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Competition and Innovation in the Anglo-American Investment Management Industry

Pension funds are at the center of a vast, and expanding, financial services industry. Notwithstanding their significance for global and local capital markets, there are few studies of investment management firms? structure and organization particularly with respect to the production of their services. Here we provide a generalized "map" of the cost structure of the industry, referencing crucial variables found in other industry studies. This is the basis for an analysis of the production process of investment management, contrasted with widely accepted notions of production inherited from studies of manufacturing. The paper also deals with competitive practice in the investment management industry, focusing upon competition by routine and performance. Data on the performance of Australian fund managers over the period 1988-1997 are used to illustrate our argument regarding the temporal contingency of performance. The paper highlights the economic geography of the industry and the special role that financial regulation may play in distinguishing Anglo-American firms from their rivals. And the penultimate section then considers implications from the previous analysis for the product innovation process. Theoretically, the paper is inspired by concepts allied with evolutionary economics. However, we also show that the arbitrage process so essential for assumptions of progressive succession are quite fragile and subject to systematic discounting in the investment management industry.