Varieties of capitalism

Emerging Markets
Fall 2023
Jakob Arnoldi
Objectives for today
• Get a sense of how institutional frameworks (business regimes) can
differ in ways other than level of development.
• Understand how these frameworks constitute systems.
• Apply this to emerging markets as an alternative theoretical approach
to the institutional voids thesis.
What characterizes Danish
capitalism?
Institutionally different vs. institutionally
underdeveloped (this slide re-appears later)?
• EMs may be characterized by institutional voids but when looking at, and
comparing, so-called mature economies something else (also) becomes
evident:
EMs contain institutional, organizational and ownership characteristics that
are different to developed markets = varieties of capitalism (VOC).
• Emerging markets as institutionally different as opposed to
underdeveloped.
• General understanding of the institutional environment to which an
organization has to adapt (with severe implications for organizations
entering new business systems) – VOC
• Partial (and balanced) focus on culture and informal institutions).
 Our current theoretical framework
Country A - Country B -
developed emerging

Formal
institutional
level
Market institutions Market institutions -
- Effective Ineffective

Informal substitutes – Informal substitutes –

Informal
relatively unimportant relatively important
institutional
level

Individualistic Collectivistic
Culture

We have not talked much Culture: mutually

about culture so far so this different
is an aside at the moment.
 A different take
Country A Country B

Mutually different
Formal institutions: different
institutional labor markets, different
level Market corporate governance,
different corporate law Market institutions –
institutions –
etc. stakeholder system
shareholder
system

Informal substitutes - less Informal substitutes -

Informal
important (or at least less less important (or at
institutional
in focus) least less in focus)
level

Individualistic/high Collectivistic/low
Culture power distance Culture: mutually power distance
different
Accounting for different market
institutions: Varieties of capitalism
Main propositions:

• Capitalism comes in different types.

• Firms operate in heterogeneous environments under institutional
forces of which they have limited control.
• This leads to different strategies, and:
• Firms are managed with different objectives.
Varieties of capitalism
Older versions (not so important…) :
• 1) Differences in terms of how nation states modernize their
economy;
• 2) …in terms of (neo)corporatism – trade unions and collective
bargaining;
• 3) …in terms of social systems of production – how there are different
systems of innovation, education, productions based on alliances and
cooperation between different organizations and sectors.
The starting point for newest
versions:
• A relational view of the firm:
• Firms have to joggle with a range of stakeholders, both internally but
also externally , i.e. entities in its environment which pose transaction
costs and agency problems. These are coordination problems.

Coordination makes us think about:

TCE: Markets and hierarchies – the two main forms
of coordination of transactions.
Institutions – support and coordinate transactions
Other (firm-centric) premises of
newest version:
• How firms are organized and mutually connected is central.
• But that is in turn affected by institutions - focus on national regimes
of regulation of the labor market, education/training and corporate
governance (and finance, trade, environment etc.).
The problem of coordination
Hall, Peter A., David Soskice. 2001.
Varieties of Capitalism. Oxford:
Oxford Univ. Press p. 6
5 problem areas of coordination
1) Industrial relations: labour etc;
2) vocational training and education;
3) corporate governance;
4) inter-firm relations;
5) employees.
Basic typology
• Liberal Market Economies: Either hierarchies (fiat) or markets (contracts, supply
and demand). Arm’s-length relations with state, price signaling and
competition.

• Coordinated Market Economies: Third party mediation; deliberation; more

collective bargaining; more incomplete contracts, more inter-firm collaboration.

• Both are systems (or modes) of coordination!!

• Firms gravitate toward a mode of coordination for which there is institutional

(system) support.
 • The double meaning of coordination
Two meanings:
1. The successful coming together in a transaction/production process
under the guidance of institutions and/or organizations (including
management of said organizations). TCE
2. Systems of economic transactions (i.e. markets) occurring in settings
which include more than merely market institutions based on arms
length principles (Coordinated market economies, aka CMEs). Var.
of Cap.
Therefore, one important thing to
note:
• LME/CME distinction transcends Williamson’s
distinction between Hierarchies and Markets. LMEs
not markets while CMEs are hierarchy.
• If anything, firms in CMEs have access to a ‘third’
type of coordination.
• In fact, hierarchies may be more important in LMEs
and markets certainly also important in CMEs.
Particularly important institutional
foundations of LME’s
• Legal system – formal contracting, relatively complete contracts.
Strong level of market supervision to avoid monopolies. Price
signaling; niche seeking.
Particularly important institutional
foundations of CMEs
“In addition to the institutions of LMEs a range of ‘institutions that reduce
the uncertainty actors have about the others and allow them to make
credible commitments to each other. A standard literature suggests that
these are institutions providing capacities for (i) the exchange of
information among the actors, (ii) the monitoring of behavior, and (iii) the
sanctioning of defection from cooperative endeavor (see Ostrom 1990).
Typically, these institutions include powerful business or employer
associations, strong trade unions, extensive networks of cross-
shareholding, and legal or regulatory systems designed to facilitate
information-sharing and collaboration. Where these are present, firms can
coordinate on strategies to which they would not have been led by market
relations alone.” (Hall and Soskice: 10)
Key differences between LMEs and
CMEs
1) Industrial relations: Unions and collective bargaining vs. strictly
market coordinated labour markets.
2) Vocational training and education: Collaboration vs. strictly firm
based.
3) Corporate governance: stakeholder vs. shareholder.
4) Inter-firm relations: Cross ownership and collaboration. Political
negotiation as collective group as opposed to fragmented
ownership and individual lobbying.
5) Employees: Different organizational and management cultures,
more long terms commitments vs more short term, etc.
Institutions and organizational
strategy
Organizations can make decisions about hierarchy and market
coordination but:
• Organizations cannot determine institutional architecture. They have
to adapt to it instead.
• Therefore, organizations gravitate toward the mode of coordination
for which there is institutional support.
Which is most efficient?
• Growth potential undecided.
• Different potential for innovation (or rather different kinds of
innovative capabilities.
Implications for emerging markets
Institutionally different vs.
institutionally underdeveloped ?
• EMs may be characterized by institutional voids but when looking at, and
comparing, so-called mature economies something else (also) becomes
evident:
EMs contain institutional, organizational and ownership characteristics that
are different to developed markets = varieties of capitalism.
• Emerging markets as institutionally different as opposed to
underdeveloped.
• General understanding of the institutional environment to which an
organization has to adapt (with severe implications for organizations
entering new business systems) – the strategy tripod.
• Partial (and balanced) focus on culture and informal institutions).
Can we apply the LMW/CME
distinction to emerging markets?
• Yes, many EMs would be classified as CMEs;
• CME arguably needs to be rethought and EMs not homogeneous
group of CME;
• basic premise – ‘third type’ of coordination (other than markets and
hierarchies) stands, but the coordinating institutions differ;
• these differences can be related at least in part to cultural differences
also.
A typology of CMEs

• Industry based coordination – Western Europe

(firms, and workers, collectively organized).
• Group based coordination – South East Asia and
South America. Obvious overlaps between
these two groups.
• State capitalism - BRICS and South East Asia.
Summation
• Firms can exist in different institutional eco-systems - having implication
for firm strategy.
• Thus there are significant differences due to differences of formal
institutions – not level of development of same
• Institutional voids thesis: Underdeveloped institutions
• Variety of capitalism: Different institutions.
• Many emerging markets are arguably CME’s but different kind of CMEs
compared to European CMEs.
• Main features of emerging market CMEs:
• State capitalism
• Business groups
Conclusion
• Be careful not to explain all things different in EMs as voids. In some
cases they are institutional differences.