Do you think global fund managers would drive local competitors out of the mutual funds business in Southeast Asia or Latin America? What has been the actual experience of foreign firms in Europe, Japan, and North America? How could government concerns about preserving local competitors be reconciled with policies favoring free trade in financial services?

Answer 1

Asian governments typically fear that foreign financial firms, if allowed to compete freely, will drive out local financial firms. However, that fear is not supported by the experience in other countries. In practice, because the level of integration among the world's markets for mutual fund products is still very low, each local market tends to limit itself to those types of mutual funds that are tailored specifically to meet the specific requirements of that market. Such limits not only give local players a competitive advantage, but also make it more difficult for global payers to take advantage of their larger size to achieve lower costs or better returns. For these reasons, foreign firms have made limited headway in the Japanese fund business. Similarly, German and French firms continue to dominate their country's fund industries even though the EU is quite open to foreign fund sponsors. Even in Canada, the local firms continue to be the largest players, although a few U.S. firms have made substantial inroads there.
If trade negotiators want to reach a compromise between free trade in financial services and the concern about local firms in Asia or Latin America, they could propose various measures. First, following the precedent of foreign banks in Mexico, they could propose ceilings on foreign market share of the fund industry, which could be gradually phased out. Second, they could require foreign firms to work with a local partner in a joint venture, with a sunset date for this requirement. Third, they could limit foreign investments to a specified percentage of fund assets, as local firms will have a comparative advantage on local investments. Again, this limit should be phased out in a specific number of years.