Varieties of Capitalism

Varieties of Capitalism became popular in the fields of political economy (due to its macroeconomic
implications) and business (because of its analytical focus on the organizational structure of the
individual firm).

Authors/Editors: Peter Hall and David Soskice

Peter Hall
 Krupp Foundation Professor of European Studies in the Department of Government and at the
Minda de Gunzburg Center for European Studies
 Co-Director of the Program on Successful Societies for the Canadian Institute for Advanced
Research
 currently working on issues in the methods of political science, the political response to
economic challenges in postwar Europe, and the impact of social institutions on inequalities in
population health

David Soskice
 a British political economist
 studied at Political Science, Philosophy and Economics at Nuffield and Trinity College of the
University of Oxford
 school professor of Political Science and Economics at the London School of Economics
 research area: Political Economy
o focuses on the study of labor markets, systems of vocational education, and production
regimes

An Introduction to Varieties of Capitalism

1.1 Introduction
 Objective of the book: “to elaborate a new framework for understanding the institutional
similarities and differences among the developing economies”
 Differing approaches for comparative capitalism
o varieties of capitalism approach
 focuses on the kinds of institutions that alter the outcomes of strategic
interactions from key relationship in the political economy using a game
theoretic approach
 seeks to connect microeconomic into an analysis of the macro economy, with
business firms at the center
o next 3 approaches  response to the economic problem of its time
Approach Response to what economic problem
1. modernization Post-war decades: Securing high rates of
 saw the principal challenge national growth
confronting the developed
economiesas one of modernizing
industries still dominated by pre-
war practices in order to secure
 high rates of national growth.
 focuses on the institutional
structures that gave states leverage
over the private sector, such as
planning systems and public
influence over the flows of funds in
the financial system
 states are categorized according to
structure (France, Japan good
examples) (Britain the laggard)
 tends to overstate the capacity of
the state
2.neo-corporatism 70’s: Inflation
 associated with the capacity of the
state to negotiate durable bargains
with employers and trade union
movement regarding wages,
working conditions and social or
economic policy
 measured by centralization or
concentration of the trade union
movement
 focuses on the organization of
society
3. social systems of production 80s – 90s: Reorganization of production in
 consists of group analysis of response to technological change
sectoral governance, national
innovation systems, flexible
production regmies that are diverse
in some respects but united by
several key analytic features
 focuses on the reorganization of
production in response to
technological changes and
advancements
 emphasize the movement of firms
away from mass production toward
new regimes that depend on
collective institutions at the
regional, sectoral, or national level

Points:
1. Each of these explains important aspects of the economic world, but we seek to go beyond them in
several respects. Features of states once seen as attributes of strength make the implementation of
many economic policies more difficult.
2. In neo-corporatist analysis, we want to bring firms back into the center of analysis of comparative
capitalism.

3. There is focus on variation among national political economies. Many of the most important
institutional structures depend on the presence of a regulatory regime that preserve of the nation-state.

1.2 Basic Elements of Approach

 varieties of capitalism approach  actor-centered  seeing political economy as a terrain
populated by multiple actors, each of whom seeks to advance his interests in a rational way in
strategic interaction with others  film-centered political economy that regards companies as
the crucial actors in a capitalist economy  key agents of adjustment in the face of technological
change/international competition whose activities aggregate into overall levels of economic
performance
 1.2.1 A Relational View of the Firm
o firms:
 actors seeking to develop as capacities for developing, producing, and
distributing goods and services profitably
 conception: relational  we take the view that critical to these is the quality o
the relationships the firm is able to establish, both internally, with its own
employees, and externally, with a range of other actors that include suppliers,
clients, collaborators, stakeholders, trade unions, business associations, and
governments
 because its capabilities are ultimately relational, a firm encounters many
coordination problems. its success depends substantially on its ability to
coordinate effectively with a wide range of actors
 5 spheres in which firms need to develop relationships to resolve coordination
problems central to their core competencies
 industrial relations
o problem facing companies is how to coordinate bargaining over
wages and working conditions with labor force, the
organizations that represent labor and other employees
 vocation training and education
o firms face the problem of securing a workforce with suitable
skills, while workers face deciding how much to invest in what
skills
 corporate governance
o firms turn for access to finance and in which investors seek
assurances of returns on their investments
 inter-firm relations
o cover the relationships a company forms with other enterprises
 employee issues
o ensure that employees have requisite competencies and
cooperate well with others to advance firm objectives
 1.2.2 Liberal Market Economies and Coordinated Market Economies
o from this perspective, it follows that national political economies can be compared by
reference to the way in which firms resolve the coordination problems they face in these
5 spheres
 o the core distinction we draw is between 2 types of political economies
 liberal market economies
 firms coordinate their activities primarily via hierarchies and competitive
market arrangements
 firms in LMEs rely heavily on the market relationship between individual
worker and employer to organize relations with the labor force market
arrangements
 coordinated market economies
 firms depend more heavily on non-market relationships to coordinate
their endeavors with other actors and to construct their core
competencies
 1.2.3 The Role of Institutions and Organizations
o institutions, organizations, and culture enter this analysis because of the support they
provide for the relationships form develop to resolve coordination problems
o Following Douglass North: institutions as set of rules, formal or informal, that actors
generally follow, whether for normative, cognitive, or material reasons, and
organizations as durable entities with formally recognized members, whose rules also
contribute to the institutions of the political economy
o from this perspective: markets are institutions that support relationships of particular
types
 concomitant: a legal system that supports formal contracting and encourages
relatively complete contracts
 in liberal market economies: these are principal institutions on which firms rely
to coordinate themselves
 in coordinated market economies: firms draw on a further set of organizations
and institutions for support in coordinating their endeavors
o institutions providing capacities for
 the exchange of information among the actors
 the monitoring of behavior
 the sanctioning of defection from cooperative endeavor
o examining coordinated market economies leads us to emphasize the importance of
another kind of institution that is not normally on the list of those crucial to the
formation of credible commitments, namely institutions that provide actors potentially
able to cooperate with one another with the capacity for deliberation
 deliberation: institutions that encourage the relevant actors to engage in
collective discussion and not to reach agreements with each other
 importance of deliberative institutions
 deliberative proceedings: where participants engage in extensive sharing
of information about their interests and beliefs can improve the
confidence of each in the strategies likely to be taken by the others
 Deliberation provides the actors with an opportunity to establish the
risks and gains attendant on cooperation and to resolve the distributive
issues associated with them
 deliberative institutions can enhance the capacity of actors in the
political economy for strategic action when faced with new or unfamiliar
challenges
  in short: deliberative institutions can provide the actors in a political
economy with strategic capacities they would not otherwise enjoy; and
we think cross-national comparison should be attentive to the presence
of facilities for deliberation as well as institutions that provide for the
exchange of information in other forms, monitoring, and the
enforcement of agreements
 1.2.4 The Role of Culture, Informal Rules, and History
o many analyses take the view that the relevant outcomes in economic performance or
policy follow more or less directly from differences in the formal organization of the
political economy
o the presence of a set of formal institutions is often a necessary precondition for attaining
the relevant equilibrium in contexts of coordination
o but formal institutions are rarely sufficient to guarantee that equilibrium
o emphasizing the importance of informal rules and understandings to securing the
equilibria in the many strategic interactions of the political economy
 these shared understandings are important elements of the common knowledge
that lead participants to coordinate on one outcome, rather than another, when
both are feasible in the presence of a specific set of formal institutions
 entry point in the analysis for history and culture
 implication: institutions of a nation’s political economy are inextricably
bound up with its history in two respects
o 1. they are created by actions, statutory or otherwise, that
establish formal institutions and their operating procedures
o 2. repeated historical experience builds up a set of common
expectations that allows the actors to coordinate effectively
with each other
 1.2.5 Institutional Infrastructure and Corporate Strategy
o stress the systematic variation found in the character of corporate structure across
different types of economies as well as the presence of coordination problems even with
hierarchical setting
o in coordinated market economies, many firms develop relationships with other firms,
outside actors, and their employees not well described as either market based or
hierarchical relations
o institutional structure conditions corporate strategy
o emphasize variations in corporate strategy evident at the national level
o firms and other actors in coordinated market economies should be more willing to invest
in specific and co-specific assets, while those in liberal market economies should invest
more extensively in switchable assets
 1.2.6 Institutional Complementarities
o The presence of institutional complementarities reinforces the differences between
liberal and coordinated market economies
o complementarities may also exist among the operations of a firm: marketing
arrangements that offer customized products, for instance, may offer higher returns
when coupled to the use of flexible machine tools on the shop floor
o relevance for the study of comparative capitalism
  it suggests that nations with a particular type of coordination in one sphere of
the economy should tend to develop complementary practices in other spheres
as well
o each type of capitalism has its partisans, one is not superior to nother
o both liberal and coordinated market economies seem capable of providing satisfactory
levels of long-run economic performance

1.5 Comparing Coordination

 Even with these two types (CME and LME), significant variations can be found
 LMEs are distinguishable from CMEs by the extent to which firms rely on market mechanisms to
coordinate their endeavours as opposed to forms of strategic interaction supported by non-
market institutions
 This part of the discussion will note the variations in COORDINATED market economies in order
to show that variation in the institutional structures underpinning strategic coordination can
have significant effects on corporate strategy and economic outcomes

1. Differences between Industry-Based Coordination and Group-Based Coordination

Industry-Based Coordination Group-Based Coordination

 Northern European nations  Japan and South Korea

 For example, in the case of Germany,
coordination depends on business
associations and trade unions that are
organized primarily along sectoral line,
giving rise to vocational training schemes
that cultivate (1) industry-specific skills,
(2) a system of wage coordination that
negotiates wages by sector, and (3)
corporate collaboration that is often
industry-specific
 Implication: Since companies are in just
one sector, they often cooperate in the
sensitive areas of training and technology
transfer
 On the other hand, in the case of Japan,
the business networks of most
importance are built on keiretsu, families
of companies with dense
interconnections cutting across sectors
 Implication: Because they are arranged by
groups or by families, cooperation is more
likely to take place within firms belonging
in the same keiretsu. On the other hand,
there is competition among firms
operating in the same sector but under
different keiretsu
 Implication in terms of patterns of skill
acquisition: They encourage workers to
acquire specific skills appropriate for use
within the keiretsu within which they
have been trained. To persuade the
workers to acquire these skills, they offer
them life-time employment (so that the
skills that they learned will not be put
into waste, since they will be using it in
their whole employment careers).
 Implication in terms of technology
transfer: They have low capacity for
 radical innovation, so they tend to have
comparative institutional advantages in
the large-scale production of consumer
goods, machinery, and electronics that
exploit existing technologies
 Varieties of capitalism are also useful for understanding political economies that do not
correspond to the ideal type of an LME or a CME
o In the case of France, collaboration across French companies is based on career patterns
that led many of the managers of leading firms through a few elite schools and the
public service before taking up their position in the private sector.
o Implication: strong ties to the state and weak ties to the enterprise. As such, they are
more likely to look for assistance from the state than to their counterparts in other
nations
 Although the contrast between CME and LME is important, Hall and Soskice do not suggest that
all economies conform to these two types.

1.6 Comparative Institutional Advantage

 Comparative Advantage – Freer trade will not impoverish nations by driving their production
abroad but enrich them by allowing each to specialize in the goods it produces most efficiently
and exchange them for even more goods from other nations
 Comparative Institutional Advantage
o A theory that explains why particular nations tend to specialize in specific types of
production or products
o Institutional structure of a particular political economy provides firms with advantages
for engaging in specific types of activities there. Firms can perform some types of
activities, which allow them to produce some kinds of goods, more efficiently than
others because of the institutional support they receive for those activities in the
political economy, and the institutions relevant to these activities are not distributed
evenly across nations
 The contention that institutions matter to the efficiency with which goods can be produced
receives considerable support from the growing body of work on endogenous growth
o Endogenous growth theorists have suggested that the institutional setting for production
also seems to matter to national rates of growth
o There is now widespread recognition that the institutional context can condition growth
and technological progress
 National institutional frameworks in this volume provide nations with comparative advantages in
particular activities and products. In the presence of trade, these advantages should give rise to
cross-national patterns of specialization
 Focus: Impact on innovation since a firm’s capacity to innovate is crucial to its long-run success.

Radical Innovation Incremental Innovation

 Substantial shifts in product lines, the  Continuous but small-scale improvements

development of entirely new goods, or to existing product lines and production
 major changes to the production process process
 Especially important in fast-moving  More important for maintaining
technology sectors, which call for competitiveness in the production of
innovative design and rapid product capital goods, such as machine tools and
development based on research, as in factory equipment, consumer durables,
biotechnology, semiconductors, and engines, and specialized transport
software development equipment
 Also important in complex system-based  There is a need to maintain the high
product, as in telecommunications, quality of an established product line, to
defense system devise incremental improvements to it
 Competitiveness demands a capacity for that attract consumer loyalty, and to
taking risks on new product strategies secure continuous improvements in the
within large, tightly coupled organizations production process in order to improve
that employ a diverse personnel, as in quality control and hold down costs
airlines, advertising, corporate finance,
and entertainment
 Coordinated market economies – better at supporting incremental innovation since CMEs have
o Highly coordinated industrial-relations systems and corporate structures which provide
employees with the guarantees that elicit their cooperation
o Training systems provide high skill levels and the requisite mix of company-specific and
more general technical skills
o Contract laws and dense networks of inter-corporate linkages allow firms to form
relational contract with other firms
o Systems of corporate governance that insulate firms against hostile takeovers and
reduce their sensitivity to current profits encourage long employment tenures and the
development of the inter-firm and employee relations that foster incremental innovation
 Liberal market economies – highly supportive of radical innovation because LMEs have
o Labor markets with few restrictions on layoffs and high rates of labor mobility
o Extensive equity markets allow firms seeking access to new or radically different
technologies do so by acquiring companies with relative ease
o Corporate organization makes it easier for senior management to implement entirely
new business strategies throughout a multi-layered organization delivering complex
system goods or services
o Inter-firm relations based primarily on markets enhance the capacities of firm to buy
other companies, to poach their personnel, and to license new products – all means of
acquiring new technologies quickly
 In short, the institutional frameworks of liberal market economies provide companies with
better capacities for radical innovation, while those of coordinated market economies provide
superior capacities for incremental innovation
 Compare Figs. 1.5 and 1.6 (USA and Germany’s comparative institutional advantages pp. 43-44)

New perspectives on Comparative Public Policy-making

A. Economic Policy-making
o Substantial literature in comparative pol eco construes the problem facing policy-makers
as one of settling on the actions that firms or other private-sector actors should take in
order to:
  improve economic performance
 Devising set of incentives
 And induce them to take those actions
o The problem was seen as one of the inducing economic actors to cooperate with the
government
o However, there was a principal problem facing policy-makers
 It is one of inducing economic actors to cooperate more effectively with each
other
 View of economy as an arena in which multiple actors develop competencies
 By devising better ways of coordinating their endeavors with one
another
 FIRMS COORDINATE EFFECTIVELY -> PERFORMACE BETTER -> Overall
economic performance will be better
o Trade unions and employers will enhance performance
o TO IMPROVE NATIONAL ECONOMIC PERFORMACE = SECURE BETTER FORMS OF
COORDINATION AMONG PRIVATE-SECTOR ACTORS
 Markets can be used to secure this coordination
 Task facing policy-makers = to improve functioning of markets
o Difficulties facing economic policy-makers
 States cannot simply tell economic actors what to do
 States generally lack the information needed
 States establish agencies but their actions are only limited
 Effective strategic coordination depends on the presence of
appropriately organized social orgs
 Effective cooperation requires common knowledge that may develop
only out of experience over time
 Economic policies will be effective only if they are incentive compatible
 Liberal market
o Better economic performance may demand policies that
sharpen market competition while coordinated market
economies may benefit more from policies that reinforce the
capacities of actors for non-market coordination.
o Wood: “viability of policy depends not only on the org of political economy but on the
org of political realm”
 Market incentive
 Rely on market-based incentives to induce actors to perform more
effectively
 Coordination-oriented policies
 Improve competencies of firms, such as their skill levels or technological
capabilities
o Addressing firm needs with relative precision
 Thus, this must be based on high levels of information about the
activities of the firm.
o However, Firms are reluctant to share such information with
governments whose position as powerful actors under a range
of unpredictable influences raises the risks that they will defect
 from any agreement and use the information they have
acquired against the firm
o THIS KIND OF POLICY-MAKING IS MARKED BY INFORMATION ASYMMETRIES, HIGH
TRANSACTION COSTS, AND TIME-CONSISTENCY PROBLEMS
o The governments of coordinated market economies have taken advantage of the strong
business associations, trade unions, and other para-public organizations in their political
economies to resolve these problems.
 Associations are independent of the government and responsible to their
member-firms
 More inclined to trust them with enough private information to administer a
coordination-oriented or ‘framework’ policy effectively.
 Because these associations are in a good position to monitor and even
gently sanction their members, they can often secure the coordination
that a policy demands with lower transaction costs
 Thus, producer-group organizations enter into ‘implicit contracts’ with the
government to administer the policy, drawing some benefits of their own in the
form of enhanced resources and authority.
o This is where the organization of the political realm matters
 Business associations and their members will be willing to form such contracts,
which usually entail some information-sharing, only if the government’s
commitment to abide by them is credible.
 However, that commitment will be more credible where the relevant producer
groups have enough structural influence to punish the government for any
deviations from its agreements.
 Structural influence may rest on a number of bases
 Authority of producer organizations inside political parties
 Entrenchment of neo-corporatist practices or policy-making procedures
decentralized enough to allow producer groups many points of access
and some veto points
 Still, despite this, the influence of producer of groups depends on the
character of those groups themselves:
o Must be encompassing and powerful enough to mobilize a
serious constituency (If sanction of the government is needed)
o COORDINATION-ORIENTED POLICIES SHOULD BE MORE FEASIBLE IN NATIONS WITH
BOTH A COORDINATED MARKET ECONOMY and A POLITICAL SYSTEM
o Coordination-oriented policies will be more difficult to implement in liberal market
economies because their business and labor associations usually lack the encompassing
character required to administer such policies well.
 This should be an especially important problem in nations where the powers of
the state are highly concentrated in the political executive or where the
influence of producer groups inside political parties is very limited.
o In general, liberal market economies should find it more feasible to implement market-
incentive policies that do not put extensive demands on firms to form relational
contracts with others but rely on markets to coordinate their activities.
 These include regional development schemes
  Tax incentives vocational programs focused on formal instruction in
marketable skills, and government subsidies for basic research.
o This analysis of institutional complementarities between political regimes and political
economies raises some intriguing issues about the patterns observable in the developed
world.
 Many liberal market economies have Westminster systems of government that
concentrate power in the political executive,
 While coordinated market economies tend to be governed by
consociational, coalitional, or quasi-corporatist regimes
 Several factors could lie behind this congruence. However, some amount of co-
evolution cannot be ruled out.
 [If regimes that provide structural influence to encompassing producer groups
find it more feasible to implement coordination-oriented policies, while states in
which power is highly concentrated have more success with market incentive
policies, the character of the political regime may contribute to the
development of a particular type of economy.]
o The fluid market settings of liberal market economies encourage investment in
switchable assets, WHILE the dense institutional networks of coordinated market
economies enhance the attractiveness of investment in specific or co-specific assets.
o Political regimes characterized by coalition governments, multiple veto points, and
parties that entrench the power of producer groups may also be more conducive to
investment in specific assets than ones that concentrate power in highly autonomous
party leaders, because
 (i) regimes of this sort are well positioned to provide the framework policies that
sustain the institutions supporting specific investments and;
 (ii) provide producers with more direct influence over government and the
capacity to punish it for deviating from its agreements
B. Social Policy
- It highlights its importance of social policy to firms and the role that business groups play in the
development of welfare states
o Convention associates the development of social policy with organized labor and
progressive political parties, on the assumption that business generally opposes such
initiatives.
 However, business groups have played key roles in the development of social
policy for over a century and develops a parsimonious model to explain the
policies in which various types of firms will have interests.
o The relational approach applied in company competencies naturally draws attention to
the support that social policies can provide for the relationships firms develop to
advance their objectives.
o Social policy is often thought to interfere with labor markets by raising labor costs or the
reservation wage.
 Social policies can improve the operation of labor markets, notably from the
perspective of the firm.
  Unemployment benefits with high replacement rates, for instance, can
improve the ability of firms to attract and retain pools of labor with high
or specific skills.
 Disability benefits and early retirement benefits can allow firms that
operate production regimes requiring employee loyalty to release labor
without violating implicit contracts about long-term employment.
o There are many respects in which social policies can be crucial to the relational
strategies of firms.
 There should be a correspondence between types of political economies and
types of welfare states.
 Virtually all liberal market economies are accompanied by ‘liberal’
welfare states, whose emphasis on means-testing and low levels of
benefits reinforce the fluid labor markets that firms use to manage their
relations with labor
 Liberal social-policy regimes also encourage individuals to develop the
general, rather than specific, skills that corporate strategies in LMEs tend
to require
- In the sphere of social policy, the varieties of capitalism approach is helping to open up several
new research agendas

1. National Interests in the International Arena

- The international arena is also an important sphere for policy-making in which states cannot
secure domestically, because of political resistance or transnational externalities, they often seek
in negotiations about inter-national regimes
- For this reason, it is important to understand how the rules or regulations of such regimes are
determined, and a number of approaches can be taken to that problem.
o One of the most influential, however, argues that the character and regulations of
regimes and of the EU are determined by their member states, operating from
conceptions of national interest
o Analysts have taken several approaches to identifying the conceptions of national
economic interest that motivate governments in international negotiations. Some
formulations associate them with prevailing economic conditions, such as the levels of
inflation or unemployment in the nation. Others employ neoclassical economic doctrine
to specify the welfare gains likely to accrue to the nation from a particular outcome,
such as freer trade
o The conceptions of national interest from which government officials operate in
international negotiations are most often seen, however, as a response to pressure from
domestic interests. The direction of that pressure can then be specified in a number of
ways. Most who take this approach use an economic theory to identify the impact a
decision will have on particular sectors and an institutional theory to predict which
sectors will have more influence over the government
o The approach to comparative capitalism developed in this volume provides another way
of specifying how states will define their national interests in international economic
negotiations. It suggests that their stance toward new regulatory initiatives will be
influenced by judgements about whether those initiatives are likely to sustain or
 undermine the comparative institutional advantages of their nation’s economy.
Governments should be inclined to support such initiatives only when they do not
threaten the institutions most crucial to the competitive advantages their firms enjoy

Dynamics of Economic Adjusment

Main Point: Our approach contains a number of conceptual tools for understanding both the nature of
contemporary challenges and the shape this evolution is likely to take. In this section we discuss some
of the dynamic elements of the analysis that are covered in more detail in subsequent chapters

Challenges of Globalization:
- Economic activity is shifting from the industrial sector into the service sector. Capitalism seems to be in
the midst of one of those cycles of nature and negative

 Technology sparked the revolution, the accelerant has been liberalization in the international
economy
o Decline of costs in transportation and communication, more liberal trade and financial
regimes inspired new flows of goods and capital across borders and large FDI
o Developed countries are more open
o International competition forces companies to innovate to survice
 Globalization – a term summarizing up the hopes of some for global prosperity and the fears of
many that their way of life will be lost to international forces beyond the congrol of the
government
 For Political Economy, Globalization concerns the stability of regulatory regimes and national
institutions in the face of heightened competitive issues

Will institutional differences among nations remain significant or will competitive deregulation drive all
economies towards a common market?

 First, firms are essentially similar across nations (in terms of basic structure and strategy)
 Second, Competitiveness of firms are associated with labor costs (production will move abroad
if there is cheaper labor there)
 Third, these propositions generate a particular model of the political dynamic, inspired by
globalization, of the following type

Threats from businesses for governments to alter their regulatory frameworks, (which in effect lowers
domestic labor costs, rates of taxation and expands internal markets via deregulation) is countered by
trade unions (which protects the wage of the members) and social democratic parties (preserve social
programs). However, the balance of power have shifted towards capital.

There is a model that predicts substantial deregulation and a convergence in economic institutions
across nation.

 Two challenges on this view

o Internationalization of trade and finance has not been as extensive or unprecedented as
often believed
o National governments are not as defenseless

Hall and Soskice provide other basis on evaluating globalization:

Reconsidering Globalization

1. Questions these assumptions of Conventional view of Globalization

a. Firms are not essentially similar across nations
i. Firms in LMEs and CMEs develop distinctive strategies and structures to
capitalize on the institutions available for market or non-market coordination in
the economy. Furthermore firms in different types of economies, react
differently to similar challenges
b. Firms will not automatically move offshore to low cost labor
i. Firms derive competitive advantage from institutions at their country that
supports specific inter- and intra-firm relationships which would hinder them to
leave just for reduced wage costs
2. There would be movements of corporate activities (seeking new markets/new sources of
supply)

3. Firms may exploit new opportunities for movement in a form institutional arbitrage
a. Companies may shift particular activities to other nations in order to secure the
advantages that the institutional frameworks of their political economies offer for
pursuing those activities
i. Moving to liberal is not mere labor costs but may also be for strategy
1. Examples on page 57
4. Questions the “monolithic political dynamic” which predicts that there is one dynamic in
liberal market economies and a different one in coordinated market economies
a. Similarity in Coordinated Market economy and LME
b. Paradoxes
i. Weakened trade unions in LMEs but strong trade unions inCMEs
5. Instead of the monolithic political dynamic, a bifurcated response marked by widespread
deregulation in liberal market economies and limited movement in coordinated market
economies would happen
a. Deregulation has been far reaching in liberal market economies than in coordinated
market economies
SUMMARY OF 1.8.2. It is not surprising that increasing flows of trade have not erased the institutional
differences across nations. World trade has been increasing for fifty years without enforcing
convergence. Because of comparative institutional advantage, nations often prosper, not by becoming
similar but by building on their institutional difference

1.8.3. DEVELOPMENTS IN THE MARKET FOR CORPORATE GOVERNANCE

 Another side to globalization with ambiguous effects.

o Exponential growth of International flow of capital
 Pressures on CME
 Investors would prefer to supply capital on arm’s length terms that
emphasize transparent balance sheet criteria
 Wave of International Merger and Acquisition Activity
 Firms based in CME which are not usually concerned on the rate of
return on capital or share price have acquired new interest because they
hope to use their own shares to make foreign acquisitions to consolidate
their competitive position in global markets that are opening and
reconfiguring rapidly
o These developments threaten traditional practices in CMEs
 Disrupt the intricate systems of cross-shareholding and inter-corporate linkage
which reduce the access of firms to capital that is not tied with profitability
 Forcing firms whose strategies and structure have reflected responsiveness to a
wide range of stakeholders including employees to become more attentive to
share holders and rates of return
 These might reduce their capacity to make credible commitments to long term
collaborative relationships with other firms and employees
 Impacts of international financial developments can easily be misinterpreted
o No doubt that companies in CMEs will have to make long-run risk adjusted real rates of
return demanded by world financial markets but it is not inconsistent with internal
management practices that maximize comparative institutional advantage.
o These practices led to closer relationships with work councils than the workers
themselves given that employee cooperation becomes more, not less, important.
o Germany case p.62

 Analyzing Change in National System

o Comparative Capitalism lacks conceptions of how national systems change. Thus
literature cluster on two poles:
 Institutions and its ways of reproducing stable patterns of behavior. (National
systems would unlikely change given globalization)
 Pressures Associated with Globalization (National practices are inertial and could
be transformed)
o Our approach offers a more dynamic conception of national political economies; it
anticipates change in them and contains specific propositions about the process
 Key implications
 Institutional recreation of comparative advantage/ National political
economies will experience external shocks (from the world economy).
Equilibra will be unsettled which would result to the modification of the
practices of the firm
 Institutional support. Support will come from the government given
those pressure from producer groups and voters.
 Strategic Interaction. If coordination entails strategic interaction, more
than institutional support is needed. The presence of common
knowledge set of beliefs that reflect the roles and interests of the
participants and their confidence in institutions
o Perspective
 Firms will sustain or restore the forms of cooperation
but the shocks may change the existing institutions or
practice in the economy
 Common knowledge to successful strategic interaction
implies some asymmetry in the development potential
of these systems
 Institutional complementarities should play an important, if ambiguous
role in these processes of adjustment. Institutional reform may cause a
snowball effect of changes into other spheres
 Financial deregulation could unravel coordinated market economies.
Institutional complementariness generate disincentives to radical
changes
 Example of Germany on p. 64-65
 According to Thelen, such problems are not unprecedented in
coordinated market economies.
 Negotiated economies experience a slower adjustment compared to
market economies but that does not mean the latter experiences
superior outcomes
 This is an approach to Pol Eco, designed not only to identify important
patterns of similarity and difference across nations but also to
eludicate the process whereby national political economies change. It
ansticipates institutional change in all developed democracies as they
adjust to contemporary changes but provides a frame work within
which the import of these changes can be assessed