Economics

I dedicate this work to all my family, classmates, and friends who have helped me greatly achieve success in my research.

Acknowledgment
A great philosopher, Socrates, once emphasized the need for reflection as a continuous exercise. I say this here because it is truly after a profound reflection that I have managed to get in touch with the enormous number of people who have helped me in developing and completion of this project. I cannot forget the various inputs that I received from various people and the significant contribution of their input to the success of my dissertation.
I would like to extend my heartfelt gratitude, first, to my supervisor who constantly encouraged me to work harder and taste sweetness of academics. He also ensured that I have remained on track by offering professional guidelines constantly. His intellectual integrity increased my trust in him. Moreover, I extend my gratitude further to my friends who through their faith in me boosted my motivation and encouraged me to carry on. There are many more others, whom because of space I cannot afford to mention, but I do keep them in mind, and I genuinely appreciate their support that has made this project a great success.

CHAPTER 1 INTRODUCTION
Introduction
Russian public scenario is that of open corruption that leave a question of whether corruption is a virtue that is jealously guarded, or vice that ought to be condemned for its harmful effect to the Russian society. To illustrate how situation on the ground regarding matter of corruption is, here is a scenario encountered in Moscow. For example, in a scenario where an individual is stopped by a traffic police officer and threatened with a large fine that do not match the offense purported by a officer to threaten the individual, the individual is being streamlined to choose easy way out. In this case, the individual keep waiting for the right moment to negotiate the price of a bribe to avoid heavy charges that are likely to be imposed on him or her.

In another situation that is dominant, when persons get into a government office hopping that they will have assistance they deserve, even after going through the right procedures, the person is made to wait on the queue with no likelihood of assistant needed. This are some of the tactics that are being used by the official involved to propagate corruption practices in the sense that the person is made to realize that if he or she had bribed somebody, he or she couldnt be waiting all that long. This way, corruption is casted to be the might ad rightful way of doing things. Belikov (2003) states that because human nature is one that tend to go for easy and less strenuous options, then, propagators of corruption popularizes it as the way of attaining what one want without much sweat, with little or no regard to side effects.

These two scenarios represent a day-in-day-out reality in various offices both in the government and in the corporate world of Russia. The scenarios imply that corruption has become part of people so much such that both parties involved tend to promote it. As much as a criminal is hopping that the arresting police officer through bribery means will set him or her free, so is the same case with the police officer who wishes that he or she got a criminal from whom to extract extra cash.
From the above analogies, it is evident that corruption does not originate from a single party, but rather a two way causal of event from both the giver of a bribe and the receiver. Thus, to fight corruption there is need to change attitudes to understand the right way of doing things without having to resort to corruption as well as the cost of corruption. It is a point of worth to realize that corruption penetrates everywhere starting with institutions where students pay for better grades, and to government offices where for one to be employed despite having adequate qualification heshe has to bribe to see the interviewing panel. Unfortunately, in the corporate world corruption is cited as a major obstacle even in the allocation of shares, managerial positions, or to obtain a certain tender. This is made worse with government interference in corporate affairs (Magdi and Naderah, 2000). This is in the sense that once corruption hamper corporate activities, while on the other had the government interferes still and there are high chances that those government officials are also corrupt this becomes double-edged sword tearing into pieces corporate governance. 

Therefore, it is in the light of the above examples that this paper deem it necessary to examine and evaluate how corruption and government interference affects Russia corporate governance. In this regard, the paper shall evaluate and show how corruption and governmental interferences relates to efficiency in corporate governance of Russia. Consequently, the paper shall seek to show how corruption and government interference has affected Russia corporate governance stability and progress.

The problem of corruption has been considered enormous as indicated by the Transparency International Corruption Perception Index that ranks Russia at position 146 out of 180 countries (Transparency International, 2009). The Russian President, Dmitry Medvedev has repeatedly reiterated that corruption is bad as it threatens Russias very stability (Feifer, 2010). Therefore, when corruption inter-marries or intertwine with government interferences in running of daily corporate affair, then definitely Russia corporate governance is affected. This acknowledgment from the President ignites and gives this paper an impetus to tackle corruption.
Objectives
The general objective of this study is to find out how corruption and governmental interferences have affected the Russian Corporate governance. This involves an examination of the Russian Corporate governance structure, followed by an understanding of the various ways in which corruption is carried out, the various instances of governmental interferences, and finally ways of alleviating this vice.
The Specific Objectives of the study are as follows
To find out how efficient corporate governance leads to improved operational efficiency
To find out how reduced corruption and reduced governmental influence leads to easy access to capital markets
To find out how efficient corporate governance leads to reduced cost of capital
To find out how compliance with legal and regulatory requirements leads to better reputation of the company, its directors, and managers
To find out how advanced corporate governance systems leads to reduced cost of capital
To find out how increased corruption activities damages the reputation of company, the directors, and the managers.

Problem Statement
Corruption is a transnational threat and should be minimized globally. Alarmingly for Russia, early July this year when U.S. President Barrack Obama visited Russia, top on his agenda was the issue of corruption. Corruption in Russia according to Welu and Muchnik (2009), they state should be added to the countrys list of issues to be urgently addressed so as to have Russia placed in the list of powerful countries globally. Consequently, corruption has seen international investors leave the country with high incidences of tax evasion, harassment, unfavorable working environment, and disputes over corporate governance have actually made investors lose interest in Russia as an investment ground.

Another revelation provided by Transparency International regarding Russia Corruption Perception Index, ranked Russia number 146 out of 180 countries in terms of corruption with a 2009 CPI score of 2.2 and a confidence range of 1.9-2.4 (2009). Roughly, as reported by Welu and Muchnik (2009), 50 of Russians believe corruption is a permanent fact of Russia life that results from official greed and wickedness.

Therefore, it is very clear that Russia has a problem of corruption, which according to the evidences given has become like an engine that drives everyday activities. Since there is rampant problem of corruption propagated by government officers, it is therefore quite logical that government inference in rightful operations which therefore validating and justifying this research paper, while at the same time gives this dissertation an impetus to search for better ways of promoting the Russian corporate governance.

Hypothesis
The study examines the relationship between corruption and governmental influence, on corporate governance. The hypothesis to be tested is that reduced cases of corruption and interference from the government, determines efficient corporate governance. In addition, the vice versa is true.
Alternate Hypothesis
Corruption and governmental interferences does not affect the Russian Corporate Governance
Null Hypothesis
Corruption and governmental interferences affects the Russian Corporate Governance

Theoretical Framework


Independent Variables
Dependent variable

    Therefore, the conceptual framework put in plain words how the independent variables impacts on the dependent variable which in the long run has an influence on ability to access capital, gain shareholder trust, and reduce vulnerability to financial crises. For example, false a accusation in a country that leads to punishment without crime as a result of corruption to implicate someone have impact on trust in justice system and thus, investors or shareholders may withdraw. Whereas, vices such as favorism in hiring may lead to selection and recruitment of incompetent workforce that may hamper productivity, and in the end company fail to compete effectively leading to losses and even closure of business.

CHAPTER 2 LITERATURE REVIEW
Introduction
This chapter mainly concerns laying a clear understanding of the concept corporate governance and then taking an advanced step to explore how corruption and governmental interference hamper corporate governance. This involves getting a clear picture of the status quo with regard to corruption in Russia, and in turn provides a platform for the formulation of recommendations, supported by evidences. Which when adopted shall be capable of making countrys corporate governance effective and therefore increased corporate access to capital, reduced vulnerability to financial crises, and increased shareholder trust.

2.2 Corporate Governance in Russia
Corporate Governance is a complex concept right from its definition. Defining corporate governance as a concept is easy because there are various situations and jurisdictions such that a single definition cannot fit into all of them (International Corporate Governance Network, 2008). Therefore, definition of corporate governance greatly depend on the institution that will define it, or author, as well as country and legal tradition within which the definition is made. However, this hurdle in definition has not been a hindrance rather a motivation to seek a best of fit definition. 

In this regard, according to the International Finance Corporation defines Corporate Governance as the structures and processes for the direction and control of companies (IFC, 2004, p.5). To add to this definition, the Organization for Economic Cooperation and Development (OECD, 1999) gives a more detailed definition of corporate governance as the internal ways in which corporate are operated and managed. This involves a network of relationships between various parties, such as, the management of the company, the board of directors, the shareholders, and other stakeholders. Additionally, corporate governance as defined by OECD (1999) provides the structure that governs the formulation of the company objectives, as well as the means through which the goals are to be attained. Therefore, effective corporate governance has to give incentives for the management and board to set out to achieve the objectives with a clear perspective on the company agenda, as well as monitor how company resources are being utilized (Magdi and Naderah, 2000 The World Bank, 2008 Stott, 2010).

Therefore, it is very clear that corporate governance is a system by which companies are directed and controlled (ICGN, 2008). Moreover, corporate governance involves a set of relationships between a companys management and its board its shareholders and other company set the means of attaining objectives and monitoring performance of the company.
However, a clear look at the internal perspective of corporate governance definitions, a certain number of elements are very common they include

That it is a system of relationships defined by structures and processes. For instance, between shareholders and management, whereby the latter provides the former with financial and operational reports on regular basis, whiles the former providing capital in order to achieve return on the latters investment. Additionally, shareholders elect a body referred to as a supervisory body, which represents their interests. The supervisory body gives the company the strategic direction and control over the companys manager. Thus, making it clear that  managers are accountable to the supervisory body, which in turn is accountable to shareholders during the General Meeting of Shareholders (IFC, 2004).

Another common element relates to the fact that the relationships concerned may involve parties with different and sometimes contrasting interests especially between the GMS (General Meeting of Shareholders), Supervisory Board and General Director. These can be manifested in the principal-agent problem. This according to the Oxford Dictionary of Economics, is The Problem of how Person (A) can motivate Person (B) to act for (As) benefit rather than following his self-interest (IFC, 2004p.5).

All the parties must take part in the direction and control of the company. Whereby, the GMS that represent the shareholders make fundamental decisions. In matters of guidance and oversight, setting company strategy and controlling managers, the Supervisory takes charge. Finally, the executives run the day-to-day operations such as implementing strategy, drafting business plans, managing human resources, developing marketing and sales strategies, and managing assets (IFC, 2004 p.6). While undertaking the duties of running the corporations, caution should be taken ensure that rights and responsibilities are distributed properly to increase long-term shareholder value. By doing so, minority shareholders are safeguarded against controlling shareholders through related party transactions, similar means or tunneling (IFC, 2004 p.6).

The external perspective of corporate governance relates to the relationships between the company and its stakeholders and by stakeholders it imply that people or institutions with the interest in the enterprise that can arise through legislation or contract or by way of social or geographic relationships (IFC, 2004 p.7). Examples of stakeholders include employees, creditors, suppliers, consumers, regulatory bodies and state agencies, and the local community harboring the company.

2.2.1 A Brief History of Corporate Governance
The systems of corporate governance have undergone evolution over the years because of system failures or crises. The first well-documented failure of governance is that of the South Sea Bubble in the 1700s, leading to a revolution in the business laws and practices in England. On similar grounds, in the U.S. a crash in the stock market in 1929 lead to establishment of securities law (IFC, 2004 p.8). These are some major turn points that have shaped the field of corporate governance to today.
Regarding the Russia context, the events and incidence of privatization can be attributes as the cause of creation of corporate governance model. According to Vasilyev, (2000) It was the particularly Russian model of privatization practiced in 1992-1994 that determined the basic characteristics of the structure of corporate ownership and governance in Russia, and it also outlined the major directors for there development. Thus, it is worthy to look at features of Russian model of privatization to gain understanding of the root of corporate governance.

2.2.2 Principal features of Russian model of privatization
Mass corporation in the course of privatization
Major special advantages for insider employees and managers, and their widespread participation in privatization
Mass sale of shares in privatized enterprises for vouchers, which were issued to all citizens for a symbolic charge
The freely  transferable nature of the vouchers and their free circulation on the market, which made it possible for processes involving the concentration of ownership to begin considerably sooner than the actual sale of shares

The sale of shares under certificate-based privatization both directly and through intermediaries  certificate investments funds

The open nature of joint-stock companies created in the course of privatization, which allowed the processes of redistribution of ownership through the free sale of shares to begin.
Therefore, the initial specific structure of corporate ownership resulted from the implementation of this privatization model. But it is important to note that first time appearance of shares of privatized institutions on the market in 1992-1994 acquisition of these shares was synonymous to lottery hence mixing up the structure of funds assets, but this has gone through better changes (Feifer, 2010).  
A number of concepts encompass the Russian Corporate Governance Model that shapes the corporate governance concept. These are first, Structure of stock ownership and trends in the change of this structure. Secondly, the role of the Russian financial system as a mechanism for the transformation of savings into investments and prospects for its development. Thirdly, regards the relationship among sources of financing Russian corporations and their prospects for change in operations to enhance profitability. Fourth, regards the history and trends in the development of the legal system governing the operations. Fifth, is the macroeconomic policy and its impact on corporations that involves the current commercial practices and business ethics and the traditions and nature of state interference in economic life.

2.3 The International Scope of Corporate Governance
Feifer (2010) state that in order to understand the international scope of corporate governance there is need to evaluate exactly what has taken place over the years and see the various steps taken over years. This is important so that to come up with an international standard of corporate governance. In this regard, there has been a creation of number of codes of best practices and corporate governance over the years, most of which refer to what is expected of the Board of Directors some of them being of international scope (Sokolov, 2004, p.10). Generally OECD Principles of Corporate Governance, recommendations of the European Association of Securities Dealers (EASD), the Corporate Governance Guidelines of the Confederation of European Shareholders Association, the International Corporate Governance networks Statement on Global Corporate Governance Principles (ICGN), and the Commonwealth Association for Corporate Governance (CACG). However, the OECD Principles have had a worldwide acceptance as reference point and framework for corporate governance. They were published in 1999, revised in 2004 with an aim to promote good governance.

2.4 Corporate Governance The Ideal Model and Russian Reality
Magdi and Naderah (2000) affirms that corporate governance involves having a balance of interests between various stakeholders, and it receives attention the world over, with a majority of countries shifting their attention to the development of corporate governance standards. Such is the case when in May 1999 an OECD council approved the Principles of Corporate Governance that are not binding as they seem to serve as reference points for the creation of legal basis for corporate governance both at company and government level.
There are 5 areas covered within this document that represents the Ideal model
the rights of shareholders
equitable treatment of shareholders
the role of stakeholders in management of a corporation
disclosure and transparency and
The responsibilities of the board of directors
Even though there is no 100 compliance with these principles, most developed countries have gone to greater heights in relation to full compliance. These countries include the U.S., Hong Kong, Canada.

Core Values for Corporate Governance
Sokolov (2004) highlights the Core Values for Corporate Governance. First, fairness that value ensures that shareholders rights are protected as well that they are treated equally (minority and majority shareholders). In other words, when any of the shareholders rights is violated heshe should be able to obtain redress (Sokolov, 2004, p.10). Second, Responsibility as a value calls for a recognition of the rights of stakeholders under the establishment of law as well as encouraging an active-co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises (Sokolov,2004, p.10).

Thirdly, transparency relates to the accurate and timely disclosure of relevant matters regarding the company  company, financial situation, performance, ownership, and governance structure (Sokolov, 2004, p.14). Transparency is important value because it promotes trust among the investors, shareholders and all team players. The fourth, core value is the accountability that ensures that the strategic guidance of the company, the effective monitoring of management by the board, and the boards accountability to the company and shareholders.

2.4.1. 1 Distinction between Corporate Governance and Corporate Management
The difference between Corporate Governance and Corporate Management is in the sense that the main focus of corporate governance is on the structure of the company and the processes to ensure fair, responsible, transparent, and accountable corporate behavior. While on the other hand, corporate managements main focus includes the tools necessary for the business operation (Sokolov, 2004, p.18).

2.4.1.2 The Distinction between Corporate Governance and Public Governance
Sokolov (2004) gives the distinction that Public governance is concerned with the structures and systems of governance in the public sector. Corporate governance is also different from good corporate citizenship, corporate social responsibility, and business ethics (Sokolov, 2004, p.22).

Benefits of Corporate Governance
The company derives from good corporate govarnace especially at advanced phases various benefits. Research by Feifer (2010), found out that early phases of corporate governance that involves legal and regulatory requirements compliance, the company is likely to benefit from better reputation of the company, its managers and directors. While at advanced phase of corporate governance that involves corporate governance leadership that corporation aspire to achieve, the company is likely to benefit from improved operation efficiency. However, a well-executed processes and efficient running of organization is paramount to lead to improved operational efficiency, access to capital markets, reduced cost of capital, and better reputation of the company, the board of directors, and the managers. The figure below illustrates the benefits vs. level of corporate governance.


Source Sokolov, Part 1, p.13

2.5 The Impact of Corruption and Governmental Interference on Corporate Governance
After having discussed through the structure and operations of the corporate governance in Russia, it is important that we take a deeper analysis of the ways things have been and still are in Russia with regard to corporate governance against corruption. To do this there is need to understand the various cases in which corruption is manifested in the Russian Corporate Governance. They include
Violation of rules of corporate governance by top managers while being protected against dismissal
Increased cases of insider trading
Lack of explicit definition of transactions with affiliated parties
Lack of mandatory preferential rights for shareholders
Lack of restrictions on cross shareholding

2.5.1 Insider information and Dealing
Insider information and dealing has actually been a common phenomenon in the corporate world when corporate insiders, including officers, directors, and employees buy or sell shares in their own companies within the confines of company policy, law, and regulation (Sokolov 2004, p.7-8). Within Russian context, illegal insider dealing occurs in several forms. For instance, it can take place when those who have access to important and confidential information, they take and use this information at their own advantage either by obtaining profits or avoid ending up in losses in the securities markets. In the case of Russia, insider information is any information about a company and its securities, which is not easily accessible and which provides privileges to those who have access to it due to their official position, contractual obligations vis--visthe company in comparison to other participants of the securities market( Feifer, 2010).

According to Feifer (2010), the following persons access insider information easily
Members of the companys governing bodies or securities market professionals with a contractual agreement with the company
The External Auditor of the company or securities market professionals having a contractual agreement with the Auditor
Officials of regulatory agencies having legal rights to control or monitor the company.

There is however a problem that is actually addressed in the Russian Corporate Governance Manual which involves disclosure and transparency. The manual asserts that the two terms are not the same simply because companies may disclose an enormous amount of information that is of no particular value to the users of such information. Important pieces can be withheld. Disclosure can be irrelevant or, worse, appear to be manipulated in such a way as to conceal the true picture of the state of the enterprise (Sokolov, 2004, September part IV p.10). As a remedy, the IFC Survey on Corporate Governance Practices in Russians regions, have emphasized the fact that companies are to be liable when they cause damages to third parties by providing false, incomplete, or distorted information (IFC Survey, p.25).

As a guideline, the OECD Principles of Corporate Governance suggest that
timely and accurate disclosure be made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company (OECD Principles, Principle IV).

2.5.2 Presenting Financial Information
Financial information is of utmost importance to shareholders, potential investors, creditors, and other stakeholders (Sokolov, 2004, p. 14). These include
The Balance sheet  companys assets, capital, and liabilities on a particular date
Income statements  Performance information over a specified period of time
Statement of changes in owners equity  changes in the charter
Cash flow statement  - sources and uses of cash
The notes to the financial statements  explain companys statements with additional information
Explanation to financial statements  features of the activities of the company, performance indicators
The External Auditors report with conclusions

2.5.3 Non-adherence to the Codes of Ethics
A code of Ethics, or code of conduct, or ethics, or responsibility statement refers to a basic guide of conduct that imposes duties and responsibilities on a companys officers and employees towards its stakeholders, including, among others, colleagues, customers and clients, business partners, government, and society (Welu and Muchnik, 2009, p.56).
A code of ethics carries with it a number of advantages, including
Enhancement of the companys reputation
Improvement of risk and crisis management
Development of corporate culture
Advancement of stakeholder communication
Avoids litigation

Therefore, the code of ethics greatly uplifts a companys overall performance and failure to adhere to it leads to an expression of corruption. A great deal of practices in the Russian Corporate world have ended up abusing this code of ethics and as a result leading to declined productivity and poor image on both internal and external investors.

The Corporate Governance Manual outlines the need for the establishment of a Supervisory Board which is responsible for setting the companys strategy and business priorities as well as guiding and controlling managerial performance, and for making decisions on matters that do not fall under the GMS authority (Sokolov, 2004, September part II p.14l).
The following responsibilities rest on the Supervisory Board
Setting company priorities and strategic direction
Establishment of the Executive Bodies
Terminating the Executive Bodies Powers
Suspending the Executive Bodies Powers
Appointing interim Executive Bodies
Concluding Contracts with the Executive Bodies
Suspending the Executive Bodies Operations
Appointing the Corporate Secretary(FCSM Code, Chapter 5, Section 2.1)
Approving By-Laws (LJSC, Article 65, Clause 1, Section 13
Establishing Branches and Representative Offices

It is therefore a great responsibility for the Supervisory Board to ensure that there are no conflicts of interests between the various stakeholders within the company. However, a number of these members sometimes overstep their authority and thus lead to tremendous disorder within the companies they are governing. Bribery is one of the major problems that affect these people and as a result, they appoint people without consideration of the Code of Ethics that should enable them appoint and regulate the various activities of the company with transparency and accountability. This has in turn led to reduced performance, poor company image, and increased cost of capital.

Another area that has received a lot of attention as regard payment for shares is that of dividends allocation. It is the work of the Supervisory Board to recommend on the amount to pay out to the General Meeting of Shareholders. In addition, the General Meeting of Shareholders possesses authority to approve dividends. In addition, in a number of cases, been the directors who end up allocating huge dividends for their own share. This provides a violation of duties ands responsibilities. This in turn drives away existing and potential investors and as such makes the company vulnerable to securities risks.

2.5.4 Governmental Interference
The government plays a major role in the country, Russian government being no exception. In this case, many cases of corruption originate from government offices right from the start of company establishment, and registration to the process of regulation of. It is at this point that the Russian President, Dmitry Medvedev promises to fight corruption (Johnson, 2009 Lazarea, Rachinsky, and Stepanov, 2007). Corruption has greatly affected Foreign Direct Investment. This has been as a result of white-collar crimes consisting of two problems

Crime without punishment  this problem has actually led to loss of trillions of rubies (32 billion) according to the Oxford Analytica (2010, June 28).

Punishment without crime  this involves the abuse of law to intimidate or eliminate business rivals, expropriate companies or renege on debts and contracts, something all too often done with impunity. A better illustration is given by MikhallKhodorkovsky trial which indicates that courts have failed to protect the innocent, and have become extortion and persecution agents, according to the Oxford Analytica (2010, June 28)

Sacking scapegoats  involves the sacking of people to conceal the actual criminals in the government. An example is given of Major-General AnatolyMikhalkin, the head of the MVD Moscow regions tax crimes department who was the main target but was dismissed, along the head of the prison. Some of Milkhalkins cohorts were simply given new duties (Oxford Analytica, June 2010).

Partial Reform  These reforms are made as a way of concealing the truth. These types of reforms do not cover the area they are supposed to cover in terms of reform.

Thus, this has implication on the corporate governance and hampers business at large. To validate the claim, the paper next section presents methodology approach to collect necessary data to prove the assertion.


CHAPTER 3 METHODOLOGY
Introduction
    This chapter relates the manner in which the research was approached. Various statistical and theoretical issues that are related to the research are provided. The chapter therefore addresses the actual methodologies used in the research process from its time of inception to the end. In the chapter, the role of both the secondary and the primary date in the process of addressing the various research questions has been addressed. Additionally, the manner in which data was collected and later analyzed to reach a reliable conclusion has been discussed. This has been done with an in-depth reflection of the research design and other related economic issues.

3.2 Methodology
    The methodology used in this research contains the use of primary and the secondary methods of data collection. The primary method depends on collecting data from the Russian Corporate Governance Principles and various Russian government reports, concerning the various cases of corruption and governmental interferences with the aim of realizing reduced vulnerability to financial crises, increased ability to access capital, and increased trust from the shareholders. Employees opinions were also collected and fully incorporated throughout the research process. Various views of different stakeholders have also been put into consideration. Questionnaires administration played a very crucial role in ensuring that potential respondents who were at different locations and who could not be reached easily (physically) could still participate in the research process.

    In order to fully identify the corruption cases as well as cases of government interference with the governance of companies in Russia, the proposed research ensured that all the stakeholders were fully involved in reaching the best solution possible. To achieve cohesiveness in the research, conclusions reached and the acceptance and easy implementation of the research finding, direct interview of personnel at the managerial level, senior level and junior level and filling of questionnaires was done. This was important since it gave the researcher a great opportunity for the vital information and findings made from the previous researches to be studied and vital findings used in this research. In addition to that, the choice of interviews was targeted at ensuring that strategic people in the industry gave their views.

    The researcher did manage to get an opportunity for a face to face interview with the top management this is with personnels at the managerial level, senior level and junior level. This, at times involved telephone interviews and internet conferencing. Similar questions to those used in the administration of the questionnaires were used in the effort to get crucial research information from the Russian top corporate managers. The telephone interviews and internet conferencing were targeted to company executives as well as different shareholders within Russia in government departments and other companies in June 2010.

3.2 Questionnaire
    The choice of questionnaires as a data collection tool was arrived at after a close and in-depth consideration of the research goals and the target group. Random method of sampling was to a large extent employed in order to ensure that the most reliable information that would be a representative of the whole population is arrived at. Employees opinions would be collected through the planned distributive questionnaires among random group of employees. In addition to the questionnaires, other online sources of information, journals, books, written articles and magazines have also been utilized in the data collection process. Questionnaires are cheap, do not require as much effort from the questioner as verbal or telephone surveys, and often have standardized answers that make it simple to compile data. Never the less, such standardized answers at times frustrate the users due to their detailed nature. The method was applied because it provides a link between the theoretical perspectives, research purposes and the data collected which in turn elicits the research findings.

3.2.1 Questionnaire Drafting
    A questionnaire with both open ended and closed ended questions was used in the collection of data from the research sample that is mainly concentrated in the randomly selected companies within Russia. Questionnaires drafting was done with a clear understanding of the diversity of the people in corporate world of Russia. In addition, the target goals of the research process (Maloney 2006). The questions used had different sets of questions that targeted the respondents in different formats. The open-ended questions used target some of the respondents such as chief information officers, chief executive officers, and employees in the industry. The closed-ended questions used enabled the participants in the industry, especially those in the human resource departments, to answer from the numerous given number of options.

3.3 Data Collection
    Data was collected through various methods. The major process of data collection was through administration of questionnaires. In addressing the various issues related to the research question, two types of data were collected. Primary data and the secondary data collected served different roles even though the ultimate purpose of the two types of data collected was to clearly bring an in-depth insight into the role of the various ethical strategies employed in the industry, key factors they have in productivity and other related issues in the industry (Travis, 2002).

    Observation was also done during the course of working hours. This was vital in that it supplemented the validity of answers in the questionnaires aspects observed included indicators of origins of poor performance. Briefs and recorded reviews from resource persons in the Human resources department and recorded reviews from the internet and other various departments was another source of information used to supplement interviews. This was important in obtaining secondary data related to the human resource department techniques in FIL industries limited during various times.

3.3.1 Role of Primary Data
    Even though questionnaires were used in the data collection process, the primary data collected played a very fundamental role in addressing the major research questions. The research question, regarding how ethical human resources management is linked to productivity was asked. This research question was best addressed using the primary data collected. The primary source of data also enabled the researcher to get the most recent set of information that would help doing the comparison between the past sources of data, the most recent sources collected either through viewing, ethnographic research study of very recent journals, and the analysis of the information collected in the questionnaires. On addressing the research that relates to productivity issues and the ethical human resources management strategies, the primary data collected helps in analyzing the core major concerns to the corporate governance and the best way of addressing them.

3.3.2 Role of Secondary Data
    Secondary data that was availed played a very important role towards reaching the research conclusion. The detailed study done on the secondary sources of data available such as journals, information on various websites, information in the national archives and the various books written on the Russian Corporate governance have given a lot of vital information that have aided the formulation of recommendations that could uplift the Russian Corporate Governance. The information also played a crucial role in identifying the various roles played by various stakeholders in addressing all the issues related to the various corrupt practices employed in the industry and the need to ensure that companies, shareholders, and stakeholders are satisfied with company progress in order to be optimistic of the operations of the companies.

    Various issues regarding the best corruption and governmental interferences that have previously been employed and their effects were availed through the in-depth study of the available sources of secondary data. The trends of various parties involved in the corporate world were identified, the  satisfaction of  their needs, security concerns and various past attempted governmental interferences and corruption,  have also been revealed through the analysis of the secondary sources of data.

3.4 Data Collection and its Analysis
    The researcher used a questionnaire for the gathering of data needed in identifying the current principles of practice that represented corporate governance, the evolution of corporate governance, the various cases of corruption, and various ways in which the government interferes with the structure and progress of Russian companies. The questionnaire helped in gathering of information about cases of corruption, effect on company performance, on the quality of productivity in the industry, the possible effective strategies that could be employed in the industry in order o enhance efficiency, effectiveness, and better corporate governance. The data collection used is the sample survey that involved only a small section of the companies executives, stakeholders, shareholders, Board of Directors in the Russian corporate world

3.4.1 Sample size and the sampling strategies
    Purposive sampling strategy was employed in determining the sample population to be used in the research process. In the final analysis and sampling of the data collected, the sample population was divided into subgroups for ease of the sampling process. Only random sampling strategy was used. This method is simple, most effective, efficient and largely the best method of drawing a sample from the population (Preston 2008 149-153). Quota sampling strategy was also used in situations where the use of random sampling strategy was impossible. In very rare cases, stratified method of sampling was used to ensure that large enough samples was used and subdivided on important variables. The major advantage to why the researcher chose purposive sampling is that it ensures inclusion in the sample, of sub-groups which otherwise could be omitted entirely by other sampling methods because of their small numbers in the population. Hence, the researcher was able to increase the representation of a sample of a given size or got an equivalent of information from a smaller population, therefore getting better estimates of the whole. The survey respondents are 60 and are tabulated as table below

3.4.2 Instruments used in the Process of Data collection

    Questionnaires were the major instrument of data collection used. Library findings were also used. To reduce the overall cost of the research process, electronic mailing system was utilized in sending the soft copy of the questionnaires to the prospective study sample. In most cases, this was accompanied by a brief introductory letter with request that the questionnaire be completed in a timely manner as specified. Indeed emailed questionnaires was utilized for administering the questionnaire to far flank sample people in locations which could not be reached in a cost effective manner.

CHAPTER 4 RESULTS, ANALYSIS, AND CONCLUSION
Introduction
From the data collection and analysis that this paper present, it was very clear, that null hypothesis emerged true that a great deal of corruption and interferences from the government tremendously affects corporate governance. I have actually, through the research that I have carried out come to an indubitable conclusion which as well has recurred in the course of the research work, that there is a clear link between incidences of corruption, and corporation efficiency. This chapter analyses these incidences in the light of coming up with a workable model conclusion.

Results and Analysis
An overview of Major Risks of Corporate Governance in Russia
RisksProbability of riskRussian UniquenessOther markets with similar riskInformation disclosureYesShare dilutionNoKoreaAsset strippingtransfer pricingNoIndonesia, Malaysia, Korea, MexicoBankruptcyNoIndiaRestriction on ownership of stocks and disposition of voting rights-NOKorea, Mexico, ThailandReorganization (mergers and takeoversNOIndonesia, Malaysia, KoreaA similar research was carried out to find out whether the above table as portrayed by Vasilyev (April 2000) is true. The results emerged synonymous, indicating that corruption related cases create more risk than other cases such as bankruptcy, mergers, and takeovers. What does this mean That Russia needs to focus more on corruption and governmental interference compared to other issues so as to promote efficient corporate governance.

The research findings that this paper have gathered right from the beginning both from primary and secondary sources, clearly show that corruption has to a larger extent derailed rate of economic growth in Russia. At the beginning, the null hypothesis asserted that corruption and governmental interference tremendously affects corporate governance. In addition, the main concern now relates to the link that exists between governance and corporate success. It should be noted that at the top of the levels of management, is the strategic level manager. It is this leader who unites all the other departments in a company setting hence, our main concern on corporate governance is without doubt, a very informed concern. The Russian President, Dmitry himself is worried of corruption, and that explains why the U.S. President, Barrack Obama during his visit to Russia, as explained earlier, gave prominence to the issue of corruption. Like any other management setting, even though corruption is very prominent in other lower levels of management, it the duty of the top-level management team to ensure that policies designed do not give room to corruption. This does not meet that corruption is the only means to downfall, but rather a major road to organizational collapse.

Organizations collapse as a result of correlated failures, both in terms of personnel, technology, and resource allocation. All these factors are so much networked in such a way that efficiency could come as a result of proper allocation of resources, usage of up-to-date technology, and finally, efficient management team. The main aim here is not to over-emphasize corruption, but rather re-affirm the part it plays in organizational decline, and most especially in the Russian corporate world. Let us now focus on the main events as observed in the literature review section.

This paper rightly concurs with Boylan (Vol. 19 1999) who asserts that corruption has actually become a culture for Russian Government Officials. Actually, in the course of research process and in line with Boylans view, bribery is so prominent in the Russian bureaucracy. Bribery is actually paid some U.S. and Western businesspersons on a regular basis, towards Russian government officials to obtain license to operate in Russia. A number of U.S. and other Western businesses and businesspersons routinely pay bribes to. Bobylan in his survey study has truthfully indicated that the 42 of those involved in bribery in 1993 were government officials and more that 25 were law enforcers. This means that Russian officials do not only regularly accept bribes but also rather enter into partnership that is illegal with organized crime and also with business groups that are clandestine in nature. In his work, Boylan illustrates with example on how a former communist apparachiks does continue to work within the Russian bureaucracy, exploit previously made black-marketeer relationships to profit in the new post-Revolutionary Russian system. Thus, a partnership formed long before the attempted coup of 1991 by organized crime and communist government officials, now threatens Russias democracy growth (Boylan, 1999).

The next corruption practice observed in research is the role of the Mafia who commit theft, murder both in Russia and in the United States. The Mafias involvement ranges from theft, extortion, money-laundering, gug-trafficking, drug running, prostitution, smuggling, loan sharking, contract killing, to name but a few. However, the U.S. Department of Justice is actually committed to address the problem of Russian Mafia in the U.S. in New York, Los Angeles, as well as Miami. This simply means that businessmen who pay bribes as well as protection money in Russia may be unintentionally facilitating Russian criminal activity as well in the U.S. Russia cannot recover if the Mafia still continues to ruin Russia and even the United States. Similarly, Russia cannot recover because of passive foreign investors passiveness. Recently law enforcement agents from the U.S. visited Russia and their message was clear that, as Boylan puts it, the U.S. Government is concerned about crime and corruption in Russiathat the growth of organized crime in Russia and Eastern Europe is a threat to the integrity of government (Boylan, 1999).

The Washington Administration has been searching for ways to fight the rise of crime and criminal elements in Russia. Certainly, it is the basis of U.S. foreign policy and the basis to the post-Cold War era that democracy derives its foundation and flourishes from, in Russia. Determination has been made by the United States and other independent countries to support Russia in its transformation from a corrupt totalitarian regime to a popular democracy. Thus, this paper rightfully agrees that there should not be any tolerance on corrupt officials and corporations by private businesses, contrary to this policy (Boylan, 1999).

So far, the United States has established a Foreign Corrupt Practices Act (FCPA) that is a means of combating bribery by U.S. citizens to the Russian Government officials. Regrettably, U.S. officials have failed to energetically enforce these legal policy vis--vis fraudulent practices in Russia as well as the former Soviet Union. In line with the FCPA government, officials are prohibited from bribing government officials. This law was enacted by the Congress so as to prevent foreign corruption practices by U.S. officials, also as a means of cautioning against poor relationship with foreign investors and businesses so as to promote economic growth. It is therefore important that we appreciate this gesture from the U.S. and encourage other countries to do the same so that Russia can be made economically stable. (Boylan, 1999)

The U.S. business community in Russia should conscious of the fact that the U.S. Government will possibly pursue the enforcement of this law with all due attentiveness. U.S. law enforcement agencies have already started to cooperate with Russian authorities in fighting organized crime and corruption. In addition, as time passes the Russian corporations will come to realize the profound role played by the U.S. anti-corruption policies. U.S. corporations should take precaution that they are operating in Russia in a manner that does not work at collide in purpose, by ensuring that their operations in Russia comply with the FCPA. Only in doing so will they prove that they are promoting their business and economic goals.

The modern harsh east atmosphere in Russia, with any luck, will not withstand. As Russia establishes democratic rule and a market economy, it is highly unlikely that proliferating bribery of government executives will continue to be stomached or that past illegal behavior will be easily forgiven. The implementation and retribution of such practices will begin.

Moreover, the virtually free market in Russia has created many prospects for criminal organizations, including the marketing of stolen nuclear fuel on the global market. Governmental interference is prominent. In fact according to Boylan, (1999) during 1995 criminal proceedings were set up against 2,000 employees of the Russian Ministry of Internal Affairs.

Corruption and governmental interference and their impact on the corporate governance are a major concern of many Russian corporations. This paper actually appreciates Boylan when he notes that, President Boris Yeltsin has strongly acted against crime in his anti-crime verdict. He continues to rightly assert that other members of the Russian legislature have expressed concern that Russia will become a criminalized society if economic reform is not pushed through the Russian Duma and corrupt influences are not eliminated from government(Boylan, 1999).

Russian politicians themselves have not been immune from the crime wave gripping Russia. A communist member of the Duma died on November 5, 1994, from head injuries sustained in attack at the entrance of his home in Moscow four days earlier. The Communist Party issued a statement stating that

Finally, the realization that the a number of top government officials in Russia have actually acknowledged  the role played by the Russian bureaucracy and police force in corruption as they have made alliance with organized crime, and thus becoming a major contender of self-regulating businessmen. There is fear among the Russian businessmen to register their companies with local governments as they tend to feel that their information may be forwarded to criminal groups who will end up extorting money from them.

4.3 Overview Summary and Conclusion
Change has been a constant in virtually all phases of Russian life in the past ten years. Chances are that this atmosphere will continue for another decade. Corporations should hope that the Russian legal system becomes more anticipated and efficient. Russian corporations should also expect continued cooperation between foreign and Russian Governments. Right from the start, it is evident that corruption has a lot of influence on the instability and miss-efficient of the Russian Corporations governance. As explained, there various ways that can describe corruption, corporate governance and the various compositions that makes up a corporate group. In this research, it is noted that Russia greatly suffers in terms of foreign relationship with other states, most especially the U.S., which if corruption is eliminated, will promote the Russian economy to a greater height. This paper strongly recommends that Russia establish anti-corruption laws are enforced and those government officials who promote this vice are brought to book. The research has also emphasized the need to control our organization structures in such a way that they do not encourage corruption.

The debate on the appropriateness of the effect created on economic growth by financial structures is one to reckon with especially with most of the modern economies. Financial structures determine how far an existing business is financed or in other words it is the credit side of a companys statement of financial position. A closer look at this topic will be geared at the use of extensive and robust research methods in defining the various economic growth and development measures and the financial structures adopted by most of the financial institutions of these economies. The main focus of financial institutions is banks and their corresponding policies with regard to finance issues and how effectively they are able to manage or mitigate risk as much as possible. We therefore use test statistics and hypothesis formulation to create a distinct comparison of financial systems and market based systems.


Financial Structure and Economic Growth.
Chapter1. Introduction
One of the biggest and most heated debates in recent financial times especially with the prevailing effects of globalization and market instability has been the impact of financial structures on economic growth.

However, varying conclusions have been made on a theoretical point of view. It is quite evident that it is very difficult to hold other factors affecting economic growth constant and assess only financial structure.  This is one evident challenge that is quite clear that the indirect effect of financial structures can be identified through the various economic growth measures.

This paper is geared at assessing three different issues as regards the topic of economic growth and financial structures namely the overall change of financial structures as economies grow, assessment of presence of financial sources and financial structure changes.

In the global world having businesses have extensively invested in portfolio analysis of the most economical yet sustainable financial structures. In this regard, they have used methods such as the Gordons model of cost of capital analysis and other measures to determine the most cost effective capital combination in making investment decisions. The impact created by these investments on economic growth is the major focus in this paper while taking direct focus on their overall sustainability.

A proposition by Mansfield (2003) and Benton (2005) is that provision of finance creates an environment that businesses are able to thrive in. A detailed analysis of this has shown that most businesses especially in the developing countries fail due to lack of access of enough capital resources, Mansfield (2003) puts it across that capital availability is the one of the most important factor of production. This just makes it clear that the essence of the presence of enough capital justifies that businesses are able to gain the rewards of capital as a factor of production.

The reward of capital as a factor of production is profit. This profit that is generated by businesses contributes to the gross domestic products when this businesses pay tax. In this analysis a detailed analysis of gross domestic product from different countries of the world extracted from word bank and International Monetary Fund will be included in this survey.

The perspective adopted by Hermann (2000) is that of a heuristic approach to the underlying concept of different forms of financial structure. Different organizations have different financial structures or capital mix. The major question in this topic is what is the influence of these different financial structures on economic growth

To demystify the different financial structures we look at the different abilities of organizations to be able to meet their capital requirements under both the financial system and the market system. To do this a detailed analysis of the characteristics, merits and demerits of these two systems is necessary.


Economic Growth
The term economic growth is used to refer to an increase in the measure of aggregate income or gross domestic product with relevance to the quantity of goods and services produced only and is usually measured as the rate of change in GDP. For the sake of comparing the per capita income for different countries, the statistics are given or quoted in a single currency depending on the prevailing purchasing power parity or exchange rates. Economic growth is either positive or negative.
 Financial structures contribute to this disparity. Economic recession and depression is normally associated with negative economic growth. To compensate for inflation or deflation, the gross domestic product is given in terms of the nominal or current figure, which is usually inflation adjusted as opposed to the actual money figure.

Measuring of economic growth is done using the real gross domestic product, real in that the effects of inflation have been adjusted. The three ways to measure growth of real GDP are the annual average growth rate, the year-over-year growth rate and the quarterly growth at an annual rate.
Financial structures define the frameworks of the various ways a firm uses to get and maintain or support resources necessary for its operations.  These entails the elements listed on the right-hand of the firms balance sheet and may include loan capital, equity capital, overdrafts and trade credit among others.   It is how these resources are utilized that leads to the assessment of economic growth.
In this analysis we try to assess how much the financial structures adopted in different countries is able to affect the gross domestic product in one way or another. The quarterly growth at an annual rate gives the change in real GDP from one quarter to the next compounded to an annual rate.

The year-over-year growth rate compares the level of GDP in one quarter to the level of GDP in the same quarter in the previous year. This method is less volatile as compared to the quarterly growth at an annual rate since it is not compounded. The average of year-over-year percent changes for a given year yields the annual average growth rate.

Financial Structure.
Capital projects undertaken by businesses in any given economy depend on the funds available to finance these investments. For example a decision by a firm to acquire a new plant that will aid in more efficient production implies specific way of financing that project. The major question in place is that of the best capital mix to apply in financing that project. Should a firm apply debt or equity or both What are the implications of the debt equity mix on the operations of the firm What are the implications of this capital structure on economic growth

Managerial economics has tried to elaborate on the various economic advantages that accrue when firms are economically and adequately financed. In this debate the system to be applied is what determines how well these firms are financed.

The various ways applied by businesses to finance their operations are known as the financial structure of the firm and this is represented on the left side of the balance sheet of a firm.
The management of a company seeks to answer many questions in regard to financial structure and some of them include how should the investment project be financed economically Of what economic use is the project to the firm Can the optimum capital mix be determined in practice for a company and what implications will the project have on economic growth and development of a given country.

Despite the quest of achievement of economic growth by the firm there are two underlying issues that the firm tries to address which include risk and return of the investment. The return is the expected growth in cash flows of a firm as result of investing in a given project where as the risk is the uncertainty created as result of undertaking the investment. The two concepts (risk and return) affect the cost of capital and the market value of a firm.

The market value of a firm is what leads us to the debate if a firm is able to generate economic growth as a result of good financial structure. The creation of a high market value means that the firm is able to contribute to the economy in terms of taxes and other government deductions which are used in assessing the gross domestic product of a country. A high gross domestic product means that there is economic growth and this creates an integration of how financial structure relates to economic growth.

Financial Structure and Financial Development.
Raymond W. Goldsmiths (1969) in his book, Financial Structure and Development insists that for economies to grow financial systems must also grow. He defines a financial structure as the overall composition of financial instruments markets and other financial institutions operating in a given economy.

Financial development on the other hand entails the growth in efficiency, effectiveness and sustainability of financial systems in a given economy. In his book Goldsmith explores the evolution of financial systems and the success and failures they have experienced in various countries.

The reason why the debate of how different financial structures affect economic growth is that financial development in the different markets is the variable behind economic growth and development. Therefore assessment of the correlation between financial development and economic growth is very important for the advancement of this debate.

Goldsmith however faced challenges in establishing this relationship between financial development and economic growth. In fact the inter firm and inter industries analysis of this had very limited success. Goldsmith however was successive enough to document a clear positive correlation between financial development and economic development across different countries.

 Financial development as one of the factors influencing financial structure is a key consideration in the adoption of financing schemes. This is because the level of accessibility and cost effectiveness of capital is determined by how financial systems are effective and efficient.

A country like England has very efficient and well developed financial structures. In fact very many scholars are of the view that one of the factors that led to high industrialization in England is the level of financial development. Walter (1873) argues that efficient financial structures ignited by the high level of financial development facilitated the mobilization of the various capital resources for very big investments.

Robinson (1952) says that finance follows enterprise in developed financial systems. According to this proposition, economic development through efficient financial structures spurs the need for different financial arrangements among different entrepreneurs.

This is to show that financial systems are able to respond automatically to the demand for capital. This demand and efficient utilization of capital leads to economic growth. However, some economists still oppose this proposition of the relationship between financial development and economic growth.
Lucas (1988 p.6) asserts that economics badly over stress the role of financial structures in economic growth. In fact Chandavakar (1992) explains that no role is played by financial systems in economic growth of any given country. Other scholars such as Seers (1984) and Nicholas (1989) in fact ignore this topic in their discussion of the level of economic growth in different countries yet they are Nobel Prize winners in the field of economics.

Beck, Demirg-Kunt, and Levine (2000), conclude that although definite conclusions must be made and with very distinctive and clear qualifications, the overall actual response from a theoretical point of view and corresponding empirical evidence suggest a very high relationship between financial development and overall economic growth.

In general it is quite evident that economies grow out of the availability of funds. Efficient and sufficient circulation of funds in the economy creates favorable conditions for businesses to thrive. In this regard the development of financial systems is very vital for economic growth to be achieved. The next chapter aims at explaining the various types of financial structures and how they have contributed to economic growth in different countries such as Japan and Germany.


Chapter 2 Financial Structures
Market system

A system can be defined as a unit that contains severally subparts that are unilaterally integrated and   are interrelated. In economics, the operation of various economic processes does not occur single handedly but depends on the integration of various processes so as to form a working system. The study of micro economics develops some of the key concepts involved in the operation of the economic process in a market system.

According to Heilbroner (1970) every macroeconomic process has its microeconomic base. It is quite evident that a market system involves large scale economic processes and yet these large scale economic processes derive their necessity from the behavior patterns from individuals and firms.
The market is a system based on macroeconomic processes and is obvious not a bazaar. The adoption of the market system to finance operations of a given economy depends on how well the market is adapted to meet the various needs of the economy as a whole. The major issue of concern in this topic is how the market exerts its controlling as well as impelling force on shoppers, job seekers, prices and firms.

According to Heilbroner (1970) the buying and selling that we see each and every day are not just merely casual activities that repeat themselves each and every day but are part of the system as a whole.

The market system is geared towards solving some of the basic economic problems such as what to produce How to produce  What goods to give to whom These are the problems that mobilize men to give an effort so as to produce some output. This output contributes to economic growth as a whole.
According to Levin (2003) the market system is not politically feasible and that it has a high potential for adverse externalities. In the development of this argument Levin that the externalities and transaction costs involved in this system are as a result of the high interdependence of the individuals or households and firms. In this the assumption that the economy operates in a two sector economy as exemplified by the circular flow of income which forms as a major basis for the development of the market system is not valid.

There are many more other external factors involved in this and therefore in this regard a market system fails to provide a reasonable basis for the development of the concept of the relationship of market system and economic growth.

Levin (2003) insists that for a market system to be eligible it must be complete in its general form of application. A market system will only be complete if the prevailing externalities are completely eliminated and when subsequent transaction costs are reduced to the bare minimum.

However according to Heilbroner (1970) the market system is very efficient as it acts a self correcting mechanism. In this debate Heilbroner (1970) continues to argue that the market for goods operates as a dynamic constantly altering and yet self-adjusting mechanism. This can be elicited in the interaction of the demand and supply curves in normal markets.

Many developing countries such as countries in Africa and Asia have a high prevalence and dependence on the market system. The main task involved in these countries has been that of how to allocate production efficiently in the economy to achieve economic growth.

The Bank Based system
The theory of the bank system is base lined upon the sole utilization of banks and other financial institutions to support economic growth and development. Though it is not the most efficient system of finance according to Mansfield (2003) it tries to exhibit most of its strong points in relation to the shortcomings envisaged in the market based system.

This debate tries to explain which of the two systems can efficiently finance firms in developing countries and the same time is in the best position to spur economic growth as much as possible.
This argument is based upon the principles of market efficiency and optimization. Fully utilized or efficient markets are markets that are able to exploit all resources or factors of production and are able to gain optimum rewards from these factors of production.

Are banks so necessary for the survival of firms Are the stock markets on the other hand just necessary for the firms Gerschenkron (1962) argues that economically backward or undeveloped countries cannot trust capital markets as the only source of finance. The argument in this is that banks can finance development of the economy as a whole more effectively than decentralized stock market.

The extent to which this theory according to Alexander Gerschenkron, in his analysis of Japan in the early 1950s is true has been upheld by many scholars. In the analysis of Japan Gerschenkron, noted that there were different market failures which could be overcome by the fact that banks were in a position to utilize deposits and savings to avert this kind of failure.

Despite the strong argument that bank based system are more suitable for economically backward countries there are still many scholars especially in the finance sector who do not believe so and argue that the whole issue is misguided because of the existence of the agency theory and the existence of perfect information in these financial markets.

One evident transition that has even supported this conclusion is that of Europe whereby finance ministers have insisted on financial markets more than banks as a source of capital for firms and there has been so much economic growth that has been experienced. This transition has changed various economies to an extent that scholars have come to believe that existence of perfect information and presence of agency theory with minimal conflict is just enough to create perfect market systems.
In this analysis a closer look at two different countries which are not in the same level of development is very vital. In this regard a good analysis is one that analyses an economy that grew out of the market system and one that has achieved economic growth out of the normal bank system.
According to Boyd and Prescott (1986), one shortcoming of the market system is lack of perfect information as compared to the banking system whereby information symmetry is one of the characteristics. In fact in Germany the continued interaction between banks and investors and investors spurred much more economic growth than the general market system.

The existence of perfect information means that the interaction between firms, individuals or households and the financial institutions which in this case are banks is based on past, present and future information. This means that this information is readily available through the different communication facilities available such as the media.

This information helps firms and individuals make sound financial decisions such as the amount of capital to invest in different projects, selection of the most viable projects to invest in and in selection of the optimum capital structure to operate with.

The combination of the above decisions spurs economic growth since firms will be in a position to contribute to the gross domestic of the country through the returns generated from these investments. The subsequent lack of this perfect information leads to subsequent inefficiencies.

Another major advantage of the bank system is that monitoring of finances is highly enhanced. Through this elimination of moral hazard is efficiently met. The reason why there is monitoring is that most financial institutions issue finances with collaterals in place. This forms a basis for providing reasonable assurance that the firm will do everything to make sure it is able to meet its obligations.

The whole system of banking is set up in manner that there is adequate controlled that integrate business policies and strategies in such a manner that the whole financial process is properly managed. This is through the enhancement of corporate governance. Corporate governance is concerned with the whole issue of the policies, laws, rules and processes adopted by organization in their day to day to day organization.

In this regard firms which are able to apply good corporate governance practices are in a better position to spur economic growth more than those which are not concerned with it. Firms in the market system as evidenced by Japan lack this due to lack of market efficiency.
There is much more cross cutting evidence that developing countries are in a higher position to adopt the bank based system rather than the market system because of the presence of very high market inefficiencies in these countries.

On the other hand it is vice verse for developed countries such as the likes of United States and United Kingdom whereby the market competition and stock exchanges could finance firms and thereby economic growth was highly experienced. This was especially due to the high rates of industrial revolution experienced in these countries. Since industrial revolution was slow in developing countries market systems could not be relied upon as the only source of finance necessary and enough to spur economic growth.

Macroeconomic Policies in bank based systems
A major player in determining the structure, behavior, performance and activity of an economy is banking and finance. Depositing and lending of funds from banks is subject to the management of these funds (finance) in a particular economy.

Government relays on the success of macroeconomic policies to achieve its objectives of establishing a stable and growing economy. The success of these policies, reliant on banking which is in turn subject to finance determines the level of economic growth.

On the international front therefore, macroeconomic policies dictate international banking and finance. This means that macroeconomic policies (fiscal policy and monetary policy), being independent of individual governments regulations on banking, are used to determine the structure, decision making, performance and behavior of the global economy. Macroeconomic policies therefore surpass regional and national boundaries without conflicting specific government regulations to influence the global economy.

According to Cawley, John  Tomas Philipson. (1999), macroeconomic policies also affect the activity of the economy through control of government spending in addition to setting interest rates which has a direct implication on international banking. This means that these policies have implications on other financial issues relating to financial institutions other than banks.

Since macroeconomic policies, specifically the fiscal policy, determines the activity of the entire economy, operations of companies and corporations involved in financial activities will also be subject to alterations in these policies.

The expansionary stance implies governments monetary authority increasing the supply of money by reducing the interest rates in an attempt to curb unemployment in the event of a recession. The monetary policy is based on the relationship between the total supply of money and price of borrowing and lending money, that is, the rates of interest.

It uses a variety of tools in order to administer control on the two in an attempt to influence outcomes of exchange rates with foreign currencies, economic growth rate, inflation and unemployment.
If issuance of currency is under a monopoly or in the case of a regulated system of issuing currency where all the banks are tied to a central bank, the monetary authority is able to alter money supply thus able to influence interest rates and thus the goals of the monetary policy is achieved.

 The monetary policy can also be termed expressed in various ways accommodative if the interest rates set by the monetary authority are aimed at creating growth in the economy, neutral if the interest rates are neither aimed at controlling inflation nor creating growth in the economy and tight if the set interest rates are aimed at reducing inflation in the economy.

Financial Structure and Bank Profitability
Financial structures also have an independent impact on the performance of banks. The overall impact on banks of these financial structures also has an effect on economic growth because banks also contribute to the gross domestic product of a country just like any other business.

The distinction that is necessary at this juncture is just to determine how financial structure affects the profitability of banks in less developed countries and in developed countries. In less developed countries there are no well developed financial systems. One of the effects of the quest to try and improve efficient bank systems is a decrease in the bank margins and profits.

Different countries differ in the extent to which their financial systems are either bank based or market based. The extent to which a financial system is said to be bank based is dependent on the overall reliance in mobilizing savings and allocation of capital by the banks in existence.

In developing countries it is quite evident that financial systems are also not developed. In this regard bank profits and margins are also in these countries. However one cross cutting feature is that most of these countries adopt the bank based system as the market based system cannot be efficient enough to handle economic growth.

Developed countries have efficient systems and their banking systems are well developed and therefore banks contribute significantly to the economic growth of these countries. However if these financially developed countries have efficiently working stock markets, the overall effect is a reduction in bank profits and bank margins.

One of the points to note is that apart from financial structure there are other factors that affect the overall profitability of banks and therefore it should not be taken as the only factor that affects the profitability and bank margins.

As developing countries develop, banks also develop. The development and growth of these banks leads to increased competition and thereby creating a long run effect of reduced bank profits and margins. However the consumers of the services provided by banks stand a chance to benefit as they are able to access capital at very low rates due to this competition.

     A detailed analysis of the topic of financial structure and banks profits can be approached in two ways. The first way is to consider the effect of financial development on bank profits. From this is it easy to develop an assessment on the impact of these profits on economic growth. The second way to approach this topic is considering the effect of financial structure on the performance of banks when financial development is controlled.

There are two measures of banks performance. One of these measures is bank profitability which can be assessed as the profits generated by the bank divided by the assets. The other most important measure of the performance of banks is the bank interest margins which is calculated as the net interest generated divided by the assets of the bank.

The inefficiency or the efficiency of banks can be measured by these two measures (bank profitability and bank interest margins). This is because these two measures act as a connector or a link between savers and borrowers.

The adoption of bank finance by the various stakeholders for investment leads to business for banks. The variables mentioned above affect the cost of bank finance and thereby firms engage in investment profits which are profitable so as to meet these costs and hence economic growth.
In general the overall performance of banks is different in both the market system and the bank system. Therefore to bridge this gap financial development should be enhanced in the economy. If financial development is achieved there is a very high possibility that bank profits and interest margins will be achieved significantly.   

The use of mathematical techniques to assess how financial development is significant in assessment of the profitability of banks has shown that there exists high correlation between the two. When financial development is achieved at the highest level regression analysis has shown that both the bank system and the market system lead to high profitability in banks. This profitability in turn leads to economic growth.

Commercial indicators of high competition in the banking industry are the reduced profitability and low interest rates in banks. The stock market on the other hand complements banks in areas of low level of financial development since there is not much competition in them. The only factor to consider in stock markets is their level of development.

             Development of stock markets is very vital in that it provides perfect information for banks in which they are able to base their decisions on. Sound financial decisions by these banks lead to improved bank performance which on the other hand impacts greatly on economic growth.

Another reason why the development of stock markets is important is that through the existence of an efficient legal framework it is easy to improve the overall banking environment in terms of business processes and contract enforcement.

FIRMS FINANCING CHOICES IN MARKET BASED AND BANK BASED SYSTEM
    The difference between market based and bank based systems is that in market based systems, firms obtain finances from the capital markets in the form of equity and bonds while in the case of bank based systems, banks, by offering credit, are the main financiers of the economy according to Schmukler and Vesperoni (2004).

Lenders in both market based and bank based system are however faced by the expenses of evaluating the performance of firms and their management. Schmukler and Vesperoni continue to argue that commanding control over the debtors and financial instruments liquidity are the major two factors that lenders have to weigh between.

Corporate bonds can be traded in markets which are liquid considering that they do not provide for inside monitoring and thus save on expenses to administer control over management since (Bhide, 1993). As opposed to these, banks, in offering unsecured loans for businesses, have to undergo the expense of acquiring inside information from borrowers in order to exercise control over them.
The two systems therefore are well suited to finance different kinds of firms. Banks are a better fit in financing organizations at their infancy while public markets would do better in funding already established firms with assets that are tangible. Inside monitoring which apparently applies more to banks holds a potential advantage in that it creates an extended relationship between the firm as the borrower and the bank as the lender (Schmukler and Vesperoni, 2004).

In order to obtain financing, a firm may opt for stage financing, which is offered in banks based systems and market based systems. This for example implies that a bank may offer short term contracts in place of long term loans. This therefore means that the bank will be able to access a firms credibility through its various stages in projects investment. Stage financing may be more effective in that, if a borrower pays their debts in time, there would be no need of trying to determine the true value of their assets and thus saving on the resources allocated to inside monitoring of the firm (Stulz, 1998).

    The results of global financial crises affect firms from the different financing sectors in different magnitudes. For example, in the event of a crisis, bank based systems may tend to be more immune to global financial crisis since the long-term relationship between the bank and its borrowers enables the bank to collect enough information regarding the firms performance.

This means that the bank, from its inside information, will continue to lend to financially sound firms and therefore, firms in the bank based system end up being less affected by the events of a financial crisis. Contrary to this, global financial crisis effects on the economy causes public markets to become illiquid leading to a reduction in prices for all firms.

This is bound to make it difficult for investors to distinguish between potentially profitable firms and those that are not potentially profitable. However this still implies that if the banking sector was to be subject to financial crisis then firms in the bank based systems would be hard hit while those in the market based economies would remain unaffected.

In order to describe firms financing choices in market based and bank based economies, Schmukler and Vesperoni use data on firms from Argentina and Indonesia as bank based economies and Brazil, Mexico, Malaysia, South Korea and Thailand as market based economies (Schmukler and Vesperoni, 2000).  The choice of these countries is based on the fact that they have been through financial liberalization, repression and crisis. Schmukler and Vesperoni test for the difference between financial choices for firms in bank based and market based economies by classifying countries depending on the attributes of their financial sector (Demirgut-Kunt and Levine, 1999).
They also study three attributes of the financial structure of a firm which are the firms choices between financing of equity and debt, external and internal financing and debts maturity structure. These attributes are built upon estimate models of dependent variables.

These variables are debt-equity, short term debt over equity, long-term debt over equity, short-term debt over total debt and retained earnings over total debt. Explanatory variables are grouped into effects of the country, macroeconomic factors, firms international capital market access, and attributes specific to a firm (Schmukler and Vesperoni, 2000).

According to Schmukler and Vesperoni (2000), there are factors or ratios that determine financing choices of firms. One of these ratios gives the fraction of short-term debt over total debt and the average debt-equity ratios for market based and bank based systems separately. From this ratio, two deductions can be identified.

One is that, for market based systems, debt-equity ratios are always higher contrasting the general expectation that as compared to debt, equity values in market based economies are higher. Second, though market based systems are best suited to funding firms with typically tangible assets, that is, liquid financial instruments and bank based systems are a better fit for long-term lending relationship, this does not always imply that greater liquidity results to short-term financial instruments.

Market based economies may also avail long-term financial assets liquidity. In essence, the second deduction from this ratio is that debt maturity structure is the same for both market and bank based economies as described in the foregoing explanation. These may also be explained by stage financing whereby short-term liabilities are not a preserve of market based economies and long-term liabilities a preserve of bank based economies.

Firms are affected differently by the effects of international capital markets access and financial liberalization depending on the firms financial structure, that is, bank or market based economy. This therefore means that there are two types of regression, regression for market based economies and regression for bank based economies.

A difference in market based and bank based systems implies a difference in the effects of integration with international financial markets, more significantly in market based systems. This will be so because variables that show international markets access are particularly expected to change significantly with changes in international financial markets integration. Resultant changes in variable that measure participation of firms in global equity and bond markets obtained in this case depicts the difference in effects across the two systems.

As Schmukler and Vesperoni (2000) continue to argue, a small difference between market based and bank based systems compared to the difference between developed and emerging economies implies that the effects of international capital markets access is also small.

Financial liberalization among other factors denotes deregulation in the local financial sector a period in which economies are in financial intermediation depending on the incentives of the market.
Financial liberalization does not necessarily imply effects on market based systems but can lead to a competent banking sector thus it is not certain that the variable depicting financial liberalization will change specifically in either of the systems according to Demirguc-Kunt and Levine (1999). Effects of the variable denoting financial liberalization are dependent on the aftermath of financial liberalization.

Specific attributes of a firm are bound to affect the financial structure in either bank based or market based economies. For both, market based and bank based economies, the extent of the debt maturity structure increases with increase in size of the firm.
 For bank based systems, increase in size of the firm will result to increase in ratios of debt-equity and long-term debt. Long-term debt and short-term debt changes depending on the size of the firm in market based systems but short-term debt effects are not very pronounced.

In market based systems, larger firms result to a reduction in risk security assuming that large firms refer to firms that are more established. These larger firms are able to reduce their short term debt and increase their long term debt by moving their maturity structure from short to long term.
 For bank based systems, in the case of stage financing, banks will not necessarily have to monitor the activities of a firm as it grows and gets sufficiently established in the market. From the foregoing, increase in size of a firm can be related to ratios of long-term debt and debt-equity.

On the choice of firms financing with regard to tangible assets, there exists insignificant difference in the case of bank based and market based systems with reference to the leverage ratios. Firms with more tangible assets achieve a greater level of internal financing and their debt maturity structure is long in the case of market based systems.

For both financial systems, there is no difference in profits over assets effects. With reference to firms attributes, the only difference between market based and bank based economies is that tradable producers are able to achieve more internal financing in market based economies. This is because tradable producers shift their maturity structure more to the short term.
Financial Services.

Bruce (2005) argues that the overall provision of a full range of financial services is necessary for economic growth achievement in developing countries. In this regard insurance companies, banks consumer finance organizations, government sponsored enterprises, stock brokerage firms and banks are all involved at the same time as sources of finance.

In this regard the financial structure consists of different capital providers at the same time. A detailed analysis of this shows that, the capital mix will be out of different sources. This is very advantageous as even the cost of capital is likely to go down due to the increased supply of capital. In this regard businesses and other firms are able to access capital needed to run their operations.
When businesses are able to access capital to run their operations they are able to contribute to the gross domestic product of the country in a very significant way. This in return spurs economic growth to a greater extent.

A country like the United States relies on financial services to finance 20 of its business operations. Major economic debates about this kind of system reveal that it is efficient in developed countries whereby financial services providers are well advanced.

Though not much criticism has been advanced about the use of financial services it has one major drawback in the rates of default. In this regard it is important to note that with very much default these financial institutions are likely to collapse and thereby will not be in a position to provide capital any further.

In any capital market the presence of financial services depicts a trend that allows for capital consumption in the most efficient way. However, the provision of financial services in developing countries has not been all that effective due to lack of awareness and information about the various sources of finance. In this regard due to the fact that these services are not fully utilized and thereby full blast economic growth is not achieved as would be expected.

In the provision of financial services on fact to behold is that the main emphasis is not the where the finance will be sourced but the emphasis is on the enactment of a conducive environment that provides efficient interaction of capital providers and capital consumers.

The provision of financial services primarily aims at the overall creation of market systems and financial institutions are able to efficiently and effectively finance operations in an economy.
The theory of financial systems aims at driving out the point that both the bank systems and market systems are both necessary for economic growth to be achieved in the best way possible. This is because the bank based system is not sufficient while the market based system is not efficient and thus a mixture of the two is very vital.

According to Levine (2001) different components of the financial system incur different costs depending on the area of coverage. The essence of their operations is just how to meet these costs such as transaction and information costs.

Risk management is also another pertinent issue relating to the financial services sector. This is because the risk associated with default is very high and in this regard a detailed analysis shows that most of these financial services providers try as much as possible to insure their interests so as to avert this risk.

Consequently the need to meet global market needs in terms of imperfections in demand and supply interactions of the market and bank systems contribute to the adoption of both systems so as to bridge this gap between the supply and demand of capital. Different structures adopted by different companies rely on the savings mobilization that financial services provide.

The essence that arises out of the need to tie capital is just enough for government economies to predict the level of change in terms of Gross domestic product and other economic growth measures.

Supply of wages is also dependent on the availability of capital and therefore the level of labor that will be provided to a firm just depends on the financial resources necessary to reward labor as a factor of production.

Any financial arrangement in this setting should therefore engage expert financial and corporate control so as to enhance and meet the desired level of liquidity. In real sense the factor that counts most in either the bank based system or the market system is how much the capital requirements of firms will be meet and what are the opportunity costs involved if these sources of capital are adopted.
The opportunity cost of not adopting a given set of system may be too high such that instead of promoting economic growth it degrades the level of the economy. In this regard careful and thorough market analysis is vital in creation of a financial system that is not only going to spur economic growth and development but one that is also able to sustain this growth.

Levin (2002) argues that The financial services view places the analytical spotlight on how to create better functioning markets and banks, and relegates the  bank based versus the market based system debate to the shadows(p. 401).

Despite the fact that emphasis is laid on the bank based system and market based system, there is much need to identify other systems that function in to integration with these systems. One of the systems involved here is the legal system.

There is no business setting without conflict as put across by James (2000). Provision of financial services is very sensitive and therefore different legal measures and procedures must be put in place in order to make sure that these systems run smoothly.

There exists legal rights relating to finance which must be safeguarded at the same time and the reasonable assurance that they can be safeguarded is only provided by the legal system in place.
The reason for the emphasis of legal procedures in this topic is that unfair competition and engaging in illegal financial activities could have a negative impact on economies. In this regard it is vital that the procedures followed in both the bank based system and the financial system should be legal.
Better protection of the financial rights of market players such as financial institutions maintains higher levels of economic growth. Market laws and regulation provide favorable conditions for businesses to be conducted.

However in a contrasting view of the two systems there is a disparity in terms of legal systems. According to Rajan and Zingales (1998) it is quite clear those economies which uphold low levels of legal institutions and with very poor legal systems experience more benefit in terms of economic growth as compared to those that use the market system.

In this theory Rajan and Zingales (1998) also suggests that for the market system to produce high levels of economic growth, very efficient and strict legal systems should be put in place. This is because the market system deals with very many industrial players and lack of their regulation will lead to collapse of business.

Economic development and growth will only be achieved if there crosscutting analysis of the different financial systems and their inherent systems and comparing them with the level of development of the economy at hand and the corresponding legal system adopted.


Measures of Activities of Financial Intermediaries.
This debate would be incomplete if total disregard of financial intermediaries was upheld. Financial intermediaries are found both on the private sector and public sector and are a key determining factor of financial structures adopted by firms.

The size of these financial intermediaries in any given economy is very important as it determines the extent to which they are able to finance investments. There are two key size indicators of financial indicators according to Goldsmith (2009) which include private credit by deposit money banks to GDP and private credit by deposit money banks and other financial institutions to GDP.
The definition of the first measure of financial is based on two variables which are claims on the private sector by deposit money banks and the gross domestic product of a country. To get the real measure the claims on the private sector by deposit money banks is divided by the gross domestic product.

The definition of the other measure is given by the valuation of claims by both deposit money banks and other financial institutions .the general method applied in both measures is the complete isolation of the private and public sectors.

In conclusion it is quite evident that the market system involves large scale economic processes whereas the bank based system is based on the provision of financial services. The market based system is mostly adopted by developed nations like the United States whereas the bank based system is adopted by developing countries such as countries in Africa and Asia. The next chapter aims at analyzing the existing empirical evidence and formulation of economic models that will further this discussion.

Chapter 3 Existing Empirical Evidence
The discussion of the bank based and the market system would be incomplete without empirical examples of countries that have adopted such kind of systems. There would be even no reasonable basis of justifying the success of any of this system in the quest for economic growth and development.

In this analysis, the countries to look at as empirical evidences of how the discussion of these systems holds are the United States and United Kingdom and Germany and Japan for the market and bank system respectively.

One of the major characteristics of any market system of finance is that there exists a lot of freedom in the market as regards factors of production and their regards. The United States and the United Kingdom are some of the countries that have been able to adopt this kind of financial structure.
The major characteristic of the market economy in the United States is that government intervention is very minimal and in this regard the forces of demand and supply determine the level of production and consumption.

A detailed analysis of the United States economy reveals that the factors of production are fully and efficiently utilized by elimination of agency problems and risk control. The economy is founded on the basis of a legal system with sound legal policies which are a further evidence of the existence of a market based system that is so successful.

In this kind of system it is quite evident that labor mobility and efficiency is very high. A detailed view of this system of finance shows that for it to hold the labor market must be very efficient for maximum production or output to be achieved.

Market demand in this type of this system revolves around the interaction of the firms and households. The circular flow of income is what determines what is right for the economy to grow. The circular flow of income is a model that shows the interactions of firms and households in an open economy.

The operation of the circular flow in real sense acts as equilibrium in which both firms and households depend on each other. Equilibrium in the circular flow of income will only occur if the injections created are equal to the corresponding leakages as depicted in the following equation
Savings  Taxes  Imports  Investment  Government Spending  Exports

The reason for the selection of Japan as a good example of the bank based is because Japan experienced a very fast economic growth due to its bank centered economy. In the 20th century banks were major financiers of operations in Japanese industries and thereby the reliance placed on them by theses industries was on the higher side. It was quite clear that those industries which had preferential access to financial services such as loans were able to grow at higher rate than those that did not rely on these services.

Though this debate remains strong in the minds of many scholars still some of them believe that the height of growth of the Japanese economy was as a result of strict government control and regulation of corporate finance.

Gerschenkron and modern theorists believe that argument which proposes Japanese growth was as a result of the presence of banks is flawed and lacks some sense of truth in it. They believed that the existence of banking institutions that gave firms access to loans and other kinds of debt did not really give these firms and advantage over others in terms of better investment and financial well being.
Perhaps a force to reckon with in this debate was the existence of the Zaibatsu group. This was one of the most powerful financial cliques of the late 1990s and early 2000s. It was believed that banks at the time which financed industrial and financial operations were under the direct control of Zaibatsu in a very significant way. This forms one of the reasons why Gerschenkron and modern theorists believed that banking systems were not involved in the economic growth of Japan.

Gerschenkron believed that the banks provided the necessary finance but it was the government that was responsible for the guidance and direction of these financial resources in order to spur economic growth.

Most of the affiliate banks under Zaibatsu were also involved but it was through the direction and focus provided by the government that sustainable economic growth was achieved. In this regard inefficiencies in financial markets were eliminated through government regulations according to Gerschenkron and his fans.

Though Gerschenkron viewed the Japanese system as one that was not contributed to by banks he reached to a point of controversy with William Lock wood one of the scholars who proposed that the Japanese system was purely run by the zaibatsu financial conglomerate.

In this regard Gerschenkron explained the economic growth of Japan as one that grew reasonably fast not because of Zaibatsu but because of the avoidance it insisted on the decentralized market system.
The German system on the other hand is one that grew out of the presence of decentralized intermediaries like Japan. Germany developed at the height of the world wars and the economy had even at one time dampened as a result of a recession.

Through the existence of market systems that were quick to generate revenues from economic facilities such as banks, Germany had no option apart from empowering them. The reason for the fast economic growth was because Germany had experienced very successful industrialization.
The intermediaries system was highly heightened during the Hitler era (1933-1945) whereby financial institutions were given high government support through the use of subsidies to the sectors that were likely to spur economic growth. Though this was a move by Hitler in order to give Germany military as well as economic power, it enabled the creation of efficient sources of finance.
The advantages stipulated under the bank based system existed also in Germany. In fact the Germans proudly label their economy as a social market economy or soziale Marktwirtschaft, In this regard control of financial structures was independent unlike in earlier times whereby it was dominated by government intervention and control.

The major privilege that this intermediaries system enjoyed then was the fact that the existing markets at the time of industrial revolution in Germany was able to diversify and manage risks very efficiently. In fact the car industry then was able to survive through effective risk management practices.

Germany also experienced very high technological advances and the best source of finance at this time was the bank system as compared on to the market system which required the presence of superior information and high government regulation.

The issue at hand during the time of Nazi power was the fact that there existed so much diversity in opinion among the stakeholders. Also there was no much perfect information present during that time. According to (Allen and Gale 1999, 2000) where there is scarcity of information and very diverse opinions, the bank oriented system comes in handy than the market based system in promoting long run economic growth.

The major concern in the Germany economy which also turned out to work very well with the bank system was the legal system that existed in the country at that time. This in turn ensured that business processes such as contracts were run smoothly and whenever there was conflict the legal system in place was able to handle them in the best way possible.

Long run economic growth is just not easy especially when financial structures come in place. The general economic situation should be one that fosters an economic condition which is suitable for   adoption of any of the above system. The analysis of the countries, Japan and Germany just shows how the conditions present at the moment were able to spur economic growth and development in the long run in these two countries.

The fact that finance is a necessary condition for economic growth and development is necessitated by the investment opportunities present. (Allen and Gale 1999, 2000) stipulates that countries do not grow fast if there is an inadequate finance to finance business operation.

However this debate has been criticized over time by most literatures and they try to explain that financial structure is not important for economic growth. Therefore the general effect of financial structures on economic growth must be taken cautiously.

Conclusions from technical surveys suggest that there is just sufficient evidence that financial structures cannot be relied upon as the only measure of explaining why different countries have different growth rates.

The explanation advanced in light of this disparity is that the access of finance in either of the two systems is not something that is just so easy and therefore the existence of different countries with similar growth rates but with different financial systems.
In light of this the most important factor according to (Allen and Gale 1999, 2000), is the existence of a very strong legal system that is able to ensure that the rights of investors are properly safeguarded and that contracts are enforced in the best way possible.

The advantage of this is that financial markets are developed efficiently and that fair play is enhanced. Intermediaries in the market sector also get a chance to develop efficient systems which in turn improve their operations.

Chapter 4 Specification and Econometric Methods
The general analysis of the production function can be done on the basis of determination of the level of output of a given economy. In this regard we assume that the economy upholds two main factors of production which are labor and capital.

The optimum combination of the two factors of production is what yields the level of production in a given economy. This optimum combination where by the producer is indifferent is depicted by the use of a contour line called the isoquant. This is where the production process is based.

The production function specifies the output of a given economy or industry. Though seen as a subject based or derived from micro economics, it is quite evident that most of the macroeconomic principles are based on the production function.

This is to show that there exists a mathematical relationship between the output derived in a given economy and the input of the two factors of production mentioned earlier. The main issue of concern in the components of the production function is determination of the most optimal combination of these factors of production.

It is also quite evident that sometimes one of the factors of production is fixed while the other one is variable in the short run. However, the production function is not influenced by this and in real sense it remains constant.

Production theory basics are not interested in monetary factors such as costs and price but are rather interested in physical units of output in an economy. This kind of function completely ignores the business processes and therefore fixed and variable costs determination is not necessary for the advancement of this debate.

The main issue of concern in this debate is how the financial structure can be incorporated in the production function and has an impact on the economic growth of a given country. This will be in the determination of the most efficient input allocation to derive maximum input.
This specific analysis involves the application of a generalized production function of the following form
Q  f(X1, X2, X3...Xn)
Where
Q represents the quantity of physical units produced,
  X1, X2, X3...Xn   represents the various factors of production such as capital, land, labor and entrepreneurship
However, in our debate due the fact that we are not interested in joint production as would be yielded by the above equation we take a general form of the Coub- Douglass production function. Being a multiplicative production function it is represented as follows
QF (K, L)
Where
Q quantity of physical units produced
K capital   
L labor 
To advance this debate let X1 represent labor and X2 represent capital. Since the Coub-Douglass function is a multiplicative model it will take the form

Where a, b, and c are parameters which have been empirically determined.
To simplify the equation we simply add logs and the function will be as follows
Log (QX2) a  b  c log(X1X2) a
To relate this equation to the financial structure we introduce a variable that is the percentage of the overall market capitalization over bank lending. The coefficient of this function is represented by W as follows
Log (QX2) a  b  c log(X1X2) a d log (W) a

A high value of W means that the economy is more of a market based economy rather than a bank based economy since bank lending is low. On the other hand a low value of W means that bank lending is high and so the market is more of a bank based system.

With this econometric relation in place it is quite clear that it is easy to establish a relationship between the level of production and the financial structure involved in the course of the production.
The various data available only accounts for per capita output rather than data on labor because time series on labor force does not exists and if it does it is not sufficient. The parameter in place especially d determines the level of impact financial structure creates on economic growth. In this regard the more significant it is, the bigger the effect it creates on economic growth and the less the significance the lower the effect it creates on economic growth.

CHAPTER 5 DATA ANALYSIS

The data provide in the table shows very important information on economic growth in terms of the share of gross domestic product and the corresponding market exchange rates. One very clear observation in the table is that United States has one of the highest shares of gross domestic product in the world as compared to other countries such as Germany and Japan.

Major evidence available is that United States has one of the highest market exchange rate indexes. This supports the adoption of the market based system as a source of finance for the different firms and industries in the United States. This shows that the market system is efficient enough to generate a market index that is very high.

Comparison with other developing countries shows that their share of gross domestic product is quite low as compared to the United States. Their market index is also very low as compared to that of the United States. One of the contributing factors to this is the adoption of a bank based system.

The data in this table takes into analysis various parameters in the United States. In the first instance it is quite clear that the United States operates a market based financial system. The data ranges from the year 1960 to the year 1980 when industrial revolution n in the United States was still a factor to reckon with. It is quite clear that the FINANCIAL SYSTEM DEPOSITS  GDP ratio has been on the rise since 1960 signifying significant level of economic growth. Market capitalization is also on the rise according to the data given.

A careful analysis of this data shows that more and more economic growth is achieved as years go by and there is increase in bank credits in the US. This suggests that however the debate of the adoption of a pure market based system in the US may hold. There is a significant adoption of finance from banking institutions.

The data provided also gives a clear relation that economies grow as a result of market efficiencies. In this regard as market growth is enhanced by the presence of adequate finance for the corresponding industries. This is evidence by the growth of liquid liabilities by industries from 1582626.00 in 1960 to 3650927.00 in 1980 in the United States.

The graph of growth in  liquid liabilities sin the united states clearly shows this. In this regard it is quite evident that growth in the gross domestic product has also been contributed by the growth in liabilities over the years. This means that the different sectors are able to access funds.

This is an analysis of Japan and Germany which adopted the bank based system in their economic growth measures. BANK CREDIT  BANK DEPOSITS show a rising trend. A high correlation exists between the level of deposits and borrowings as years go by. In this regard these countries exhibit a high reliance on the bank system.

One of the features evidencing this is the rise in gross domestic levels as evidenced in the increase of the BANK DEPOSITS  GDP ratio over the years. For example the table shows that Germany had a BANK DEPOSITS  GDP ratio of 0.32 in the year 1960 while in the year 1980 there was a significant increase of this ratio to 0.53 meaning that there was significant increase in the gross domestic product thereby economic growth.

The overall growth in money deposits in the banks created over the years just shows by how much Japan relied on finance from banks. BANK DEPOSITS  GDP are a measure of by how much the bank deposits contribute to the economic growth in terms of the growth in domestic product.
The graph of the growth in BANK DEPOSITS  GDP over the years shows this.

Attached too are excel file which show different aspects of financial structures and their relevance to economic growth in different countries. This analysis draws its data form low income countries, medium income countries and high income countries of the world.

Some of the aspects contained in  the excel files are world bank income group of the country which shows whether a country is in which group of income according to world bank statistics and deposit money bank assets  (deposit money  central) bank assets . The three countries involved in this analysis are Gabon which happens to be an upper middle income country, Indonesia which is a lower middle income country and France which is a high income country.

The three countries analyzed show different parameters as regards deposit money bank assets  (deposit money  central) bank assets, liquid liabilities  GDP, central bank assets GDP, deposit money bank assets  GDP, other financial institutions assets  GDP, private credit by deposit money banks  GDP, bank deposits  GDP, bank credit  bank deposits, financial system deposits  GDP, and private bond market capitalization  GDP over different years.


Chapter 6 Conclusion
This paper was geared to focus on the effects of financial structure and economic growth and a brief literature on the same has been put across. The link that exists between the financial structures put in place by different countries and the growth rate they experience has also been explained.
 A detailed analysis on how different financial structures are deficient or efficient has also been put forward. In this it is prudent to conclude that there is diversity of opinion and views that the suitability of any financial structure on any country cannot just be measured in real terms but is affected by many other factors.

The various theoretical and technical approaches advanced against the market based system derive their negativity from the advantages of the bank based system. On the other hand the disadvantages of the bank based system are derived from the various advantages of the market based system.
The disparity in the views advanced by various scholars implies that economic growth is not only dependent fully on the financial structures adopted by the various countries. This debate is contributed by the fact that different economies have different financial structures but experience nearly the same growth rate.

It is has also been evident that legal institutions and the general concept are key issues to consider in the adoption of any of these systems. This is because legal institutions determine the protection of investors rights and the also determine the extent to which contracts are enforceable. Finance is also vital especially in the bank based system since it helps in evaluation of financial decisions.
Another major area of concern has been how different financial structures impact on economic growth of different countries. It has been quite clear that most of the developing countries prefer the bank based system rather than the market system.

Developed countries like the United States have adopted the market based system and are therefore able to support their economies as a result of stable financial markets. They also have a definite well balanced circular flow of income whereby there is efficient interaction of both demand and supply.
It is also quite clear that through the different literature that is available from various scholars, that the bank based system, financial services and the law and finance views have more theoretical support than the market based system. This is due to the prevailing strict conditions that are available under the market based system.

One feature to note in modern economies is that both the market system and bank based systems complement each other. The issue at hand in the market system is how far the government should regulate the different aspects of the economy so as to maintain market demand and availability of funds at the optimum. Through this regulation, it is inevitable to employ the services of intermediaries. The whole process ends up being a mixed financial structure since it has aspects of both the bank based system and the market system.

As advanced throughout the development of this paper it is quite evident that the two different financial structures have their corresponding advantages and disadvantages depending on the different economic scenarios.   The choice of what system to adopt depends on the suitability it poses on the countrys economic growth and development.

The bank based system or the use of intermediaries is better suited for financing firms that engage in economically viable projects where by the possibility of existence of a moral hazard such as default is highly mitigated. For example financial institutions such as banks will finance capital investment with the likely hood of yielding higher returns as opposed to those that do not yield return
On the other hand the market system is well suited for financing developed economies whereby there is existence of a continuous advancement in technologies. It is also very efficient in countries where by firms are able to function with minimum government intervention in the provision of financial aid.
Different countries differ in the extent to which their financial systems are either bank based or market based. The extent to which a financial system is said to be bank based is dependent on the overall reliance in mobilizing savings and allocation of capital by the banks in existence.

The most ideal economy that would be in existence would be the economy that upholds the two financial structures at par. This is because adoption of any of the systems has its shortcomings that are derived from the strong points of the other. For example one of the shortcomings of the use of intermediaries such as banks is the risk of default. However if there was existence of a well developed financial market this risk could be minimized as there exists financial markets which can be used as an alternative source of finance.