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According to Hall and Soskice the aim of the varieties of capitalism approach is to move away from the 'three perspectives on institutional variation' which were in response to the economic issues that developed formed each perspective as a solution to an economic problem that took over the last thirty years of the study of comparative capitalism. These three perspectives included the modernization approach which was stated in the Shonefield's magisterial treatise of 1965. The basis of comparism was in the public and private sector as well as in the financial institutions. Five years down the line a second perspective based on the trade union and the strength of bargaining was used to compare nations and this was called neo-corporatism.
- Framework - institutional advantage, understanding the link between management of companies and business contexts
Institutions - formal institution, national laws and legislations, building blocks of society's e.g. collective bargaining, welfare institution, central banks etc.
Types of Varieties of Capitalism
Capitalist economies are 'regarded as systems in which companies as systems in which companies and individuals invest, not only in machines and material technologies, but in competencies based on relations with others that entail coordination of problems'(Hall and Soskice, 2001:21-22). Of all the OECD countries six of them are tabled under the Liberal Market Economies (LMEs) - the market determines e.g. USA, Britain, Australia, Canada, New Zealand, and Ireland. On the other hand, ten countries coordinated market economies (CMEs) - the market is determined by the state and associations such as Labour unions and employer association Germany, Japan, Switzerland, the Netherlands, Belgium, Sweden, Norway, Denmark, Finland, Austria, France, Italy, Spain, Portugal, Greece and Turkey(Hall and Soskice, 2001). The major distinguishing factor amongst the two is their approach to solving the problem of coordination 'between the firm, its financiers, employees, suppliers and customers'. For LMEs their coordination is by the market mechanisms while the CMEs are non-market economies embedded in the involvement of formal institutions that run the economy regulates inter-company relations as well as the stakeholders (Heery & Noon, 2010). The coordination governance and coordination of activities, the state influences the laws and legislation and this is common in the United Kingdom with the popularity of employment regulations. The association which is governance via organisations such as employer associations and labour unions, this system is popular in Germany. For some other nations such as the US the market determines governance.
In making a decision as to where the company should set up its plant, it is rather imperative to explore the different types of capitalism narrowing the comparism down to two nations the United States of America (USA) for the liberal market economy (LMEs) and Germany for the coordinated market economy (CMEs). The areas to be addressed include the financial system or market for corporate governance, the internal structure of organisation/firms, Industrial relations, education and training, inter-company relations.
Financial systems or market for corporate governance, for the CMEs using the German case the supervisory board appoints its managers and make the investment decisions. The use of 'patent capital' which allows for long term strategies enables firms to retain highly skilled workforce during the companies downturns and also producing returns on the long run. The investors which are majorly the banks ensure that they have 'private' and 'inside' information about the firm they invest. The financial institution secures its investment also by the use of the networks to build strong and reputable relation across firms and they operate by transparency, information sharing cannot be over-emphasised in the CMEs and a credible reputation is important by a firm and if false information is shared the network and access to information suffers. The involvement of Labour and the banks in the corporate governance of a firm is to ensure access to company information, fair treatment of employees and accurate financial statements and balance sheets.
The internal structure of organisation/firms
CME's do not allow for 'unilateral action' which makes for a larger decision making body of supervisory boards such as employee representation, major shareholders, managers and major customers and suppliers these facilitates network monitoring and reputation building amongst the board. The incentives for firms are the fact of the information gathered and long-term employment contracts. It is important to note that the focus of the CMEs is less on profitably when compared to its counterparts in the LMEs.
In other to uphold a strong industrial relations and protect companies from 'poaching' by companies after employees have been trained and employee 'hold up'('withdrawal of active cooperation to back up demands' Williamson, 1985). To prevent the above from occurring, the German industrial system set wages through sector or industry level bargaining between employer associations and the trade unions to ensure fixed rates to specific skills and employer associations bind their members to the by agreement to pay the set wages. The use of a flat rate system reduces poaching examples of these sectors include metal, banking, chemical and engineering. All these patterns usually spread across other sectors. Aside from reducing poaching the collective bargaining helps to reduce inflation effects of wage settlement and also removing the salaries out of market competition (Hall and Soskice, 2001, Street, 1995).
Education and training
The importance of education and training in a CME such as Germany cannot be overemphasised because the economy is highly dependent on industry specific skill. In other to increase the economic outcome 'dual training' with the cooperation of competing firms, government and industry for the purpose of increasing the skill of the employee and ensuring everyone with a particular skill at a particular can perform the same task across boards in each sector, increasing employability and reducing poaching. Associations ensure that there is constant cooperative research and development to improve the skills available to the employees and also technology transfer (Streek, 1995). When compared to the LMEs, CMEs have a lower percentage of general skills because the skills a vocational and sector specific because most job opportunities require vocational training, there is need for theory and practice in the training, the training of apprentices begin from after their secondary school education and are between the ages of 16-19 and their apprenticeship are done in industry specific firms (Hauptmeier, 2012). The comfort of all these is in the knowing by the apprentice is that after specific vocational training there is good job and firms know that the employees in the market have been properly trained and highly skilled for the task. Even if the issue of poaching is controlled at best unemployment rates are still high because of the long term contracts the employees have (Culpepper, 2001)
In CMEs, the use of company level representation through the works council, these councillors are not imposed on the employees but they are voted into office to represent them, they are officially different but they work hand in hand in employee representation. While the works councils do not possess the power to strike they agree to work restructuring such as wages, working time, transfer of an employee from one location to another. Firm management still have to negotiate with labour compromise, but can be either side of a coin, an advantage or a disadvantage for management (Hauptmeier, 2012).
The relationships between companies are on different levels in the CME which help for diffusion of practices, the uniform development of training and education schemes to benefit across board, the collective bargaining of employee wages, work hours, and holiday. The technological standards help to fostered by sector associations, setting which help build the quality of products from the German market. To foster these strong relationships amongst these companies business associations help promote diffusion through the use of public officials, monitoring to know when there is need for improvement in a particular skill or area. The fact that companies also share and have access to one another's company information enables the development of programs that suit the purpose. The joint financing of the research and development alongside 'quasi-public research institutes' there are also long term relationships amongst the suppliers especially in the auto industry and these relationships are built on trust. According to Casper (2001), in order to bind the institutions and management in agreement and creating avenue for contingenciess to be resolved faster a system of 'contract law supplementary' that makes room for adjustments due to the
Streek 1995 believes that the economy of Germany due to its social nature is drawn into the
High labour cost-expensive
USA has market pressures
Govt subsidy on training in Germany to reduce poaching
House members must be informed about investment
High unemployment(Streek, 1995)