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Varieties of Capitalism – Comparative Advantages Essay


Varieties of capitalism is the latest model for comprehending the organizational similarities and distinctions noted in the advanced economies because national political economies may be contrasted by referring to various means through which organizations determine how to coordinate various challenges they face (Hall and Soskice 7). In this respect, there are multiple actors, which seek to promote their own interests in a coherent manner as they pursue strategic interactions with other actors. Two distinctive forms of capitalism have been identified, namely liberal market economies (LMEs) and coordinated market economies (CMEs).

Specifically, the LME is mainly made up of countries such as the US, the UK, Ireland, Australia and New Zealand while CME consists of Austria, Germany, Sweden and Japan. One can note the differences between CME and LME mainly through various ways in which they interact with each other and other stakeholders, including employees and trade unions among others. In addition, these actors could be individuals, companies, suppliers or governments.

While several actors exist, the firm-centered political economy only recognizes firms as the most vital players in a capitalist economic system. Firms are regarded as the major agents of change in the era of technological advancement or international competition. As such, firms’ aggregate activities contribute to notable economic performance. LMEs rely on hierarchies to run their affairs and market dynamics. Thus, there are several elements of non-market interactions during coordination of diverse relationships among stakeholders. Five areas of interactions have been identified.

First, firms must coordinate different activities that involve industrial relations. For instance, they must engage workers’ unions over labor disputes and employee productivity. LMEs tend to manage issues at the company levels because employees are not highly organized while CMEs prefer highly organized membership with bargain power that could occur at the national levels. Second, employee skills and training differ between CMEs and LMEs, for instance, the latter display more general skills applicable across the industries while the first depicts specific skills required within an industry. Third, corporate governance also is defined based on capital relations.

CMEs, for instance, prefer less transparent capital with short-term earnings, not based on publicly available information or returns. It is referred to as ‘patient capital’ for retaining skilled employees and focusing on long-term returns. Conversely, LMEs promote open financial system in which short-term capital is preferred. Much emphasis is placed on market conditions, share prices and earnings on equity market. Laws and regulations encourage merger and acquisition. Generally, insider information could be difficult to obtain and, therefore, only publicly available information and balance sheets act as core sources of information. The mode of takeover, including hostile one and access to information are critical distinguishing factors in corporate governance of LMEs and CMEs.

It is important to recognize that corporate governance is subjected to change as shown by the case of Germany and Japan in the 1990s. These changes were driven by globalization of capital markets, investors’ pressure, competition between countries to develop stock markets and the growth of the US in information technology and venture capital businesses (Jackson 261). Thus, shareholders’ value as become the key objective for modern corporation (Jackson 261).

Fourth, LMEs promote fierce competition to depict inter-firm relations while CMEs believe in collaborative relations. Finally, CMEs prefer cooperation with employees in decision-making processes while LMEs tend to leave decision-making to managers. In addition to CMEs and LMEs, ‘hybrid’ form of capitalism has been identified to reflect practices and relations of countries found in the Mediterranean region.

Various proponents also present the case for convergence. In their arguments, they believe that various forms of capital economies would eventually converge, particularly the LMEs. On this note, they identified critical areas that can promote convergence between firms. For instance, globalization is identified as a key mechanism that drives convergence through financing models and production. Wages, particularly firms’ threats to relocate to other regions with low wages drive cost of labor down. Financial regulations and taxation regimes tend to drive capital flows to investment destinations with light regulations and low taxes.

The debate on convergence is based on international convergence that promotes the US shareholder-based model. Convergence theorists assert that the expanding global capital mobility puts competitive pressures on firms to generate more values for their shareholders. Counties will favor competition over the rights of shareholders and capital market transparency, but legal variations may exist and persist. Nevertheless, corporate activities may still experience functional convergence by adopting self-regulation strategies and making strategic decisions, for instance, Alibaba choosing to list in the US rather than China. While these elements of convergence are observed, it is also noted that national variations will hold due to corporate governance diverse characteristics (Jackson 262).

As previously noted, the general debate on Varieties of Capitalism revolve around five major spheres, including industrial relations, vocational training and education, corporate governance, inter-firm relations, and a firm’s relations with its own employees. For convergence, researchers have identified other areas of interests. First, it is noted that internal accounting standard would push for convergence. Alternatively, theorists agree that firms would voluntary adopt these practices once they list on any foreign stock exchange markets. Thus, companies will promote convergence. Nevertheless, the listed firms may retain some features of their corporate governance. Second, voluntary codes are also driving convergence. In this respect, transparency and protection of investors are key factors required for self-regulation.

Consequently, the Organization for Economic Cooperation and Development (OECD) and other institutions embarked on issuing voluntary codes to share ideas, support change and create supportive sanctions and pressures for compliance. Self-regulation was therefore seen as means of enhancing international convergence by replacing laws and regulations. Third, various forms of capital market pressures have been cited as driving factors behind convergence. Firms experience significance competition from external sources of capital and therefore influence shareholders. Moreover, increased mergers and acquisitions with international firms continue to enhance globalisation and adoption of global best practices. These new sources of capital also weaken the relations between domestic banks and firms. Fourth, ownership structures of organisations continue to change and weaken. These changes provide opportunities for institutional investors to acquire important stake in domestic firms and, therefore, reducing the growth of domestic institutional investors.

Foreign investments and ownership have grown tremendously in domestic markets. In this case, mutual fund and pension fund investors are the major foreign investors, who are mainly from the UK and the US. Foreign shareholders are known to influence stock market prices because they trade actively in most active shares. Finally, corporate finance also enhances convergence. Firms depend on different sources of finance to drive investment. Availability of investment funds influence investors. On this note, convergence theorists argue that there is competition for global investment capital. While dependence on external capital may be limited, bank lending has declined and, therefore, institutional investors seek for external partners. These points attempt to show that convergence from CMEs to LMEs is inevitable, but corporations are most likely to retain their unique practices defined by cultures.

Normative questions at play here seem to reinforce the concept of varieties of capitalism. Varieties of capitalism are firm-centered and, therefore, firms have gained tremendous power because they influence a political economy when faced with emerging technological change and shape international competition. The emergence of corporate laws in the US, for instance, has created powerful corporations with possibly unlimited life and powerful than the shareholders because they protect assets from single shareholders who may have different demands (Blair 45). This argument highlights the benefit of capitalism of protecting small shareholders and assets.

Consequently, corporations can develop their core competencies, produce and supply products and services at profits with a focus on maximizing profits for shareholders. The obscure Supreme Court laws and massive profits have given corporations too much power (Nace 19). Corporate laws have been used to complement political resources at the disposal of corporations, and they have therefore affected the growth of democracy and transparency in corporations. This implies that large corporations wield their power with no one to monitor them. Thus, in some instances, hostile takeover is noted because of declining shareholders’ voice and growing power of corporations. Besides, the corporation is at the center, which implies that offer stakeholders, including the state, play secondary roles.

According to argument put forward for varieties of capitalism, it generalizes and covers forms of capitalist institutions, which is better, but the question should reflect the exact argument covered in the approach. Specifically, proponents of varieties of capitalism developed an ambitious theory that perhaps covered all developed nations, but not emerging economies. This implies that the scope of the theory was limited to developed nations and only two types of capitalism were identified.

Thus, there are ideal forms of capitalism in which developed nations can be grouped. While proponents have favored capitalism, they give readers an opportunity to question whether one type of varieties of capitalism is superior to the other. Thus, readers must evaluate CMEs and LMEs to determine their strengths and weaknesses to determine superiority. At the same time, another factor of hybrid capitalism is brought into focus to determine the best form of capitalism.

The reasoned position is that varieties of capitalism arguments reinforce the existence of capitalism characterized by different types. While it is difficult to gauge superiority of these various types of capitalism, other authors have pointed toward eventual convergence. In this regard, convergence will ultimately be realized. Comparative studies on corporate laws reveal some divergence specifically in the US, the EU, and Japan. These differences are also reflected in corporate governance, capital markets, share ownership, and business culture (Hansmann and Kraakman 1). However, notwithstanding these variations and jurisdictions, the authors argue that there is uniformity in underlying issues facing corporations and their forms. They generally have the same set of legal features and face nearly the same legal issues across all jurisdictions (Hansmann and Kraakman 1).

Given other views that support convergence in addition to these observations, convergence will ultimately take place. However, corporations will most likely retain their unique characteristics defined by culture and history. This implies that if a corporation, for instance, Mondragon wishes to expand its operations overseas, it is most likely to face the same challenges across different jurisdictions, which it must navigate and accommodate within its existing corporate governance model. This approach recognizes the need to converge and at the same time retain unique features influenced and reinforced by history and culture.

While varieties of capitalism arguments provide a core basis for understanding capitalism and reinforcing its existence, the arguments however do not include most economies and are thus restricted. On the other hand, convergence recognizes the differences in culture, institutions and geographical positions (Flecha and Ngai 666). Convergence will occur in the end because of the common structural features noted in political economies. At the same time, it might also take place even without those conditional requirements. In addition, all political economies will adopt the ‘best practices’ to promote convergence. It is imperative to recognize that convergence will move toward LME because the ‘best practices’ are akin to this type of capitalism (Özveren, Havuç and Karaoğuz 13-36).

Thus, the outcome is automatically unity of capitalism types rather than divergence. It is imperative to note that ‘varieties of capitalism’ show that convergence and best practices may not be possible. This argument reinforces the notion that capitalism is not uniform and, therefore, it is made up of different types defined by differences noted in cultures, geographical positions and corporate governance practices. Thus, the essay supports convergence discourse because it is driven by several vibrant factors, including globalization and related practices in international political economies among multinational corporations. Perhaps there would only be one after the convergence of varieties (Howell 104).

Works Cited

Blair, Margaret M. “The Neglected Benefits of the Corporate Form: Entity Status and the Separation of Asset Ownership from Control.” Corporate Governance and Firm Organization: Microfoundations and Structural Forms. Ed. Anna Grandon. Boston: Oxford University Press, 2004. 45-66. Print.

Flecha, Ramon and Pun Ngai. “The challenge for Mondragon: Searching for the cooperative values in times of internationalization.” Organization 21.5 (2014): 666–682. Print.

Hall, Peter A. and David Soskice. Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. London: Oxford University Press, 2001. Print.

Hansmann, Henry and Reinier Kraakman. What is Corporate Law? Oxford: Oxford University Press, 2004. Print.

Howell, Chris. “Varieties of Capitalism: And Then There Was One?” Comparative Politics 36.1 (2003): 103-124. Print.

Jackson, Gregory. “Corporate Governance in Germany and Japan: Liberalization Pressures and Responses during the 1990s.” The End of Diversity?: Prospects for German and Japanese Capitalism. Ed. Kōzō Yamamura and Wolfgang Streeck. Ithaca, NY: Cornell University Press, 2003. 261-305. Print.

Nace, Ted. Gangs of America: The Rise of Corporate Power and the Disabling of Democracy. Berkeley, CA: Ted Nace, 2003. Print.

Özveren, Eyüp, Utku Havuç and Emrah Karaoğuz. “From Stages to Varieties of Capitalism: Lessons, Limits and Prospects.” PANOECONOMICUS 1 (2012): 13- 36. Print.

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