Varieties of Capitalism

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MG 190: Human Resource Management and Employment Relations

Session 1

Summer School 2016 midsession examination (1st July 2016)

LSE Student ID

LSE teaching Department: Department of Management

Lead Faculty: Professor David MARSDEN and Professor Sarah ASHWIN

Classes: Alumdena CANIBANO, Elisa PANNINI, Lisa SEZER[pic 2]

                                         Varieties of Capitalism

                                              LSE ID: 

           The political economy is like a plateau where everything is actor centered. Each multiple actor seeks to achieve their interest by working effectively and efficiently. The germane actors may be individuals, firms, producer groups, or governments. The Varieties of Capitalism is the subsection of this plateau of political economy into two models: liberal and coordinated economy. However, according to this approach, the actor which is the most self centered, is the firm in a capitalist economy. As said by Hall and Soskice (2001),”The firms are the vital catalysts for technological change or international competition. Their activities sum up into an overall economic transformation.”

          The elemental distinction we draw of the political economy is between two types of political economies; liberal market economies and coordinated market economies which also leads to a division of the nation’s economies all over the world. The Market-outsider systems or the Liberal system are large and active equity markets. The firms are publicly listed and can raise significant amount of external capital from equity or debt markets. The firms work around their ways with the competitive market arrangements and hierarchies.  The United Kingdom and US are apt examples of the liberal systems. Whereas, in the Relational-Insider systems or the coordinated markets, the large firms have more concentrated ownership. The equity markets are thinner and there is a humongous amount of reliance on long term debt. Germany and Japan are the examples of Coordinated systems.

         The definition of Institutions by North 1990 is,” A set of rules, formal or informal, that actors generally follow, whether for normative, cognitive or material reasons.”  Hall and Soskice argue that there are 4 spheres of institutions which need to complement each other in order to attain efficient and effective production, sales and other interests of the economy and the organization. The first sphere is Corporate Governance. It deals with how to salvage and secure the finance in order to attain financial stability. Once the investor invests in a particular thing, corporate governance helps to tell how secure the investor feels about the investment. The second branch of the institutions is the Industrial Relations. It talks about how to set the norms, terms and conditions of the organization and especially how to set the wages to keep the employees with the impression of job satisfaction and job security.  The third sphere is the Training and skills which deals with the employee development perspective which is a very vital part as the better trained the employees are, the more efficiently and effectively the organization functions. The last and final part of the institutions is the Inter firm relations which says how the firm maintains their relations with the environment which include other firms, and particularly the most vital players in the firm’s environment, the suppliers and customers. Hence as said by Aoki, 1994, two institutions are supposed to be complementary if the efficiency of one increases the return from the others. This leads to increase in productivity, efficiency and effectiveness which increases the overall turnover of the firm.

           The relational insider system of employee relations in the Coordinated Market Economies (Germany and Japan) is where they have thinner equity markets, there is reliance on long term debt and there is concentrated ownership. The loan providers for the Coordinated Market economies have substantial equity stakes. The inter-corporate shareholding is vital and there is an intense amount of insider monitoring and modulation which is done by the board representation of major supplier of capital. The market for corporate control was feeble or absent. The Japanese Economy which was built on these lines of the relational insider model, went through the ‘Pressures of Change’ and it lead to the kick-start of the transformation of its Corporate Governance. There were a number of overlapping and interconnected modifications as the complexion of the Japanese economic environment changed.