Capital Market Internationalization 3 The Model Internationalization has a dynamic,historical character:it feeds on itself.Although all studies of internationalization acknowledge this feature,they fail to draw the appropriate methodological consequence. When inquiring into the origins of internationalization,all authors concur in listing two sets of determining factors:(1)technological innovations yielding reduc- tions in cross-border transaction costs,and (2)government policies easing cross- border capital flows.Although technological innovations may,in some circum- stances,be viewed as exogenous shocks,government policies are unequivocally endogenous to the mechanism of internationalization.Causal models of the compara- tive-statics type cannot supply the proper explanation;internationalization would be serving both as independent and dependent variable-an axiomatic non sequitur for this kind of model.That circularity must instead be explicitly tackled through a dynamic model. The need for a dynamic approach is far from being universally shared.Studies of internationalization that seek to explain internationalization,instead,try to fit it into the Procrustean bed of comparative statics,with circularity being avoided in one of two ways:(1)technological determinism,which makes technological innovation exogenous and uses it to determine the model:10 and(2)structural determinism, which sees internationalization as the suboptimal outcome of states'competitive bidding for international capital.Technological determinism,however,goes against recent developments in "new growth"theory,making innovation a process that is endogenous to firms'profit-maximizing strategies,which states can influence through diverse policies.2 With respect to the second claim only the future will tell whether the deregulatory race between states for capital is structural or contingent on revers- ible domestic changes.The fact that the same countries already went through a simi- lar race under the gold standard weakens considerably the claim that today's compe- tition is here to stay. A simple dynamic model features a two-period decision process,allowing for a change in the state of nature in between.In the first period,the government is con- fronted with a technological innovation that promises to ease internationalization in the second period if the regulatory status quo is left unchanged and if the innovation is allowed to move down its learning curve,that is,be adopted,diffused,and im- proved through learning by doing.The government decides on the basis of expected return and opportunity cost,taking into account what other countries might do,whether to check the innovation by means of countervailing policies or let it mature.If the 9.See Goodman and Pauly 1993;Andrews 1994;Frieden and Rogowski 1996;and Haggard and Maxfield 1996. 10.Frieden and Rogowski 1996. 11.Andrews 1994. 12.Roemer 1994.The Model Internationalization has a dynamic, historical character: it feeds on itself. Although all studies of internationalization acknowledge this feature, they fail to draw the appropriate methodological consequence. When inquiring into the origins of internationalization, all authors concur in listing two sets of determining factors: (1) technological innovations yielding reduc￾tions in cross-border transaction costs, and (2) government policies easing cross- border capital  ows.9 Although technological innovations may, in some circum￾stances, be viewed as exogenous shocks, government policies are unequivocally endogenous to the mechanism of internationalization. Causal models of the compara￾tive-statics type cannot supply the proper explanation; internationalization would be serving both as independent and dependent variable—an axiomatic non sequitur for this kind of model. That circularity must instead be explicitly tackled through a dynamic model. The need for a dynamic approach is far from being universally shared. Studies of internationalization that seek to explain internationalization, instead, try to Ž t it into the Procrustean bed of comparative statics, with circularity being avoided in one of two ways: (1) technological determinism, which makes technological innovation exogenous and uses it to determine the model;10 and (2) structural determinism, which sees internationalization as the suboptimal outcome of states’ competitive bidding for international capital.11 Technological determinism, however, goes against recent developments in ‘‘new growth’’ theory, making innovation a process that is endogenousto Ž rms’ proŽ t-maximizing strategies, which states can in uence through diverse policies.12 With respect to the second claim only the future will tell whether the deregulatory race between states for capital is structural or contingent on revers￾ible domestic changes. The fact that the same countries already went through a simi￾lar race under the gold standard weakens considerably the claim that today’s compe￾tition is here to stay. A simple dynamic model features a two-period decision process, allowing for a change in the state of nature in between. In the Ž rst period, the government is con￾fronted with a technological innovation that promises to ease internationalization in the second period if the regulatory status quo is left unchanged and if the innovation is allowed to move down its learning curve, that is, be adopted, diffused, and im- proved through learning by doing. The government decides on the basis of expected return and opportunity cost, taking into account what other countries might do, whether to check the innovation by means of countervailing policies or let it mature. If the 9. See Goodman and Pauly 1993; Andrews 1994; Frieden and Rogowski 1996; and Haggard and MaxŽ eld 1996. 10. Frieden and Rogowski 1996. 11. Andrews 1994. 12. Roemer 1994. Capital Market Internationalization 3