, service-delivery, and backroom support structures on a cross-border basis, in ways that result in cross-border transacting by both the firm and its customers/consumers.   Furthermore, where existing national rules preclude such cross-border synergies and activities, firms with operations in multiple environments are likely candidates to lobby for reduced transaction costs through the increased harmonization of rules and the liberalization of flows across borders (cf. Frieden, 1991; Mugge, 2006).  As a result, it is worth looking to the rules that govern takeovers and mergers at the firm level, because those rules can clearly have an impact on the emergence of multinational firms, and thus the degree to which those multinational firms and the multiple markets that they operate in are subsequently integrated.   There is a small but well-developed literature in political science that looks at the provenance and impact of corporate governance rules, and the manner in which those rules vary across jurisdictions.  Corporate governance itself is a host of mechanisms, institutions, and processes that allocate property rights, decision-making powers, and procedural duties to the various stakeholders in a public corporation.  In general, corporate governance rules provide mechanisms for some empowered stakeholders to hold corporate managers to account – whether  108  those stakeholders are employees, diffuse shareholders, large blockholders, public officials, or some combination thereof.   A major accountability mechanism (particularly in liberal market systems) is the takeover, including the hostile takeover, which is theorized to solve moral hazard and principal-agent problems within the business firm (Callaghan and Hopner, 2005).  This is a means by which ineffective and/or inefficient corporate management is held to account through the loss of independence and, as is likely, the significant loss of prestige and remuneration as it is replaced by a more efficient and effective management team able to generate greater value for stakeholders (whether that ‘value’ is defined as dividends or some other payout).  It is notable in this context that hostile takeovers are not allowed and/or deployed to the same degree across jurisdictions, which reflects the preferences of the different stakeholders that are empowered across different capitalist systems (Goyer, 2011).    The political economy of corporate governance has thus focused on how different allocations of property rights and privileges with regards to the public firm are the result of – and therefore empower – the political activities of different coalitions of social groups, including major financial service firms such as asset managers, securities dealers and investment firms; as well as more diffuse groups such as pension-holders and employees/labour (with frequent overlaps between those groups) (Roe, 2003; Gourevitch and Shinn, 2005; Cioffi, 2006, 2010).   These preferences for different systems of corporate governance are refracted through political institutions, including electoral systems and political parties, which lead to and empower certain coalitions and their preferences over others, and give rise to distinct systems of rules and laws governing public firms.  Of course, these rules and laws are also embedded in historical and cultural factors such as national legal systems, the degree of state involvement in the economy, the development of institutional complementarities, and the expectations of various stakeholders  109  regarding the appropriate oversight of private business activity; crises and scandals of corporate governance may also play a significant, galvanizing role in driving coalition-building efforts (Cioffi, 2010).   In sum, these dominant approaches to corporate governance rules across jurisdictions are logically and analytically similar to the OEP model, in which social preferences are mediated through institutions (including but not limited to political institutions) to generate some set of distributional outcomes that are crystallized in corporate governance rules.   A second approach to explaining takeover rules can be found within, or as a subset of the VOC literature, in which corporate governance rules are part of larger system of institutional complementarities that result in “insider” forms of stakeholder governance in some economies and “outsider” forms of largely diffuse shareholder governance in others (Dore, 2000).   Those rules are designed to protect existing comparative advantages, for instance by protecting incumbent managers in order to promote long-term research and growth strategies in coordinated systems, or exposing those managers to the threat of hostile takeover in order to promote innovation and rapid returns in liberal systems (Hall and Soskice, 2001).  Scholars influenced by the VOC note that takeover rules are supported by coalitions of employers, private stakeholders, and labour groups with sunk costs in existing institutional designs, but also note that large employers in coordinated economies may have incentives to alter or even loosen restrictions on hostile takeovers as they become more globally active.   This shift in production models may render employers more inclined to their swallow sunk costs in existing institutions if it means greater access to foreign capital and investment (Culpepper, 2005).   In addition, in “insider” or coordinated corporate governance systems, the various stakeholders of large corporate entities (their business partners, large shareholders, and employees) have been theorized to be opposed to corporate takeovers by foreigners because  110  those takeovers undo existing residual network-based mechanisms of coordination – and politicians are theorized to be opposed to foreign takeovers as a result of their incentives to be responsive to those domestic shareholders (Hellwig, 2000).  As the incentives of stakeholders to protect those networks declines (as a result of previous rounds of integration, for instance), however, the inevitable political backlash to foreign corporate takeovers declines as well, suggesting a secular decline in the stakeholder demand for protection and the political response to it (Callaghan, 2014).  In these studies, it is an institutional equilibrium that determines the rationality of certain rules governing takeovers and the incentives of stakeholders to invest in activities that maintain those rules; while societal preferences for institutional change may give rise to altered or wholly-new corporate governance rules, any independent role for state actors remains very much circumscribed by societal preferences.    Indeed, Culpepper has recently argued that takeover rules are almost entirely a function of the access and lobbying power of private interests engaged in “quiet politics” and thus capturing the rulemaking process (2011). Finally, in a study beyond political science, Dinc and Erel (2013) find that the most efficient explanations for displays of “economic nationalism” in cross-border takeovers (which includes interference as well as blocking takeovers at the expense of foreign counterparties) can be found in “societal preferences for natives against foreigners”, measured by the vote-share for far right-wing political parties and by survey evidence.    These nationalist and nativist ideological preferences aggregate from the societal to the policy level and inform the political decision to act against foreign takeovers in the corporate sector.  In Dinc and Erel, as in the approaches elaborated above, the state’s approach to takeovers is largely determined by the constellation of societal preferences regarding those rules and the outcomes they shape.      111  Explanations based on the independent preferences of public actors There are a small number of perspectives that examine the emergence of cross-border product markets and multinational corporations not as a result of societal or systemic pressures acting on policymakers, but as a result of independent public decision-making made within the context of the goals that policymakers are trying to achieve.   The following approaches are important in that they explain integration as an outcome that is shaped by relatively insulated policymakers, who either pursue it or block it for their own discrete policy-seeking reasons (i.e., substantially free from domestic or international pressures).  While these explanations are ultimately unable to explain exchange merger outcomes, they are important to flag as broadly similar to the analytical approach adopted in this dissertation, in that they see the impacts of integration on state authorities’ broader policymaking capacity as a significant explanation for the level of integration that those authorities prefer or pursue.  Many of these inferences underpin the theory of regulator dependence that follows.  There are several studies that emphasize the state’s and public actors’ causal role in decision-making relating to corporate takeovers in particular.   Tiberghien (2007) looks to the state to explain change.   He analyses how coordinated market economies respond to a common external incentive: capital-rich fund managers and institutional investors that offer the promise of investment in return for transparency-oriented reforms to corporate governance and corporate structure rules, and related areas.   Unlike the VOC approaches discussed above, which emphasize institutional equilibria reinforced by firms’ investment patterns, Tiberghien finds a critically important causal role for senior policy elites, or “entrepreneurs”, who navigate institutions and, where state institutions afford them the needed autonomy, attempt to build policy coalitions around these processes of regulatory and  112  institutional change: “unlike the VOC approach, [the book] argues that political and state institutions play a large and active role” (2007, xiv).   Where state actors share a preference for policy changes that bring capital and investment into the domestic economy, although they are differently enabled or constrained by statist institutions regarding the degree and content of the reforms they can pursue.   Conversely, Callaghan and Hopner (2005) look to the state to explain continuity.  They examine the distribution of votes on harmonized European takeover rules, and find that “due to different national starting points, the benefits and costs of a unified market for corporate control are distributed unevenly across EU member states.”  Member states vote in a manner befitting their “national starting point”.   As a result, national preferences regarding the Takeover Directive follow from the logic of a “clash of capitalisms” – that is, the votes show a conflict between coordinated and liberal capitalist models and demonstrate the incentives that each states’ authorities have to promote European rules that protect the sunk costs and comparative advantages of their domestic constituents.   Importantly, they find that this explanation trumps a partisan explanation based on class conflict, which predicts that the distributional implications inside the business firms of different corporate governance rules, “by securing benefits for shareholders at the expense of employees”, should explain outcomes.  This suggests that on takeover rules, Member State officials are voting to protect the value of (i.e., the public goods generated by) their domestic institutions, rather than voting in order to protect any particular social group from adjustment costs.   Goyer and Valdivielso del Real (2014) assess how takeover rules that differ across two market economies, France and Germany, can give rise to functionally equivalent outcomes, namely the very low level of foreign penetration of the French and German banking sectors.    113  They determine that institutions that are designed quite differently, including corporate governance provisions regarding the powers of boards and shareholders, can be deployed to similar ends by stakeholders determined to impede foreign takeovers of domestic financial institutions.  In the French case in particular, the authors identify the critical role of the state in driving concentration in the French banking sector, because it holds a veto over foreign takeovers in banking and insurance.   However, the state preference for a nationally-owned banking sector is not interrogated in this article, and it is assumed non-problematically in the article introducing the same volume on banking ownership (Esptein 2014a).  While is it not a surprising finding that Paris officials have interfered in the market for corporate control of the French banking sector, it is worth wondering why, then, they did not do the same regarding the Parisian stock exchange.   Their preferences are not explained On this, Callaghan and Lagneau-Ymonet (2012) look to the state to understand a single decision-point: the lack of official French interference in the foreign takeover of its stock exchange.  They find that the discursive resources of leading societal actors – namely, whether their “economically patriotic” claims to be motivated by the public or national interest are persuasive and deemed legitimate, and whether those claims can be mobilized to find “patriotic” alternatives – shaped the French government’s approach to the treatment of the NYSE takeover of Paris-based Euronext in 2006-2007.    In particular, those societal actors’ lack of discursive resources, plus the relative lack of electoral and public mobilization on the issue, meant that the French government and the markets regulator were free to pursue their preferred strategy, which was to promote the competitiveness of the Parisian market by taking a hands-off approach to (and even tacitly encouraging) the tie-up between New York and Paris.  Callaghan and Lagneau-Ymonet thus specify conditions under which policymakers will be more or less able to pursue an  114  independent set of preferences regarding a takeover of a key piece of financial market infrastructure.  However, the authors’ framework cannot explain why French policymakers were unconcerned about a merger where other authorities have stepped in to act.  Explaining independence and insulation are important, but a full causal explanation of any decision also demands an understanding of what the authorities do under those insulated circumstances, and why – i.e., why they want what they want.   Lastly, Thatcher (2014) has recently analysed the EU’s competition regime to draw out the ideological and policy objectives that drive the European Commission’s decision-making on cross-border mergers within Europe.  In doing so he looks carefully at the preferences of public officials regarding the liberalization and re-regulation of various product markets in Europe.  In this way, Thatcher’s study recalls previous work on service sector re-regulation across OECD states that takes seriously the independent and often ideologically-driven preferences of politicians and, regulatory officials in building competitive markets in the often-statist and often-monopolistic telecoms, transportation, and financial service sectors (Derthick and Quirk, 1985; Vogel, 1996; Thatcher, 1999).  In particular, Thatcher (2014) develops an explanation for merger outcomes that differentiates between firm-level integration that is consistent with broader EU policy objectives, and firm-level integration that works against those objectives and as a result is blocked on competition grounds.  His medium-n results indicate that the Commission does not simply pursue a pro-competition policy predicated on neo-classical economics and the pursuit of ideal-type market structures.  Rather, “the Commission pursues an ‘integrationist merger policy’ whereby it both applies competition criteria and also allows the development of larger European [firms] to enhance economic integration” (2014, p. 3).   This suggests that cross-border integration of European firms may often complement or reinforce the broader Single Market- 115  building activities that the Commission is also tasked with implementing, even if the competition directorate is meant to apply a purely technical and apolitical analysis in its merger review.  Firm-level integration can therefore augment the capacity of European officials to develop the Single Market for various products and services.  This finding is important and discussed again in the relevant case analysis, below.  But it is important to consider that the goals that the Commission is pursuing in its integration decision-making are by their very definition already “international” in nature, as the Commission is a supranational entity with a cross-border market-building mandate.  As Chapter 7 of this thesis demonstrates, it is necessary to consider the interaction between the supranational policy goals of the EU and the domestic policy goals of Member States, the latter of which may or may not align neatly with those of the Commission, and which must be considered in the context of the Commission’s independence to pursue its own policy objections (Putnam, 1988; Moravscik, 1997).  Only such an analysis can render a full explanation not just of process but also the sources of policymakers’ preferences during discrete exercises of EU competition authority.  Beyond the narrow realm of takeover and corporate governance rules, there are broader perspectives on financial market governance that consider the independent preferences of state officials in determining the extent to which markets and firms are internationally integrated.  Mercantilists and scholars of development and dependency have long noted the value of retaining national control over the financial sector (cf. Epstein, 2014a); some more contemporary arguments have noted, conversely, that national purposes might be actually well-served by international markets and firms.    For instance, at the same time that economic interdependence was being identified by leading scholars as a potential constraint and source of complexity for unilateral state action  116  (Keohane and Nye, 1977), others saw in the growth of global trade, multinational firms and cross-border production the potential for officials from powerful states to export their regime preferences abroad through that integrated system (cf. Hirschman, 1945; Nye, 1974; Krasner, 1976).  Gilpin (1975, 1976) in particular looked at the multinational US corporation as a potential ambassador and enabler of American preferences for a liberal regime governing global trade and production (cf. Nye, 1974, pp. 157-161).  This neo-mercantilist approach noted the potential synergies between the expansion of US market actors and the expanding reach of US policy preferences as, “generally, in the relationships between American business and government the activities of the corporate are seen by public officials to advance the larger security and economic interest of the nation” (Gilpin, 1976, p. 190).    It is notable that for Gilpin, the relationship between public and private American interests in the global economy is initially complementary but in no way monotonic: the positive impact of American foreign investment has the potential to decline over time and erode US comparative advantages, for a host of reasons.  One compelling reason is foreign national interests’ increasing influence over the private undertakings of American MNCs.  Gilpin’s approach therefore identifies circumstances where national goals are not met by the spread of multinational firms, and he predicts a highly-plausible long-term political reaction to those circumstances.  For instance, Gilpin writes, [As] American foreign investment is increasingly forced to serve the interests of other nation-states, one will witness a reassessment of American public and official attitudes about the MNC’s usefulness to the US.  As Americans become more concerned over high employment, inflation, industry, there will be increased pressures to restrict the outflow of American capital and technology.  More and more groups will join American organized  117  labor in challenging the thesis that what is good for Exxon and IBM is good for the country.  The issue of the multinational corporation will become increasingly politicized both domestically and internationally. (1976, p. 191) Gilpin usefully identifies a major reason why officials (particularly American officials) might be initially keen to encourage the growth of MNCs, but, importantly, he also follows earlier mercantilist scholars to make a clear case for the long-term retention of domestic control over financial services (Gerschenkron, 1962; cf. Krasner, 1985; Epstein, 2014a).  However, while at a high-level his insights are compatible with the approach here, the neo-mercantilist lens adopted by Gilpin and his mercantilist predecessors is both outdated and unable to predict a) the nature and content of the political backlash to an increasingly ‘politicized’ MNC, b) the impacts of that political backlash, and c) the way in which these negative long-term effects may influence ex ante decision-making about market integration.  Gilpin’s study and the broader mercantilist mindset provides a call-to-arms for policymakers to revisit their assumptions about the utility of the MNC model, rather than a theory of various ways in which the internationalization of firms and production is shaped by public authorities.  Abdelal (2007) explains the emergence of international capital mobility by reference to the independent policymaking preferences of “unlikely” state actors in Europe.  He does so by, first, questioning the American (and Wall St.) dominance in most mainstream accounts and, second, pointing to substantial European and particular French influence in the development of a liberal global regime for capital.   In Abdelal’s account, French policymakers chose financial market integration as a way to introduce innovation into the economy, free up credit and capital for households (cf. Seabrooke, 2006) and export inflationary pressures abroad – i.e., state actors pursued liberalization for domestic (French) reasons.  Abdelal gives French policymakers  118  considerable autonomy in developing their preference for capital liberalization as a ‘fix’ for several policy challenges in the domestic economy.   More recently, scholars have unpacked the concept of “economic nationalism” and have helpfully separated that term from its association with protectionism and autarky.  In particular, studies have pointed to the reasons why nationalists might be willing to support – or even aggressively pursue – the integration of their markets and market participants into the global economy.   This “liberal economic nationalism” in places such as Quebec and post-communist Europe can underpin the liberalization of domestic markets and drive their support for free trade (Helleiner, 2002; Helleiner and Pickel, 2005), i.e., where the integration of markets is believed to complement the purpose of building a distinct global role and strong material basis for the nations in question.   In this sense the broader public policy objectives of nation-building and even independence may be pursued via a liberalization and integration strategy.  The scope of this particular argument is quite narrow, however, and the more nationalistic elements of the integration decisions examined in this thesis are, as is shown below, epiphenomenal and emergent, and do not cause the outcomes that are observed (cf. Callaghan and Lagneau Ymonet, 2012).   Each of these accounts notes that public officials can have strong and independent preferences regarding the rules that shape corporate structure, corporate takeovers, and (more broadly) the extent of cross-border integration in the private sector; moreover, each of these accounts notes and that those independent public sector preferences can be causally significant.    As is demonstrated below, however, they are unable to predict the outcomes of mergers involving financial exchange firms.    119  The main difficulty is that the source of official preferences is either underdeveloped or insufficiently theorized to be applied in a comparative study.  State actors’ preferences are tied to an invariant external mandate or imperative such as market or nation building or competitive re-regulation (Helleiner, 2002; Helleiner and Pickel., 2005; Tiberghien, 2007; Thatcher, 2014), or simply to the particular policymaking context in which their autonomy and insulation is enjoyed (Gilpin, 1976; Abdelal, 2007; Callaghan and Lagneau-Ymonet, 2012).  Most of these approaches fail to provide the tools necessary for a comparative assessment of different state actors’ preferences regarding takeovers and firm-level integration.   The VOC-based perspective does offer a general theory of preferences that could be used for comparative study, whereby officials’ preferences are derived from the type of capitalism practiced in their home market (Callaghan and Hopner, 2005; Goyer and Valdivielso del Real, 2014) – but the VOC approach is simply not able to explain the outcomes of cross-border exchange mergers, as has been discussed.    Towards a theory of public preferences regarding multinational corporations If the public sector is indeed insulated regarding its capacity to formulate and act on preferences over international firms, then what are public actors likely to want regarding such firms?  This chapter concludes, here, with a final review of literature that begins to offer suggestions regarding how public officials view multinational corporations, detailing in particular the nature and sources of their preferences and concerns regarding the structure and undertakings of MNCs.  These inferences are then put to work in the next chapter, which develops the theory of regulator dependence in detail.    It is worth first looking to existing analyses of the public sector’s perspective on international firm activity. The relevant approaches to the multinational corporation (MNC) in  120  political economy tend to make use of one of two analytical strategies: either public sector variables are deployed as independent variables that explain firm-level outcomes; or MNCs’ activities are the explanatory variables that determine political outcomes.   Both approaches are significant here.  Although they do not explicitly theorize public preferences, they invoke the preferences that public actors are likely to develop regarding MNCs – preferences over how MNCs behave and how the benefits of MNCs’ international production are distributed.   The first type of study looks at the scope and activities of multinational firms as by-products of political variables such as regime type, political institutions, and public policies.  Dunning’s “eclectic paradigm” theorizes firm decision-making about internationalization based on “locational advantages” (1977, 1993) among other variables; more recently, Li and Resnik (2003) and Jensen (2006) have explained firms’ FDI decisions as a based on their preferences for certain types of political institutions – i.e., transparent and democratic systems with strong property rights – rather than the specific incentives generated by policy concessions (such as tax breaks or regulatory loosening).  Pauly et al. (1999) have demonstrated that far from converging on a standard set of organizational and strategic behaviours, multinational firms retain highly differentiated structures that strongly reflect the different financing, industrial, and political attributes of their home markets, which shows that different types of capitalist systems can affect the way that firms behave abroad as well as how they organize at home (cf. Berger and Dore, 1996; Hall and Soskice, 2001).  Woll (2008) argues that firms undertake their lobbying regarding international integration and their subsequent internationalization strategies in a deeply social environment, through their interactions with public actors such as regulators and trade negotiators.  Through these socialization processes, incumbent and monopolistic firms can learn  121  to have preferences for trade liberalization that might not appear rational if simply extrapolated from their material production profiles.   It is certainly the case that firms’ cross-border business activities are endogenous to regulation: their incentives to expand are not entirely reducible to the cost and opportunity structures generated by technology but are also informed by the costs and opportunity structures generated by existing market rules and political conditions (Mugge, 2006).  Many of these rules-induced reasons for exchange firms to merge were discussed in Chapter 2, and the cases under examination here cannot be understood without also understanding exchange firms’ incentive structures within the broader regulatory context in which they operate.   Given the impacts of institutions, policies, and regulations on firm-level activity, it is reasonable to infer that public officials will have systematic preferences regarding these political supply-side variables – that is, regulators and politicians care about the incentives the public rules are generating for firms.   These rules indeed provide important background conditions and populate the empirical details in the case studies that follow in this dissertation.   However, firms’ responses to political structures or policy choices are not the independent variable of interest in this dissertation; it is instead focused on the political ramifica