Summary of the following articles :
- Witt, M. A., & Jackson, G. (2016). Varieties of capitalism and institutional comparative advantage: A test and reinterpretation. Journal of International Business Studies, 47(7), 778-806.
- Fainshmidt, S., Judge, W. Q., Aguilera, R. V., & Smith, A. (2018). V...
Witt, M. A., & Jackson, G. (2016). Varieties of capitalism and institutional comparative advantage: A test and
reinterpretation. Journal of International Business Studies, 47(7), 778-806.
ABSTRACT
How do national-level institutions relate to national comparative advantages? We seek to shed light on this
question through exploring two different sets based on the varieties of capitalism and other branches of
comparative capitalisms literature. Our article contributes to our understanding related to capitalist diversities and
its implications for location decisions of multinational enterprises.
Varieties of capitalism is a concept developed through political scientist Peter Hall and economist David Soskice.
The concept expresses the belief that capitalist economies (economic structures) do not assume a single and
universal form but differ across states. Hall and Soskice identified two sorts of capitalist economies among which
the liberal market economies and coordinated market economies. In liberal market economies (United States –
Canada – Australia – United Kingdom) firms focus on competitive markets to secure access to resources while firms
in coordinated market economies (German – Japan – Northern Europe) focus more on collaborative arrangements
often coordinated through business associates or trade unions.
INTRODUCTION
Comparative studies have argued that different sorts of institutions constrain and enable different forms of
economic activities. Most prominent among these has been the varieties of capitalism framework which contrasted
liberal market economies (LME) and coordinated market economies (CME). The common objective of this
comparative capitalisms literature has been to shed light on how the institutional diversities of advanced capitalist
economies shape economic and business outcomes. A core argument of the literature is that institutions might
generate distinct profiles of institutional comparative advantage which manifest themselves in distinct patterns of
economic performance and specialization across different industrial sectors. Strong evidence in support of
institutional comparative advantage has important implications for government policies and the location choices of
multinational enterprises (MNEs) seeking to avoid home countries disadvantages and project competitive
advantages related to their home countries or exploit complement resources related to host countries institutional
environments.
In this article we explore the question of institutional comparative advantage in relation to two arguments. First we
test that liberal market economies have an institutional comparative advantage in industries featuring radical
innovation whereas coordinated market economies have an institutional comparative advantage in industries with
incremental innovation. Second we develop an alternative view that certain combinations of liberal market and
coordinated logics across two or more institutional domains might enable institutional comparative advantage
through compensating for institutional weaknesses inherent in pure configurations.
,LITERATURE REVIEW
Renewed interest in institutions has led to a large and difficult literature on comparative capitalisms focused on
institutional diversities across national contexts. Research linking institutional differences to specific economic
outcomes has remained underdeveloped. First a lack of consensus continues about relevant information and
second suitable measures of institutional diversities have limited availabilities. These obstacles have limited the
wider application of comparative institutional research in international business through which research remains to
understand how institutions shape the comparative institutional advantage of different countries in world
economies. As a step to overcome this challenge this paper examines the arguments from the varieties of
capitalism framework that links institutions to comparative institutional advantage.
In developing the Varieties of Capitalism approach Hall and Soskice proposed that the advanced industrialized
societies fall into two main forms : LME and CME.
Firms in LME tend to focus more on liberal market mechanisms while firms in CME tend to coordinate
business transactions through non-market relationships. LME such as the US features a market-driven
financial structure and flexible use of external labor markets and generalist education and training
structures and low levels of networks and alliances among firms and management-driven and top-down
decision making structures inside the firms. These institutional differences encourage firms to invest in and
utilize transferable assets to a greater extent in LME where institutions do not bind economic actors to
long-term commitments but support their keeping options open to using the external market.
The classic CME such as German has a bank-led financial structure providing patient capital and stronger
internal labor markets based on work protection and skills formation structures conducive to the
development of specialized skills and high levels of networks and alliances among firms and consensual
decision making inside firms brining together management and labor. The use of relational assets in CME
implies investments whose value is specific to the continuation of long-term relationships among firm
stakeholders. Such investments require different sorts of institutional support such as protection of
investments in firm-specific human capital and contracting arrangement or mechanism to govern
collective action problems and support wider patterns of cooperation across a network or industries.
The varieties of capitalism framework posits that LME and CME exhibit strong complementarities through being
organized around a coherent institutional logic. Complementarities exist where features of institutional structures
reinforce each other through mutual generating increasing returns. Meanwhile coherence is present where
institutions follow the same market or coordinated logic across domains of the economies such as corporate
governance and work relations. Varieties of capitalism argues that complement sets of institutions favor certain
patterns of economic activities over others that manifest in comparative strengths and weaknesses in different
sorts of industries. In contrast countries with lower levels of coherence are argues to lack the institutional
complementarities needed for institutional comparative advantage.
Based on this logic Hall and Soskice proposed that LME and CME would show distinct patterns of institutional
comparative advantage for radical or incremental innovations. Hall and Soskice defined radical innovation as
entailing substantial shifts in product lines and the development of entire new goods or major changes to the
production process while incremental innovation is marked through continuous but small-scale improvements to
existing product lines and production processes. The combination of patient capital and long-term work and firm-
specific skills in CME would enable more efficient production in industries with incremental patterns of innovation
because the relative immobile labor and capital in CME enabled and constrained firms to focus on their efforts on
improving existing lines of products. Meanwhile fluid capital markets with short-term work and general skills in
LME would enable more efficient production in industries with radical patterns of innovation as these conditions
,support firms using external markets to mobilize risk equities finance and workers with different skill sets and take
advantage of new technological breakthroughs. Comparative advantage is defined as the abilities to make on
product more efficient than another this suggests the presence of comparative advantage in industries drawing on
incremental innovation in CME and radical innovation in LME.
H1 : LME show trade patterns consistent with institutional comparative advantage in industries featuring radical
innovation whereas CME show trade patterns consistent with institutional comparative advantages in industries
with incremental innovation.
The varieties of capitalism approach has assumed that complementarities require coherence of institutions. The
logic stems from the concept of complementarities as developed in economies with which investments in
transferable assets in one institutional domain are complemented with transferable assets in other domains.
Varieties of capitalism implies a restrictive view of how institutions combine. Crouch argues that institutions might
have positive effects through compensating for the weaknesses of other institutions. In terms of the CME and LME
information this perspective implies that mixed cases might have beneficial characteristics. Based on these
considerations we develop two arguments where coordinated institutions help to prevent market failures in liberal
settings or liberal market institutions help to prevent problems of rigid in high coordinated settings. In developing
these arguments we turn to the concept of beneficial constraints. Beneficial constraint is a dialectical concept
suggesting a relationship of both mutual subversive and mutual supportive conflict between the economic and the
social ruling-out lasting harmonies between the two. Institutions act as constraints on markets on the one hand
but serve to stabilize them on the other.
Coordinated institutions help to prevent market failures in liberal settings
The coherent set of market-oriented institutions characterizing LME might have destructive tendencies. Markets
across different domains reinforce one another through creating incentives for greater market-orientation causing
these markets becoming overheated. Firms in LME might respond to radical innovations through shifting their
investment in markets for capital and labor. Firms might also focus on predator responses such as using mergers
and acquisitions to obtain new technologies or protect market shares or aggressive restructure corporate
hierarchies. Firms might be unable to capitalize on radical innovations through developing related firm-specific
advantages that lead to sustained comparative advantages.
These deficits of pure liberal markets are most acute in the are of working relations. Firms entering and expanding
new lines of business as a result of radical innovation will need skilled workers with sufficient understanding of the
workings of the firm to capitalize on the opportunities offered through new technologies. While active external
labor markets might help firms gain access to new skills firms are also like to suffer from substantial problems to
retain workers through periods of change. Economic sociologies have thus suggested that markets need to be
embedded within social relations. Institutional constraints imposed through coordination might be beneficial for
markets because these curtail the opportunism and rationalities that lock actors into potential market failures due
to collective action problems. Countries in Europe thus restrict competition between firms based on wages
through institutions that regulate wages at sectoral or national level.
Rather than complementarities based on coherence we expect that firms facing radical innovation in countries with
liberal market institutions in most domains might benefit from complement institutions that support coordination
in work relations. A combination of liberal and coordinated institutions might be beneficial for dealing with radical
innovation through providing for both flexibilities in restructuring of economic organization and trust and
coordination to solve problems of asymmetric information or hold-up.
, H2 : countries with coordinated institutions in work relations and liberal institutions in other domains will show
trade patterns consistent with comparative advantage in industries with radical innovation.
Liberal market institutions help to prevent problems of rigid in high coordinated settings.
Beneficial constraints also extend to a second argument. Similar to the inherent problems with unconstrained
market-oriented transactions and high levels of coordination might lead to an overextension of relational logics. To
the extent that coordination becomes self-reinforcing firms might lack incentives to take risks and enter into new
lines of business. These patterns might be beneficial in stable industries characterized through low levels of
innovation or even incremental patterns. However it seems unlike to these institutional arrangements can support
adjustments to more radical and discontinuous forms of innovation.
The potential deficits of high coordination might create particular problems for shareholders who are
disadvantaged through low competitiveness. Consequent we see more liberal forms of corporate governance as
having potential to exert a counter balancing effect on high coordination and thus to represent an economic
beneficial compromise between competing logics. Here firms benefits from high coordination across different
domains including work relations and develop strong capabilities based on their human assets and relational
linkages to other firms. However increasing pressures from capital markets might lead stakeholder-oriented firms
to take bolder and faster adjustments to changes in technologies and product markets. Aoki argues that external
monitoring of internal linkages of corporate organization might be beneficial in giving corporate insiders important
signals about their business strategies and help benchmark their efforts against competitors. A more liberal market-
oriented process might be a beneficial resource for investors seeking to constrain the tendencies toward stagnation
among corporate insiders such as workers and managers.
While commitment to corporate stakeholders remains strong some pressure from capital markets and influence
from owners might help to get more responses to radical innovations through more discontinuous management
strategies or changes in production technologies. Liberal market institutions in corporate governance might help
counterbalance risk averse tendencies of corporate insiders thus helping to get their potential in terms of
functional flexibilities and abilities to foster trust but here in the service of adjustments to radical innovation.
H3 : countries with liberal institutions in corporate governance and coordinated institutions in other domains will
show trade patterns consistent with comparative advantage in industries with radical innovation.
CONCLUSION
The main finding is that radical innovation consistent leads to high comparative advantage in countries with
institutions that combine specific liberal and coordinated elements : radical innovation leads to comparative
advantage in economies with liberal institutions but coordinated work relations and in economies with coordinated
institutions but liberal corporate governance. We interpret these mixed combinations of liberal and coordinated
institutions as having complementarities derived from beneficial constraints.
Which one of the following is consistent with Hall and Soskice (2001) hypothesis?
a. Liberal market economies have an institutional comparative advantage in industries with radical
innovation
b. Coordinated market economies have an institutional comparative advantage in industries with
incremental innovation
c. A and B
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