1. Varieties of Capitalism (1) The Hall and Soskice model

2. Global political economy The context in which business operates
Management students need to understand:
How markets work - competition
How organisations work – cooperation
The context in which business operates
Professor Edward Snyder, Dean of Yale School of Management (quoted in the Financial Times, 17 October 2011)
This week is about CONTEXT
Governance, structures, capabilities, labour

3. The end of history? “Mr. Gorbachev, tear down this wall!”
(President Ronald Regan, June 1987)
Destruction of the Berlin Wall, 9 November 1989
Dissolution of the Supreme Soviet of the USSR, 26 December 1991
Francis Fukuyama (1992) The End of History and the Last Man.
Argued that the global spread of liberal democracy and free-market economics signalled the end point of humanity's socio-economic evolution and had become the final form of human government

4. A counter-argument Varieties of capitalism
A collection of essays based from 1992, collaboration between Harvard & Wissenschaftszentrum (WZB) in Berlin
Peter Hall and David Soskice (2001) Varieties of Capitalism. The Institutional Foundations of Comparative Advantage; Become a seminal text, generating debate & research around a variety of politico-economic models

5. Hall & Soskice spawned a huge literature!

6. Theoretical framework (1)
An institutional model, where institutions are:
“ humanly devised constraints that structure human interaction…formal…(rules, laws, constitutions), informal…(norms of behaviour, conventions, and self-imposed codes of conduct), and their enforcement characteristics.” (North,1994)
Understanding of economic behaviour at micro-level helps to explain macro-economy (Milgrom & Roberts, 1992)

7. Convergence Framework
(US) capitalism vs. (Soviet) central planning
Convergence theory expressed in Washington, OECD, World Bank, etc.:
Market economy viz. pluralist democracy

9. Awareness of economic system diversity within capitalism
Convergence has not happened
Rise of Japanese & German models
Managerial capitalism vs. family ownership
Revival of small firms & industrial districts
Legal contracts vs. relational contracting
Survival of fittest not best metaphor
Specialisation more appropriate
Whitley’s “national business systems”

10. Theoretical framework (2)
Corporate governance and financing
Training & education system
System of inter-company relations
Company needs
Industrial relations
Source: After Hall & Soskice, 2001

11. Theoretical framework (3)
Firms exist to solve coordination problems
Spheres in which firms must develop relationships to solve coordination problems
Corporate governance – where do firms obtain finance and how to investors protect their investments?
Inter-firm relations – how to firms relate to other enterprises, especially suppliers and customer
Vocational training and education – how do firms secure workforce with appropriate skills, how to workers decide which skills to invest in?
Industrial relations – how to coordinate bargaining over wages with workers, organised labour and other employers
A firm-centric framework – company needs are at the centre of the model

12. Examples (1) (US and UK)
Corporate governance - equity-based enterprise funding, widely dispersed shareholding (though note impact of pension funds and pooled investment vehicles), unitary boards, but corporate governance regimes designed to address principal-agent problems
Inter-firm relations - conducted based on market contracting
Vocational training and education – company-based training, private financing of further education.
Industrial relations – independent contracting common, collective bargaining and trade unions relatively weak
Hall & Soskice call these “Liberal market economies” or “LMEs”

13. Examples (2) (Germany and Japan)
Corporate governance – bank-based enterprise funding, corporate governance regimes designed to share power among “social partners”.
Inter-firm relations - conducted based on relational contracting
Vocational training and education – industry-based training, public financing of further education.
Industrial relations –consensual relations, collective bargaining and trade unions relatively strong
Hall & Soskice call these “Coordinated market economies” or “CMEs”

16. Corporate governance models
“Company law / shareholder” model
Based on Dore / Marsden
“Enterprise as community” model

17. UK model e.g., BP plc (1)

18. UK model e.g., BP plc (2)
Established in 1909 as the Anglo-Persian Oil Company. British government acquired a controlling stake in Privatised in 1979 by the Thatcher government
Corporate governance: unitary board, shares listed on LSE, FWB, NYSE, shareholders are 38% in US, 36% in UK, 14% rest of Europe, major shareholders BlackRock 5.58%, Legal &General 3.06%, top 10 shareholders own 23.06%
Intercompany relations: 1950s JV with Saudi Aramco, 1980s Kuwait Investment Office acquired 10% stake, acquired AMOCO in 1998 and ARCO in 2000, Russian JVs e.g., TNK-BP
Training & education: BP Institute at Cambridge, BP scholarships in UK and Russia, graduate development programme has 1,600 participants, leadership develop programmes, internal assessments etc.
Industrial relations: 86,000 employees, employee share ownership encouraged, employee engagement via town hall meetings, annual staff survey, employee workplace satisfaction index
Sources: FT, BP website & annual report, Wikipedia.

19. “Japanese management”
Keiretsu = business group
Groups of companies with cross-holdings based around a bank and trading company
E.g., Sumitomo: Sumitomo Trust & Banking, Sumitomo Corporation (trading company), Ashai Breweries, Hanshin Railway, Masda (cars) NEC (electronics), Sumitomo Real Estate (property and finance); Other Keiretsu: Mitsubishi, Mitsui, Fuyo, Dai-ichi, Sanwa, Tokai (Toyota), IBJ (Industrial Bank of Japan)
Japanese management terminology:
e.g., Hourensou (collaboration and information sharing, keeping others informed). Kaizen (continuous flow of incremental improvements). Kyosei (spirit of co-operating for the common good). Mottainai (sense of regret when we become aware of waste)

20. Theoretical framework (2) A game theoretic approach
Institutions:
Are “the rules of the game” (North)
Provide capacities for information exchange, monitoring and sanctioning defections
“Institutional Complementarity” (after Aoki, 2001) iff ΩAB, ΩA’B’ > ΩA’B, ΩAB’
Two Nash equilibria (e.g., LME and CME) iff ΩAB = ΩA’B’
Institution
A A’
Institution B B’
ΩAB
ΩA’B
(1,1)
(0,1)
ΩAB’
ΩA’B’
Amable, Ernst & Palobarini, 2005
(1,0)
(1,1)

21. Variations (on varieties of capitalism)
Dependent market economies (“DME”) - market economies heavily dependent on FDI e.g., Eastern and Central Europe (Nolke and Vliegenhart, 2009)
Hierarchical market economies (“HME”) – market economies characterised by the supremacy of economic might in firm-actor relationships e.g., Latin America (Schneider, 2009; Schneider & Soskice, 2009)
China - many LME characteristics, but with a unique (sui generis) financial system (Witt, 2010)
India – “the varieties of capitalism approach is limited in its capacity to explain Indian capitalism along the LME-CME divide” (Singh, LSE MOG MSc dissertation, 2011)