An Invisible Giant

The power of small states is not measured in absolute numbers, but in their ability to navigate global markets with agility. This is one of the lessons emerging from the paper "Business-Government Networks in Small States: The Emergence and Evolution of the Luxembourg Global Mutual Fund Industry, 1945–1988," by Valeria Giacomin (Bocconi University) and Matteo Calabrese (a Bocconi postdoc at the Free University of Berlin), published in Business History Review. The study employs the case of Luxembourg to explain a broader phenomenon: how close relationships between political and economic elites can foster trajectories of specialization in small states. The Grand Duchy, now second only to the United States for size of mutual fund assets under management, has become a strategic hub for European and global finance since the 1960s, despite (or perhaps thanks to) its small size. "Our goal was not to propose policy models, but to understand what enables certain small states to sustain competitive advantage over time," explains Valeria Giacomin, Assistant Professor of Business and Global History. "Luxembourg offers an interesting case of 'managed intimacy,' where personal relations and cohesion between public and private actors contribute to regulatory sophistication and financial attractiveness."

A strategy built on relations, not simply rules

The story told in the paper starts in the 1930s, when Luxembourg's legislation began to offer tax advantages to international investors in “holding companies.” But it was in the postwar period, and particularly in the 1950s, that a close network of notaries, business lawyers and politicians incubated the birth and growth of the mutual fund industry. These people had hybrid profiles, often holding positions in both the public and private sectors, and managed to orchestrate a string of legislative decisions and legal interpretations (such as that of the 1929 law) to make Luxembourg a fertile ground for foreign capital. One of the key elements highlighted in the article is the concept of "bifurcation of sovereignty:" small states creating an area of lesser fiscal and normative regulation within their own borders, open to foreign investment, while formally maintaining consistency with EU laws. This strategy has allowed Luxembourg to become an offshore finance hub despite being a founding member of the European Union. "Luxembourg has developed a unique form of governance, where informality has not impeded efficiency, but has rather fostered it. Local elites have been able to use EU rules to their advantage, applying them selectively," observes Giacomin.

Power in powerlessness

The research also offers a broader reflection on the condition of small states, traditionally perceived as vulnerable and dependent on external powers. According to the literature, however, these same characteristics can become leverage: the small size allows for faster decision-making processes, greater regulatory flexibility and stronger cohesion between public and private actors. In the case of Luxembourg, these conditions have favored "specialization without labor," focusing on capital-intensive sectors such as financial services. This has been compounded by the involvement of foreign experts in the legislative process, such as Belgian economist Jeanne Chèvremont, who contributed to the drafting of the 1988 law on mutual funds and its timely translation into legal English: "A veritable marketing tool," she recalls in an interview with the authors.

Reflections beyond Luxembourg

The paper raises a critical point: the practices that have supported Luxembourg's growth and its specialization in investment funds — such as tax avoidance or the systematic acceptance of conflicts of interest — are also problematic from an ethical perspective. They are not proposed as "best practices," but as key elements to understand how smaller economies can build competitive advantage. The conclusion also lends itself to comparative scenarios: "Further investigation is needed into cases of other small states, such as Ireland," the authors suggest in the conclusion, "to understand whether this model is replicable or whether its success is due to a unique set of historical and political circumstances."