Why does the US have so much more investment banking activity than the rest of the world?
Why does the US have so much more investment banking activity than the rest of the world? Why more M&A? Why more capital markets (both debt and equity) activity?
The United States is the world's largest economy with a GDP of approximately $20.513 trillion, notably due to high average incomes, a large population,7 capital investment, low unemployment,8 high consumer spending,9 a relatively young population,10 and technological innovation.
I appreciate the comment and am aware of most of the above, I am mostly interested in what has enabled those conditions?
Capitalism
If you're genuinely curious to learn more about this, I recommend a book called "The Accidental Superpower" by Peter Zeihan.
Because most of the rest of the world is shit. The US economy is the largest, and it's the most attractive for businesses
bro open up a fucking US History textbook or something then
The US was the pretty much the only major western nation to come out of WW2 unscathed. During the 1980s, a lot of very corporate friendly policies were passed such as lower top marginal tax rates and corporate tax rates. Supply side economics worked really well for the corporations in the 1980s and onward. Today, many western nations in Europe like France have had strong democratic-socialist policies which aren't really friendly toward mega-corporations. The European Union has also capped banker bonuses which makes a lot of top talent want to work in the United States.
If you want to go back even further, the US had a *lot* of untapped potential in the late Reconstruction Era (1865 - late 1870s) which eventually began to become more utilized which resulted in explosive growth during the Gilded Age (late 1870s - around 1900). This explosive growth slowed during the Progressive Era (around 1900 - 1929) due to progressive policies such as Roosevelt's trust busting and labor laws. Obviously it all went to shit in 1929 which marked the start of the depression era (1929-1941) and people realized that complete unfettered capitalism may not be the best idea. (This next part is arguable): New Deal Policies combined with the complete utilization of American manufacturing resources jumpstarted the US economy which leads us to where I started this comment. The post war era wasn't the most conductive to big business due to lingering New Deal policies that strongly reduced income inequality and prevented the formation of large monopolies like those seen during the Gilded Age. Then like I said Reagan came into the pictures. The policies of his era allowed banks to take on far more risk than they could since the pre-New Deal era. Even Jimmy Carter was more lax than people remember him to be regarding banking. Later in 1999, Bill Clinton repealed FDR's law that separated commercial and investment banks which is attributable to the growth seen in 2000-2008. Then everyone knows what happened next.
Not to get too political or anything, but my personal opinion on all this is that there definitely needs to be a balance of regulation and freedom in finance. The free market can go too far like as was seen in the Gilded Age with child labor and the sort, but regulation can also go too far as well like totally banning any prop trading by banks.
Anyway, that's all from a regulatory and fiscal policy perspective. I don’t really know enough about monetary policy history to give an answer from that perspective.
Just because we have the biggest economy (for now) does not mean "most of the rest of the world is shit." The US is a shithole in comparison to OECD countries in a number of categories, with some of the highest poverty rates, highest incarceration rates, highest obesity rates, lowest early childhood education outcomes, and lowest life expectancy numbers. Americans think 99% of the world is a shithole but really only like 65% of the world is a shithole.
That's most bro. Only about a third of the world is even relevant
The US is the best version of the Liberal Market Economy, which relies on markets and prices to co-ordinate economic activity. In Coordinated Market Economies, like Germany, companies are much more reliant on lending from their bank, as opposed to going to the market for financing. Thus, when you combine the size of the US economy, along with the nature of financing, the amount of ECM and DCM activity is not surprising. M&A is likely a result of this as well due to the pricing mechanism and the lack of reliance on coordination / collaboration to do business (you'd just buy the company instead).
Besides all the macro factors there's also a culture of growth and M&A that does not exist anywhere else. If you look at Latin American and Asian conglomerates, they are usually family owned and only make a minority % publicly traded. Then the Board is led by people related to the family. They are not risk takers (notable exceptions are Korean chaebols like Samsung) and usually diversify across the same type of businesses which require some type of government permission (telecom, mining, energy, food & bev).
This is a gross generalization but I have had the opportunity work in emerging markets and is always the same. Owners don't want to transact and see their companies as something they build for their kids to inherit and are weary of different capital structures so are usually 100% equity. The US is not like that, in the US people dream about making a company public or selling it.
It is actually much more simpler than what others are saying. The US is not even close to being the most liberal country (its around 17 on the Economic Freedom Index), nor that young vs other developed nations, nor its unemployment is that low nor its policies are that much different than those of the EU (if anything the US is becoming more and more like the EU these past few years).
The reason the US is the epicenter of M&A is three simple reasons: purchasing power (enabled by the technological gap that the US had in the past century across industries) and a slowing down of growth over time (the ugly face of the concept know as catch-up growth) and most importantly, a culture of networking.
From an industrial organization perspective, there is a clear correlation between a decrease in growth and an increase in M&A. At its simple level: decreasing profits due to oversaturated market = further incentive to have more control of the market to be able to charge more. This is why most industries in the US are oligopolies, far from a free market and liberalized mecca. This is further enabled by companies that have a lot of power at hand due to its massive growth in the past, as the US succeeded in that its rise was also the rise of the world. In other words, American companies were selling globally as the world developed but bringing those profits home.
Finally, the number 1 driver of M&A is actually “hungry” MDs. If you actually take a look at you average transaction many times the stock of the acquirer goes down over time whereas their ability to increase prices is not materialized as you would need to acquire many more companies to have a high HHI to make it worth it. This is obviously impossible given the anti monopolistic laws in the US. The US economy has had a series of “waves” over the years (we are on wave 7) of M&A, and the number one driver of those waves has always been bankers looking for profits.
I know you probably had a seizure reading that, but it is a lot of content to type from my phone. I took a class in college that touched on this subject and it was really eye opening