PS 11/Econ 11 –Reading Response Assignments
Instructions: Please answer BOTH questions to the best of your ability. Each answer
should no less than half a page single-spaced, but will probably require more than this.
Your entire reading response should be anywhere from 1-2 pages single-spaced (500-1000
words). You are required to use your textbook but are also welcome to use outside sources
as well. Please be sure to put things into your own words, do not write phrases directly from
the text. Some questions will require you to simply summarize the information. Other
questions will require you to think critically and present your own critique, argument, or
opinion. Be sure to explain your answers and opinion, providing extensive evidence.
Rubric: A good paper will have the following
• A clear and original argument (this means going beyond just summarizing what the
text says, take a stance on the issue and defend your stance)
• A detailed introduction paragraph that provides a roadmap to your paper. I should
be able to read your introduction and know exactly what you will argue/talk about
in the rest of the paper.
• Evidence that supports your argument (quantitative like statistics or data or
qualitative like your own life experiences, work, or historical examples)
• The paper has thoroughly answered ALL of the questions
• The paper uses citations from the text and possibly outside sources
• No grammatical or syntax errors- make sure you read and edit your paper.
Citations: If you cite something directly from the book please put the pg. number in
parentheses at the end of the sentence as such: (pg. # ). You do not need to provide a
bibliography or works cited pg. if you only use the textbook. If you use outside sources
(internet, books, etc.) please use APSA format and include a works cited/bibliography.
You can find APSA format instructions here:
http://citesource.trincoll.edu/apsa/apsaconfpaper_000.pdf or
https://www.tamiu.edu/uc/writingcenter/documents/APSAformatanddocumentation_7-3012_JM.pdf
***MUST SUBMIT TO TURNITIN BEFORE CLASS BEGINS TO RECEIVE FULL
CREDIT
1) Reading Response 1- DUE August 30th
Describe the 3 main perspectives (also called “ideologies”) of International Political
Economy. Which perspective do you find most convincing—that is, which one offers the
most accurate description of politics and economics? Use evidence from the history and
current events to support your argument.
2) Reading Response 2- DUE September 13th
Explain the arguments for free trade. Why do so many people still oppose free trade
policies? Is your country more protectionist or liberal when it comes to trade? Make 3
trade policy recommendations for your country.
3) Reading Response 3- DUE October 2nd
What causes financial crises? What caused the 2008 global financial crisis? Who is to
blame for 2008 and what lessons should be learned? How should U.S. policy reflect those
lessons?
4) Reading Response 4- DUE October 18th
What are the primary differences between liberal and coordinated market economies?
What are some of the consequences of each system (i.e. employment, wages, commodities
produced, policies concerning regulation, vocational training etc.) What is your country?
Which system would you prefer and why? Is there anything that the author’s are missingdo you have any criticism for their explanations?
5) Reading Response 5- DUE October 30th
What are the explanations for Africa’s economic stagnation and extreme poverty? What
are the solutions? Is it foreign aid? More trade? What do you think? Be sure to defend
your argument.
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An Introduction to Varieties of Capitalism
Peter A. Hall and David Soskice
1.1 Introduction
Political economists have always been interested in the differences in
economic and political institutions that occur across countries. Some
regard these differences as deviations from ‘best practice’ that will
dissolve as nations catch up to a technological or organizational leader.
Others see them as the distillation of more durable historical choices for
a specific kind of society, since economic institutions condition levels of
social protection, the distribution of income, and the availability of collective goods—features of the social solidarity of a nation. In each case,
comparative political economy revolves around the conceptual frameworks used to understand institutional variation across nations.
On such frameworks depend the answers to a range of important
questions. Some are policy-related. What kind of economic policies will
improve the performance of the economy? What will governments do in
the face of economic challenges? What defines a state’s capacities to meet
such challenges? Other questions are firm-related. Do companies located
in different nations display systematic differences in their structure and
strategies? If so, what inspires such differences? How can national differences in the pace or character of innovation be explained? Some are
issues about economic performance. Do some sets of institutions provide
lower rates of inflation and unemployment or higher rates of growth
than others? What are the trade-offs in terms of economic performance
to developing one type of political economy rather than another? Finally,
second-order questions about institutional change and stability are of
special significance today. Can we expect technological progress and the
competitive pressures of globalization to inspire institutional convergence? What factors condition the adjustment paths a political economy
takes in the face of such challenges?
The object of this book is to elaborate a new framework for understanding the institutional similarities and differences among the developed economies, one that offers a new and intriguing set of answer to
2
Peter A. Hall and David Soskice
such questions.1 We outline the basic approach in this Introduction.
Subsequent chapters extend and apply it to a wide range of issues. In
many respects, this approach is still a work-in-progress. We see it as a set
of contentions that open up new research agendas rather than settled wisdom to be accepted uncritically, but, as the contributions to this volume
indicate, it opens up new perspectives on an unusually broad set of
topics, ranging from issues in innovation, vocational training, and corporate strategy to those associated with legal systems, the development of
social policy, and the stance nations take in international negotiations.
As any work on this topic must be, ours is deeply indebted to prior
scholarship in the field. The ‘varieties of capitalism’ approach developed
here can be seen as an effort to go beyond three perspectives on institutional variation that have dominated the study of comparative capitalism
in the preceding thirty years.2 In important respects, like ours, each of
these perspectives was a response to the economic problems of its time.
The first of these perspectives offers a modernization approach to comparative capitalism nicely elucidated in Shonfield’s magisterial treatise of
1965. Devised in the post-war decades, this approach saw the principal
challenge confronting the developed economies as one of modernizing
industries still dominated by pre-war practices in order to secure high
rates of national growth. Analysts tried to identify a set of actors with
the strategic capacity to devise plans for industry and to impress them
on specific sectors. Occasionally, this capacity was said to reside in the
banks but more often in public officials. Accordingly, those taking this
approach focused on the institutional structures that gave states leverage
over the private sector, such as planning systems and public influence
over the flows of funds in the financial system (Cohen 1977; Estrin and
Holmes 1983; Zysman 1983; Cox 1986). Countries were often categorized,
according to the structure of their state, into those with ‘strong’ and
‘weak’ states (Katzenstein 1978b; Sacks 1980; Nordlinger 1981; Skocpol
and Amenta 1985). France and Japan emerged from this perspective
as models of economic success, while Britain was generally seen as a
laggard (Shonfield 1965; Johnson 1982).
1
We concentrate here on economies at relatively high levels of development because we
know them best and think the framework applies well to many problems there. However,
the basic approach should also have relevance for understanding developing economies as
well (cf. Bates 1997).
2
Of necessity, this summary is brief and slightly stylized. As a result, it does not do full
justice to the variety of analyses found within of these literatures and neglects some discussions that fall outside them. Note that some of our own prior work can be said to fall within
them. For more extensive reviews, see Hall (1999, 2001).
Introduction
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During the 1970s, when inflation became the preeminent problem
facing the developed economies, a number of analysts developed a
second approach to comparative capitalism based on the concept of neocorporatism (Schmitter and Lehmbruch 1979; Berger 1981; Goldthorpe
1984; Alvarez et al. 1991). Although defined in various ways, neocorporatism was generally associated with the capacity of a state to negotiate durable bargains with employers and the trade union movement
regarding wages, working conditions, and social or economic policy.3
Accordingly, a nation’s capacity for neo-corporatism was generally said
to depend on the centralization or concentration of the trade union movement, following an Olsonian logic of collective action which specifies that
more encompassing unions can better internalize the economic effects of
their wage settlements (Olson 1965; Cameron 1984; Calmfors and Driffill
1988; Golden 1993). Those who saw neo-corporatist bargains as a ‘political exchange’ emphasized the ability of states to offer inducements as well
as the capacity of unions to discipline their members (Pizzorno 1978;
Regini 1984; Scharpf 1987, 1991; cf. Przeworski and Wallerstein 1982).
Those working from this perspective categorized countries largely by
reference to the organization of their trade union movement; and the
success stories of this literature were the small, open economies of
northern Europe.
During the 1980s and 1990s, a new approach to comparative capitalism
that we will term a social systems of production approach gained currency.
Under this rubric, we group analyses of sectoral governance, national
innovation systems, and flexible production regimes that are diverse
in some respects but united by several key analytic features. Responding to the reorganization of production in response to technological
change, these works devote more attention to the behavior of firms.
Influenced by the French regulation school, they emphasize the movement of firms away from mass production toward new production
regimes that depend on collective institutions at the regional, sectoral, or
national level (Piore and Sabel 1984; Dore 1986; Streeck and Schmitter
1986; Dosi et al. 1988; Boyer 1990; Lazonick 1991; Campbell et al. 1991;
Nelson 1993; Hollingsworth et al. 1994; Herrigel 1996; Hollingsworth and
Boyer 1997; Edquist 1997; Whitley 1999). These works bring a wider
range of institutions into the analysis and adopt a more sociological
approach to their operation, stressing the ways in which institutions
3
An alternative approach to neo-corporatism, closer to our own, which puts less
emphasis on the trade union movement and more on the organization of business was also
developed by Katzenstein (1985a, 1985b) among others (Offe 1981).
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Peter A. Hall and David Soskice
generate trust or enhance learning within economic communities. As a
result, some of these works resist national categories in favor of an
emphasis on regional success of the sort found in Baden-Württemberg
and the Third Italy.
Each of these bodies of work explains important aspects of the economic world. However, we seek to go beyond them in several respects.
Although those who wrote within it characterized national differences in
the early post-war era well, for instance, some versions of the modernization approach tend to overstate what governments can accomplish,
especially in contexts of economic openness where adjustment is firmled. We will argue that features of states once seen as attributes of
strength actually make the implementation of many economics policies
more difficult; and we seek a basis for comparison more deeply rooted
in the organization of the private sector.
Neo-corporatist analysis directs our attention to the organization of
society, but its emphasis on the trade union movement underplays the
role that firms and employer organizations play in the coordination of
the economy (cf. Soskice 1990a; Swenson 1991). We want to bring
firms back into the center of the analysis of comparative capitalism
and, without neglecting trade unions, highlight the role that business
associations and other types of relationships among firms play in the
political economy.
The literature on social systems of production accords firms a central
role and links the organization of production to the support provided by
external institutions at many levels of the political economy. However,
without denying that regional or sectoral institutions matter to firm
behavior, we focus on variation among national political economies. Our
premiss is that many of the most important institutional structures—
notably systems of labor market regulation, of education and training,
and of corporate governance—depend on the presence of regulatory
regimes that are the preserve of the nation-state. Accordingly, we look for
national-level differences and terms in which to characterize them that are
more general or parsimonious than this literature has generated.4
Where we break most fundamentally from these approaches, however,
is in our conception of how behavior is affected by the institutions of the
political economy. Three frameworks for understanding this relationship
4
One of the pioneering works that some will want to compare is Albert (1993), who
develops a contrast between the models of the Rhine and America that parallels ours
in some respects. Other valuable efforts to identify varieties of capitalism that have influenced us include Hollingsworth and Boyer (1997), Crouch and Streeck (1997b), and Whitley
(1999).
Introduction
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dominate the analysis of comparative capitalism. One sees institutions as
socializing agencies that instill a particular set of norms or attitudes in those
who operate within them. French civil servants, for instance, are said to
acquire a particular concern for the public interest by virtue of their
training or the ethos of their agencies. A second suggests that the effects
of an institution follow from the power it confers on particular actors
through the formal sanctions that hierarchy supplies or the resources an
institution provides for mobilization. Industrial policy-makers and trade
union leaders are often said to have such forms of power. A third framework construes the institutions of the political economy as a matrix of
sanctions and incentives to which the relevant actors respond such that
behavior can be predicted more or less automatically from the presence
of specific institutions, as, for instance, when individuals refuse to provide public goods in the absence of selective incentives. This kind of logic
is often cited to explain the willingness of encompassing trade unions to
moderate wages in order to reduce inflation.
Each of these formulations captures important ways in which the
institutions of the political economy affect economic behavior and we
make use of them. However, we think these approaches tend to miss or
model too incompletely the strategic interactions central to the behavior
of economic actors. The importance of strategic interaction is increasingly
appreciated by economists but still neglected in studies of comparative
capitalism.5 If interaction of this sort is central to economic and political
outcomes, the most important institutions distinguishing one political
economy from another will be those conditioning such interaction, and
it is these that we seek to capture in this analysis. For this purpose, we
construe the key relationships in the political economy in game-theoretic
terms and focus on the kinds of institutions that alter the outcomes of
strategic interaction. This approach generates an analysis that focuses on
some of the same institutions others have identified as important but
construes the impact of those institutions differently as well as one that
highlights other institutions not yet given enough attention in studies of
comparative capitalism.
By locating the firm at the center of the analysis, we hope to build
bridges between business studies and comparative political economy,
two disciplines that are all too often disconnected. By integrating gametheoretical perspectives on the firm of the sort that are now central to
microeconomics into an analysis of the macroeconomy, we attempt to
connect the new microeconomics to important issues in macroeconomics
5
There are a few notable exceptions that influence our analysis, including the work of
Scharpf (1987, 1997a) and Przeworski and Wallerstein (1982).
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Peter A. Hall and David Soskice
Ours is a framework that should be of interest to economists, scholars of
business, and political scientists alike. We turn now to an elucidation of
its basic elements.
1.2 The Basic Elements of the Approach
This varieties of capitalism approach to the political economy is actorcentered, which is to say we see the political economy as a terrain populated by multiple actors, each of whom seeks to advance his interests in
a rational way in strategic interaction with others (Scharpf 1997a). The
relevant actors may be individuals, firms, producer groups, or governments. However, this is a firm-centered political economy that regards
companies as the crucial actors in a capitalist economy. They are the key
agents of adjustment in the face of technological change or international
competition whose activities aggregate into overall levels of economic
performance.
1.2.1 A Relational View of the Firm
Our conception of the firm is relational. Following recent work in economics, we see firms as actors seeking to develop and exploit core competencies or dynamic capabilities understood as capacities for developing,
producing, and distributing goods and services profitably (Teece and
Pisano 1998). We take the view that critical to these is the quality of the
relationships the firm is able to establish, both internally, with its own
employees, and externally, with a range of other actors that include suppliers, clients, collaborators, stakeholders, trade unions, business associations, and governments. As the work on transactions costs and principal–
agent relationships in the economics of organization has underlined, these
are problematic relationships (Milgrom and Roberts 1992). Even where
hierarchies can be used to secure the cooperation of actors, firms
encounter problems of moral hazard, adverse selection, and shirking. In
many cases, effective operation even within a hierarchical environment
may entail the formation of implicit contracts among the actors; and many
of a firm’s relationships with outside actors involve incomplete contracting (cf. Williamson 1985). In short, because its capabilities are ultimately
relational, a firm encounters many coordination problems. Its success
depends substantially on its ability to coordinate effectively with a wide
range of actors.
For the purposes of this inquiry, we focus on five spheres in which
firms must develop relationships to resolve coordination problems central
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to their core competencies. The first is the sphere of industrial relations
where the problem facing companies is how to coordinate bargaining
over wages and working conditions with their labor force, the organizations that represent labor, and other employers. At stake here are
wage and productivity levels that condition the success of the firm
and rates of unemployment or inflation in the economy as a whole. In the
sphere of vocational training and education, firms face the problem
of securing a workforce with suitable skills, while workers face the
problem of deciding how much to invest in what skills. On the outcomes
of this coordination problem turn not only the fortunes of individual
companies and workers but the skill levels and competitiveness of the
overall economy.
Issues of coordination also arise in the sphere of corporate governance,
to which firms turn for access to finance and in which investors seek
assurances of returns on their investments. The solutions devised to these
problems affect both the availability of finance for particular types of
projects and the terms on which firms can secure funds. The fourth
sphere in which coordination problems crucial to the core competencies
of an enterprise appear is the broad one of inter-firm relations, a term we
use to cover the relationships a company forms with other enterprises,
and notably its suppliers or clients, with a view to securing a stable
demand for its products, appropriate supplies of inputs, and access
to technology. These are endeavors that may entail standard-setting,
technology transfer, and collaborative research and development. Here,
coordination problems stem from the sharing of proprietary information
and the risk of exploitation in joint ventures. On the development of
appropriate relationships in this sphere, however, depend the capacities
of firms to remain competitive and technological progress in the economy as a whole.
Finally, firms face a set of coordination problems vis-à-vis their own
employees. Their central problem is to ensure that employees have the
requisite competencies and cooperate well with others to advance the
objectives of the firm. In this context, familiar problems of adverse
selection and moral hazard arise, and issues of information-sharing
become important (see Milgrom and Roberts 1992). Workers develop
reservoirs of specialized information about the firm’s operations that can
be of value to management, but they also have the capacity to withhold
information or effort. The relationships firms develop to resolve these
problems condition their own competencies and the character of an
economy’s production regimes.
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Peter A. Hall and David Soskice
1.2.2 Liberal Market Economies and Coordinated
Market Economies
From this perspective, it follows that national political economies can be
compared by reference to the way in which firms resolve the coordination
problems they face in these five spheres. The core distinction we draw is
between two types of political economies, liberal market economies
and coordinated market economies, which constitute ideal types at the
poles of a spectrum along which many nations can be arrayed.6
In liberal market economies, firms coordinate their activities primarily via
hierarchies and competitive market arrangements. These forms of coordination are well described by a classic literature (Williamson 1985).
Market relationships are characterized by the arm’s length exchange
of goods or services in a context of competition and formal contracting.
In response to the price signals generated by such markets, the actors
adjust their willingness to supply and demand goods or services, often
on the basis of the marginal calculations stressed by neoclassical economics.7 In many respects, market institutions provide a highly effective
means for coordinating the endeavors of economic actors.
In coordinated market economies, firms depend more heavily on nonmarket relationships to coordinate their endeavors with other actors
and to construct their core competencies. These non-market modes of
coordination generally entail more extensive relational or incomplete
contracting, network monitoring based on the exchange of private information inside networks, and more reliance on collaborative, as opposed
to competitive, relationships to build the competencies of the firm. In
contrast to liberal market economies (LMEs), where the equilibrium
outcomes of firm behavior are usually given by demand and supply
conditions in competitive markets, the equilibria on which firms coordinate in coordinated market economies (CMEs) are more often the result
of strategic interaction among firms and other actors.
Market relations and hierarchies are important to firms in all capitalist
economies, of course, and, even in liberal market economies, firms enter
6
In other works by the contributors to this volume, ‘organized market economy’ is sometimes used as a term synonymous with ‘coordinated market economy.’ Although all of the
economies we discuss are ‘coordinated’ in the general sense of the term, by markets if not
by other institutions, the term reflects the prominence of strategic interaction and hence of
coordination in the game-theoretic sense in CMEs.
7
Although we do not emphasize it here, this is not meant to deny the observation of
Granovetter (1985) and others that market relations are usually underpinned by personal
relationships of familiarity and trust.
Introduction
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into some relationships that are not fully mediated by market forces.8
But this typology is based on the contention that the incidence of
different types of firm relationships varies systematically across nations.
In some nations, for instance, firms rely primarily on formal contracts
and highly competitive markets to organize relationships with their
employees and suppliers of finance, while, in others, firms coordinate
these endeavors differently. In any national economy, firms will gravitate toward the mode of coordination for which there is institutional
support.
1.2.3 The Role of Institutions and Organizations
Institutions, organizations, and culture enter this analysis because of the
support they provide for the relationships firms develop to resolve coordination problems. Following North (1990: 3), we define institutions as
a set of rules, formal or informal, that actors generally follow, whether
for normative, cognitive, or material reasons, and organizations as
durable entities with formally recognized members, whose rules also
contribute to the institutions of the political economy.9
From this perspective, markets are institutions that support relationships of particular types, marked by arm’s-length relations and high
levels of competition. Their concomitant is a legal system that supports
formal contracting and encourages relatively complete contracts, as the
chapters by Teubner and Casper indicate. All capitalist economies also
contain the hierarchies that firms construct to resolve the problems that
cannot be addressed by markets (Williamson 1985). In liberal market
economies, these are the principal institutions on which firms rely to
coordinate their endeavors.
Although markets and hierarchies are also important elements of coordinated market economies, firms in this type of economy draw on a
further set of organizations and institutions for support in coordinating
their endeavors. What types of organizations and institutions support
the distinctive strategies of economic actors in such economies? Because
the latter rely more heavily on forms of coordination secured through
8
This point applies with particular force to market relationships in which one or more
of the participants has substantially more market power than the others, as in cases of
oligopoly, oligopsony, and the relations found in some supplier chains. We are not arguing
that all markets in LMEs are perfectly competitive.
9
Note that, from time to time, we refer loosely to the ‘institutions’ or ‘organization’ of
the political economy to refer to both the organizations and institutions found within it.
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Peter A. Hall and David Soskice
strategic interaction to resolve the problems they face, the relevant
institutions will be those that allow them to coordinate on equilibrium
strategies that offer higher returns to all concerned. In general, these
will be institutions that reduce the uncertainty actors have about the
behavior of 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.
The problem of operating collaborative vocational training schemes
provides a classic example. Here, the willingness of firms to participate
depends on the security of their beliefs that workers will learn useful
skills and that firms not investing in training will not poach extensively
from those who do, while the participation of workers depends on
assurances that training will lead to remunerative employment. As
Culpepper’s chapter in this volume indicates, it is easier for actors to
secure these assurances where there are institutions providing reliable
flows of information about appropriate skill levels, the incidence of
training, and the employment prospects of apprentices (Finegold and
Soskice 1988; Culpepper and Finegold 1999).
Similarly, the terms on which finance is provided to firms will depend
on the monitoring capacities present in the economy. Where potential
investors have little access to inside information about the progress of
the firms they fund, access to capital is likely to depend on highly
public criteria about the assets of a firm of the sort commonly found
on balance sheets. Where investors are linked to the firms they fund
through networks that allow for the development of reputations
based on extensive access to information about the internal operations
of the firm, however, investors will be more willing to supply capital to
firms on terms that do not depend entirely on their balance sheets.
The presence of institutions providing network reputational monitoring
can have substantial effects on the terms on which firms can secure
finance.
In short, this approach to comparative capitalism emphasizes the presence of institutions providing capacities for the exchange of information,
monitoring, and the sanctioning of defections relevant to cooperative
Introduction
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behavior among firms and other actors; and it is for the presence of such
institutions that we look when comparing nations.
In addition, examination of coordinated market economies leads us to
emphasize the importance of another kind of institution that is not
normally on the list of those crucial to the formation of credible commitments, namely institutions that provide actors potentially able to cooperate with one another with a capacity for deliberation. By this, we simply
mean institutions that encourage the relevant actors to engage in collective discussion and to reach agreements with each other.10 Deliberative
institutions are important for several reasons.
Deliberative proceedings in which the participants engage in extensive
sharing of information about their interests and beliefs can improve the
confidence of each in the strategies likely to be taken by the others. Many
game-theoretic analyses assume a level of common knowledge that is
relatively thin, barely stretching past a shared language and familiarity with the relevant payoffs. When multiple equilibria are available,
however, coordination on one (especially one that exchanges higher
payoffs for higher risks) can be greatly facilitated by the presence of a
thicker common knowledge, one that extends beyond the basic situation to a knowledge of the other players sufficiently intimate to provide
confidence that each will coordinate on a specific equilibrium (Eichengreen 1997). Deliberation can substantially thicken the common knowledge of the group.
As Scharpf (1987: ch. 4) has pointed out, although many think only of
a ‘prisoner’s dilemma’ game when they consider problems of cooperation, in the political economy many such problems take quite different
forms, including ‘battle of the sexes’ games in which joint gains are
available from more than one strategy but are distributed differently
depending on the equilibrium chosen. Distributive dilemmas of this sort
are endemic to political economies, and agreement on the distribution
of the relevant gains is often the prerequisite to effective cooperation
(Knight 1992). In some cases, such as those of collaborative research and
development, the problem is not simply to distribute the gains but
also the risks attendant on the enterprise. Deliberation provides the
actors with an opportunity to establish the risks and gains attendant on
cooperation and to resolve the distributive issues associated with them.
In some cases, the actors may simply be negotiating from positions of
10
One political economist who has consistently drawn attention to the importance of
deliberation is Sabel (1992, 1994) and the issue is now the subject of a growing gametheoretic literature (see Elster 1998).
12
Peter A. Hall and David Soskice
relative power, but extensive deliberation over time may build up specific
conceptions of distributive justice that can be used to facilitate agreement
in subsequent exchanges.
Finally, deliberative institutions can enhance the capacity of actors
in the political economy for strategic action when faced with new or unfamiliar challenges. This is far from irrelevant since economies are
frequently subject to exogenous shocks that force the actors within them
to respond to situations to which they are unaccustomed. The history of
wage negotiations in Europe is replete with examples. In such instances,
developments may outrun common knowledge, and deliberation can
be instrumental to devising an effective and coordinated response,
allowing the actors to develop a common diagnosis of the situation and
an agreed response.
In short, deliberative institutions can provide the actors in a political
economy with strategic capacities they would not otherwise enjoy; and
we think cross-national comparison should be attentive to the presence
of facilities for deliberation as well as institutions that provide for the
exchange of information in other forms, monitoring, and the enforcement
of agreements.
1.2.4 The Role of Culture, Informal Rules, and History
Our approach departs from previous works on comparative capitalism
in another respect.11 Many analyses take the view that the relevant
outcomes in economic performance or policy follow more or less directly
from differences in the formal organization of the political economy.
Particular types of wage settlements or rates of inflation and unemployment are often said to follow, for instance, from the organizational structure of the union movement. Because we believe such outcomes are the
products of efforts to coordinate in contexts of strategic interaction,
however, we reject the contention that they follow from the presence of
a particular set of institutions alone, at least if the latter are defined
entirely in terms of formal rules or organizations.
As we have noted, the presence of a set of formal institutions is often
a necessary precondition for attaining the relevant equilibrium in
contexts of coordination. But formal institutions are rarely sufficient
to guarantee that equilibrium. In multi-player games with multiple
iterations of the sort that characterize most of the cases in which we are
11
Here we depart from some of our own previous formulations as well (cf. Hall 1986;
Soskice 1990b).
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interested, it is well known that there exist multiple equilibria, any one
of which could be chosen by the actors even in the presence of institutions conducive to the formation of credible commitments (Fudenberg
and Maskin 1986). Something else is needed to lead the actors to coordinate on a specific equilibrium and, notably, on equilibria offering high
returns in a non-coooperative context.12 In many instances, what leads
the actors to a specific equilibrium is a set of shared understandings
about what other actors are likely to do, often rooted in a sense of what
it is appropriate to do in such circumstances (March and Olsen 1989).
Accordingly, taking a step beyond many accounts, we emphasize the
importance of informal rules and understandings to securing the equilibria in the many strategic interactions of the political economy. These
shared understandings are important elements of the ‘common knowledge’ that lead participants to coordinate on one outcome, rather than
another, when both are feasible in the presence of a specific set of formal
institutions. By considering them a component of the institutions making
up the political economy, we expand the concept of institutions beyond
the purely formal connotations given to it in some analyses.
This is an entry point in the analysis for history and culture. Many
actors learn to follow a set of informal rules by virtue of experience with
a familiar set of actors and the shared understandings that accumulate
from this experience constitute something like a common culture. This
concept of culture as a set of shared understandings or available ‘strategies for action’ developed from experience of operating in a particular
environment is analogous to those developed in the ‘cognitive turn’
taken by sociology (Swidler 1986; DiMaggio and Powell 1991). Our view
of the role that culture can play in the strategic interactions of the political economy is similar to the one Kreps (1990) accords it in organizations faced with problems of incomplete contracting.
The implication is that the institutions of a nation’s political economy
are inextricably bound up with its history in two respects. On the one
hand, they are created by actions, statutory or otherwise, that establish
formal institutions and their operating procedures. On the other, repeated historical experience builds up a set of common expectations that
allows the actors to coordinate effectively with each other. Among other
things, this implies that the institutions central to the operation of the
political economy should not be seen as entities that are created at one
point in time and can then be assumed to operate effectively afterwards.
12
Culpepper documents this problem and explores some solutions to it in this volume
and Culpepper (1998).
14
Peter A. Hall and David Soskice
To remain viable, the shared understandings associated with them must
be reaffirmed periodically by appropriate historical experience. As Thelen
emphasizes in this volume, the operative force of many institutions
cannot be taken for granted but must be reinforced by the active
endeavors of the participants.
1.2.5 Institutional Infrastructure and Corporate Strategy
This varieties of capitalism approach draws its basic conceptions of how
institutions operate from the new economics of organization. We apply
a set of concepts commonly used to explain behavior at the micro level
of the economy to problems of understanding the macroeconomy
(Milgrom and Roberts 1992). One of the advantages is an analysis with
robust and consistent postulates about what kind of institutions matter
and how they affect behavior. Another is the capacity of the approach to
integrate analysis of firm behavior with analysis of the political economy
as a whole.
However, there are at least two respects in which our account deviates
from mainstream views in the new economics of organization. First,
although we make use of the influential dichotomy between ‘markets’
and ‘hierarchies’ that Williamson (1975) has impressed on the field, we
do not think this exhausts the relevant variation. Markets and hierarchies
are features of LMEs and CMEs but we stress the systematic variation
found in the character of corporate structure (or hierarchies) across
different types of economies and the presence of coordination problems
even within hierarchical settings (Milgrom and Roberts 1992). Even
more important, we do not see these two institutional forms as the
only ones firms can employ to resolve the challenges they confront.
In coordinated market economies in particular, many firms develop relationships with other firms, outside actors, and their employees that are
not well described as either market-based or hierarchical relations but
better seen as efforts to secure cooperative outcomes among the actors
using a range of institutional devices that underpin credible commitments. Variation in the incidence and character of this ‘third’ type of relationship is central to the distinctions we draw between various types of
political economies.13
Second, it is conventional in much of the new economics of organization to assume that the core institutional structures of the economy,
13
Williamson (1985) himself acknowledges the presence of institutionalized relationships
extending beyond markets or hierarchies, albeit without characterizing them precisely as
we do here.
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whether markets, hierarchies, or networks, are erected by firms seeking
the most efficient institutions for performing certain tasks. The postulate
is that (institutional) structure follows (firm) strategy (cf. Chandler 1974;
Williamson 1975, 1985; Chandler and Daems 1980). In a restricted sense,
this is certainly true: firms can choose whether to contract out an
endeavor or perform it in-house, for instance, and they enjoy some
control over their own corporate form.
However, we think it unrealistic to regard the overarching institutional
structures of the political economy, and especially those coordinating the
endeavors of many actors (such as markets, institutional networks, and
the organizations supporting collaborative endeavor), as constructs
created or controlled by a particular firm. Because they are collective
institutions, a single firm cannot create them; and, because they have
multifarious effects, it may be difficult for a group of firms to agree on
them.14 Instead, as Calvert (1995) observes, the construction of coordinating institutions should be seen as a second-order coordination problem of considerable magnitude. Even when firms can agree, the project
may entail regulatory action by the government and the formation of
coalitions among political parties and labor organizations motivated by
considerations well beyond efficiency (Swenson 1991, 1997).
As a result, the firms located within any political economy face a set of
coordinating institutions whose character is not fully under their control.
These institutions offer firms a particular set of opportunities; and companies can be expected to gravitate toward strategies that take advantage
of these opportunities. In short, there are important respects in which
strategy follows structure. For this reason, our approach predicts systematic differences in corporate strategy across nations, and differences that
parallel the overarching institutional structures of the political economy.
This is one of the most important implications of the analysis.
Let us stress that we refer here to broad differences. Of course, there
will be additional variation in corporate strategies inside all economies in
keeping with differences in the resource endowments and market settings
of individual firms. The capabilities of management also matter, since
firms are actors with considerable autonomy. Our point is that (institutional) structure conditions (corporate) strategy, not that it fully determines it. We also agree that differences in corporate strategy can be
conditioned by the institutional support available to firms at the regional
or sectoral levels (Campbell et al. 1991; Hollingsworth et al. 1994; Herrigel
14
At the sectoral or regional level, of course, large firms may be able to exercise substantial influence over the development of these institutions, as Hancké shows in this volume
(see also Hancké forthcoming).
16
Peter A. Hall and David Soskice
1996). Many of the works making this point are congruent with our own
in that they stress the importance of the institutional environment to firm
strategy, even though there has been fruitful disagreement about which
features of that environment matter most (cf. Streeck 1992b).15
However, we emphasize variations in corporate strategy evident at
the national level. We think this justified by the fact that so many of the
institutional factors conditioning the behavior of firms remain nationspecific. There are good reasons why that should be the case. Some of
the relevant institutions were deeply conditioned by nationally specific
processes of development, as are most trade unions and employers’
associations. In others, the relevant institutions depend heavily on
statutes or regulations promulgated by national states, as do many institutions in the financial arena and labor market, not to mention the sphere
of contract law.
In sum, we contend that differences in the institutional framework of
the political economy generate systematic differences in corporate
strategy across LMEs and CMEs. There is already some evidence for this.
For instance, the data that Knetter (1989) has gathered are especially
interesting. He finds that the firms of Britain, a typical LME, and those
of Germany, a CME, respond very differently to a similar shock, in this
case an appreciation of the exchange rate that renders the nation’s goods
more expensive in foreign markets. British firms tend to pass the price
increase along to customers in order to maintain their profitability, while
German firms maintain their prices and accept lower returns in order to
preserve market share.
Our approach predicts differences of precisely this sort. We would
argue that British firms must sustain their profitability because the structure of financial markets in a liberal market economy links the firm’s
access to capital and ability to resist takeover to its current profitability;
and they can sustain the loss of market share because fluid labor markets
allow them to lay off workers readily. By contrast, German firms can
sustain a decline in returns because the financial system of a coordinated
market economy provides firms with access to capital independent of
current profitability; and they attempt to retain market share because the
labor institutions in such an economy militate in favor of long-term
employment strategies and render lay offs difficult.
15
It is possible to apply the general analytical framework of this volume to variations
at the regional or sectoral level, as the chapter by Hancké does in some respects. From the
perspective of this volume, institutional variation at the regional or sectoral level provides
an additional layer of support for particular types of coordination and one that enhances
a nation’s capacity to support a range of corporate strategies and production regimes.
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These are only some of the ways in which the institutional arrangements of a nation’s political economy tend to push its firms toward
particular kinds of corporate strategies. We explore more of these below
with special emphasis on innovation.
To put the point in the most general terms, however, firms and
other actors in coordinated market economies should be more willing to invest in specific and co-specific assets (i.e. assets that cannot
readily be turned to another purpose and assets whose returns depend
heavily on the active cooperation of others), while those in liberal market
economies should invest more extensively in switchable assets (i.e. assets
whose value can be realized if diverted to other purposes). This follows from the fact that CMEs provide more institutional support for
the strategic interactions required to realize the value of co-specific
assets, whether in the form of industry-specific training, collaborative
research and development, or the like, while the more fluid markets
of LMEs provide economic actors with greater opportunities to move
their resources around in search of higher returns, encouraging them
to acquire switchable assets, such as general skills or multi-purpose
technologies.16
1.2.6 Institutional Complementarities
The presence of institutional complementarities reinforces the differences
between liberal and coordinated market economies. The concept of
‘complementary goods’ is a familiar one: two goods, such as bread and
butter, are described as complementary if an increase in the price of one
depresses demand for the other. However, complementarities may also
exist among the operations of a firm: marketing arrangements that offer
customized products, for instance, may offer higher returns when
coupled to the use of flexible machine tools on the shop floor (Jaikumar
1986; Milgrom and Roberts 1990, 1995).
Following Aoki (1994), we extend this line of reasoning to the institutions of the political economy. Here, two institutions can be said to be
complementary if the presence (or efficiency) of one increases the returns
from (or efficiency of) the other.17 The returns from a stock market trading
16
For examples in one sphere, see the essay by Estevez-Abe, Iversen, and Soskice in this
volume.
17
Conversely, two institutions can be said to be ‘substitutable’ if the absence or inefficiency of one increases the returns to using the other. Note that we refer to total returns,
leaving aside the question of to whom they accrue, which is a matter of property rights,
and we define efficiency as the net returns to the use of an institution given its costs.
18
Peter A. Hall and David Soskice
in corporate securities, for instance, may be increased by regulations
mandating a fuller exchange of information about companies.
Of particular interest are complementarities between institutions
located in different spheres of the political economy. Aoki (1994) has
argued that long-term employment is more feasible where the financial
system provides capital on terms that are not sensitive to current
profitability. Conversely, fluid labor markets may be more effective at
sustaining employment in the presence of financial markets that transfer
resources readily among endeavors thereby maintaining a demand for
labor (cf. Caballero and Hamour 1998; Fehn 1998). Casper explores
complementarities between national systems of contract law and modes
of inter-firm collaboration, and we identify others in the sections that
follow.
This point about institutional complementarities has special relevance
for the study of comparative capitalism. It suggests that nations with a
particular type of coordination in one sphere of the economy should tend
to develop complementary practices in other spheres as well.18 Several
logics may be operative here. In some cases, the institutions sustaining
coordination in one sphere can be used to support analogous forms of
coordination in others. Where dense networks of business associations
support collaborative systems of vocational training, for instance, those
same networks may be used to operate collective standard-setting.
Similarly, firms may pressure governments to foster the development of
institutions complementary to those already present in the economy in
order to secure the efficiency gains they provide.
If this is correct, institutional practices of various types should not be
distributed randomly across nations. Instead, we should see some clustering along on the dimensions that divide liberal from coordinated
market economies, as nations converge on complementary practices
across different spheres. Fig. 1.1 presents some support for these propositions. It locates OECD nations on two axes that provide indicators
for the character of institutions in the spheres of corporate finance
and labor markets respectively. A highly developed stock market indicates greater reliance on market modes of coordination in the financial
18
Of course, there are limits to the institutional isomorphism that can be expected across
spheres of the economy. Although efficiency considerations may press in this direction, the
presence of functional equivalents for particular arrangements will limit the institutional
homology even across similar types of political economies, and the importance to institutional development of historical processes driven by considerations other than efficiency
will limit the number of complementarities found in any economy.
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JAP
FRA
FIN
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0.5
AUS
CAN
UK
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0
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Stock market capitalization
209.72
FIG. 1.1 Institutions across sub-spheres of the political economy
Note: Employment protection refers to the index of employment protection developed by EstevezAbe, Iversen, and Soskice in this volume. Stock market capitalization is the market value of listed
domestic companies as a percentage of GDP.
Source: International Federation of Stock Exchanges, Annual Report.
sphere, and high levels of employment protection tend to reflect higher
levels of non-market coordination in the sphere of industrial relations.19
Although there is some variation within each group, a pronounced clustering is evident. Nations with liberal market economies tend to rely on
markets to coordinate endeavors in both the financial and industrial relations systems, while those with coordinated market economies have
institutions in both spheres that reflect higher levels of non-market coordination.
Among the large OECD nations, six can be classified as liberal market
economies (the USA, Britain, Australia, Canada, New Zealand, Ireland)
and another ten as coordinated market economies (Germany, Japan,
Switzerland, the Netherlands, Belgium, Sweden, Norway, Denmark,
19
The employment protection index developed by Estevez-Abe, Iversen, and Soskice in
their chapter for this volume is a composite measure of the relative stringency of legislation or collective agreements dealing with hiring and firing, the level of restraint embedded
in collective dismissal rules, and the extent of firm-level employment protection. Stock
market capitalization is the market value of listed domestic companies as a percentage of
GDP.
20
Peter A. Hall and David Soskice
Table 1.1 The economic performance of liberal and coordinated market
economies
Liberal market economies
Growth rate of GDP
GDP per capita
Unemployment rate
61–73
74–84
85–98
74–84
85–97
60–73
74–84
85–98
Australia
Canada
Ireland
New Zealand
UK
United States
5.2
5.3
4.4
4.0
3.1
4.0
2.8
3.0
3.9
1.8
1.3
2.2
3.3
2.3
6.5
1.7
2.4
2.9
7932
9160
4751
7378
7359
11055
16701
18835
12830
14172
15942
22862
1.9
5.1
5.0
0.2
2.0
4.9
6.2
8.4
9.1
2.2
6.7
7.5
8.5
9.5
14.1
6.9
8.7
6.0
LME average
4.3
2.5
3.2
7939
16890
3.2
6.7
8.9
Coordinated market economies
Growth rate of GDP
GDP per capita
Unemployment rate
61–73
74–84
85–98
74–84
85–97
60–73
74–84
85–98
Austriaa
Belgium
Denmark
Finland
Iceland
Germany
Japan
Netherlandsb
Norway
Sweden
Switzerland
4.9
4.9
4.4
5.0
5.7
4.3
9.7
4.9
4.3
4.2
4.4
2.3
2.0
1.8
2.7
4.1
1.8
3.3
1.9
4.0
1.8
0.58
2.5
2.2
2.2
2.2
2.7
2.2
2.6
2.8
2.9
1.5
1.3
7852
8007
8354
7219
8319
7542
7437
7872
8181
8450
10680
17414
17576
18618
15619
18285
16933
18475
16579
19325
16710
21398
1.6
2.2
1.4
2.0
0.6
0.8
1.3
1.5
1.6
1.9
0.01
2.2
8.2
7.1
4.8
0.6
4.6
2.1
5.6
2.1
2.3
0.4
5.3
11.3
9.3
9.4
2.5
8.5
2.8
6.8
4.3
4.8
2.5
CME average
5.1
2.4
2.3
8174
17902
1.3
3.6
6.1
Notes: Growth rate of GDP: average annual growth in GDP, averaged for the time-periods indicated. GDP per capita: per capita GDP at purchasing power parity, averaged for the time-periods
indicated. Unemployment rate: annual unemployment rate.
a
b
Unemployment series begins in 1964.
Unemployment series begins in 1969.
Sources: Growth rate of GDP: World Bank, World Development Indicators CD-ROM (2000); except
for Germany, for which data were taken from OECD, Historical Statistics (1997), for 1960–91, and
WDI for years thereafter. GDP per capita: OECD, OECD Statistical Compendium CD-ROM (2000).
Unemployment rate: OECD, OECD Statistical Compendium CD-ROM (2000).
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Finland, and Austria) leaving six in more ambiguous positions (France,
Italy, Spain, Portugal, Greece, and Turkey).20 However, the latter show
some signs of institutional clustering as well, indicating that they may
constitute another type of capitalism, sometimes described as ‘Mediterranean’, marked by a large agrarian sector and recent histories of extensive state intervention that have left them with specific kinds of capacities
for non-market coordination in the sphere of corporate finance but
more liberal arrangements in the sphere of labor relations (see Rhodes
1997).
Although each type of capitalism has its partisans, we are not arguing
here that one is superior to another. Despite some variation over specific
periods, both liberal and coordinated market economies seem capable of
providing satisfactory levels of long-run economic performance, as the
major indicators of national well-being displayed in Table 1.1 indicate.
Where there is systematic variation between these types of political
economies, it is on other dimensions of performance. We argue below
that the two types of economies have quite different capacities for innovation. In addition, they tend to distribute income and employment
differently. As Fig. 1.2 indicates, in liberal market economies, the adult
population tends to be engaged more extensively in paid employment
and levels of income inequality are high.21 In coordinated market
economies, working hours tend to be shorter for more of the population
and incomes more equal. With regard to the distribution of well-being,
of course, these differences are important.
To make this analytical framework more concrete, we now look more
closely at coordination in the principal spheres of firm endeavor in coordinated and liberal market economies, drawing on the cases of Germany
and the United States for examples and emphasizing the institutional
complementarities present in each political economy.
1.3 Coordinated Market Economies: The German Case
As we have noted, we regard capitalist economies as systems in which
companies and individuals invest, not only in machines and material
20
Luxembourg and Iceland have been omitted from this list because of their small size
and Mexico because it is still a developing nation.
21
The Gini Index used in Fig. 1.2 is a standard measure for income inequality, measured
here as post-tax, post-transfer income, reported in the Luxembourg Income Study for the
mid- to late 1980s. Full-time equivalent employment is reported as a percentage of potential employment and measured as the total number of hours worked per year divided by
full-time equivalent hours per person (37.5 hours at 50 weeks) times the working-age population. It is reported for the latest available of 1993 or 1994.
22
Peter A. Hall and David Soskice
JPN
Full-time equivalent employment
77.8
US
AUS
CAN
UK
NZ
SWE
FIN
NOR
GER
FRA
ITL
ESP
44.9
20.7
GINI
36.8
Fig. 1.2 Distributional outcomes across political economies
Note: Full-time equivalent employment is defined as the total number of hours worked per year
divided by full-time equivalent hours per year per person times working age population. GINI
refers to the gini coeffficient measuring post-tax, post-transfer income inequality.
Sources: For full-time equivalent unemployment: OECD (1996a). For GINI: Spain, Portugal, Japan,
New Zealand are from Deiniger and Squire (1996); the remaining countries are from OECD
(1996a).
technologies, but in competencies based on relations with others that
entail coordination problems. In coordinated market economies, firms
resolve many of these problems through strategic interaction. The resulting equilibria depend, in part, on the presence of supportive institutions.
Here, we use the case of Germany to illustrate how non-market coordination is achieved in each of the principal spheres of firm endeavor. Of
course, the institutions used to secure coordination in other CMEs may
differ to some extent from those of Germany.
(i) The financial system or market for corporate governance in coordinated
market economies typically provides companies with access to finance
that is not entirely dependent on publicly available financial data or
current returns. Access to this kind of ‘patient capital’ makes it possible
for firms to retain a skilled workforce through economic downturns and
to invest in projects generating returns only in the long run. The core
problem here is that, if finance is not to be dependent on balance-sheet
criteria, investors must have other ways of monitoring the performance
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of companies in order to ensure the value of their investments. In
general, that means they must have access to what would normally be
considered ‘private’ or ‘inside’ information about the operation of the
company.
This problem is generally resolved in CMEs by the presence of dense
networks linking the managers and technical personnel inside a
company to their counterparts in other firms on terms that provide for
the sharing of reliable information about the progress of the firm.
Reliability is secured in a number of ways. Firms may share information
with third parties in a position to monitor the firm and sanction it for
misleading them, such as business associations whose officials have an
intimate knowledge of the industry. Reputation is also a key factor:
where membership in a network is of continuing value, the participants
will be deterred from providing false information lest their reputation in
the network and access to it suffer. CMEs usually have extensive systems
for what might be termed ‘network reputational monitoring’ (Vitols et
al. 1997).
In Germany, information about the reputation and operation of a
company is available to investors by virtue of (a) the close relationships
that companies cultivate with major suppliers and clients, (b) the knowledge secured from extensive networks of cross-shareholding, and (c)
joint membership in active industry associations that gather information
about companies in the course of coordinating standard-setting, technology transfer, and vocational training. Other companies are not only
represented on the supervisory boards of firms but typically engaged
closely with them in joint research, product development, and the like.
In short, firms sit inside dense business networks from which potential
funders can gain a considerable amount of inside information about the
track record and projects of a firm.22
The overall structure of the market for corporate governance is equally
important. Since firms often fund their activities from retained earnings,
they are not always sensitive to the terms on which external finance
is supplied. But they can be forced to focus on profitability and shareholder value if faced with the prospect of hostile takeover by others
claiming to be able to extract more value from the company. Thus, the
corporate strategies found in many CMEs also depend on tax provisions, securities regulations, and networks of cross-shareholding that
22
In previous decades, the German banks were also important contributors to such
networks by virtue of their control over large numbers of shares in industrial firms (Hall
1986: ch. 9). In recent years, the role of the large commercial banks has declined, as they
divest themselves of many holdings (Griffin 2000).
24
Peter A. Hall and David Soskice
discourage hostile mergers and acquisitions, which were very rare until
recently, for instance, in Germany.
(ii) The internal structure of the firm reinforces these systems of network
monitoring in many CMEs. Unlike their counterparts in LMEs, for
instance, top managers in Germany rarely have a capacity for unilateral
action. Instead, they must secure agreement for major decisions from
supervisory boards, which include employee representatives as well as
major shareholders, and from other managers with entrenched positions
as well as major suppliers and customers. This structural bias toward
consensus decision-making encourages the sharing of information and
the development of reputations for providing reliable information,
thereby facilitating network monitoring.
In the perspective we present, the incentives facing individuals,
whether managers or workers, are as important as those facing firms. In
CMEs, managerial incentives tend to reinforce the operation of business
networks. Long-term employment contracts and the premium that firmstructure places on a manager’s ability to secure consensus for his projects lead managers to focus heavily on the maintenance of their
reputations, while the smaller weight given to stock-option schemes in
managerial compensation in CMEs relative to LMEs inclines them to
focus less on profitability than their counterparts in LMEs. The incentives
for managers are broadly aligned with those of firms.
(iii) Many firms in coordinated market economies employ production
strategies that rely on a highly skilled labor force given substantial work
autonomy and encouraged to share the information it acquires in order
to generate continuous improvements in product lines and production
processes (Sorge and Warner 1986; Dore 1986). However, companies that
adopt such strategies are vulnerable to ‘hold up’ by their employees and
the ‘poaching’ of skilled workers by other firms, while employees who
share the information they gain at work with management are open to
exploitation.23 Thus, CMEs need industrial relations institutions capable of
resolving such problems.
The German industrial relations system addresses these problems by
setting wages through industry-level bargains between trade unions and
employer associations that generally follow a leading settlement,
normally reached in engineering where the union is powerful enough to
23
‘Hold up’ is Williamson’s (1985) term for the withdrawal of active cooperation to back
up demands.
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assure the labor movement that it has received a good deal. Although
union density is only moderately high, encompassing employers’ associations bind their members to these agreements. By equalizing wages
at equivalent skill levels across an industry, this system makes it difficult for firms to poach workers and assures the latter that they are
receiving the highest feasible rates of pay in return for the deep commitments they are making to firms. By coordinating bargaining across the
economy, these arrangements also limit the inflationary effects of wage
settlements (Streeck 1994; Hall and Franzese 1998).
The complement to these institutions at the company level is a system
of works councils composed of elected employee representatives endowed with considerable authority over layoffs and working conditions.
By providing employees with security against arbitrary layoffs or changes
to their working conditions, these works councils encourage employees
to invest in company-specific skills and extra effort. Their effectiveness is
underpinned by the capacity of either side to appeal a disputed decision
to the trade unions and employers’ associations, who act as external
guarantors that the councils function as intended (Thelen 1991).
(iv) Because coordinated market economies typically make extensive
use of labor with high industry-specific or firm-specific skills, they
depend on education and training systems capable of providing workers
with such skills.24 As Culpepper notes in his chapter, the coordination
problems here are acute, as workers must be assured that an apprenticeship will result in lucrative employment, while firms investing in
training need to know that their workers will acquire usable skills and
will not be poached by companies that do not make equivalent investments in training. CMEs resolve these problems in a variety of ways.
Germany relies on industry-wide employer associations and trade
unions to supervise a publicly subsidized training system. By pressuring major firms to take on apprentices and monitoring their participation in such schemes, these associations limit free-riding on the training
efforts of others; and, by negotiating industry-wide skill categories and
training protocols with the firms in each sector, they ensure both that the
training fits the firms’ needs and that there will be an external demand
for any graduates not employed by the firms at which they apprenticed.
Because German employer associations are encompassing organizations
24
Compared to general skills that can be used in many settings, industry-specific skills
normally have value only when used within a single industry and firm-specific skills only
in employment within that firm.
26
Peter A. Hall and David Soskice
that provide many benefits to their members and to which most firms in
a sector belong, they are well placed to supply the monitoring and
suasion that the operation of such a system demands as well as the deliberative forums in which skill categories, training quotas, and protocols
can be negotiated. Workers emerge from their training with both
company-specific skills and the skills to secure employment elsewhere.
(v) Since many firms in coordinated market economies make extensive
use of long-term labor contracts, they cannot rely as heavily on the movement of scientific or engineering personnel across companies, to effect
technology transfer, as liberal market economies do. Instead, they tend
to cultivate inter-company relations of the sort that facilitate the diffusion
of technology across the economy. In Germany, these relationships are
supported by a number of institutions. Business associations promote the
diffusion of new technologies by working with public officials to determine where firm competencies can be improved and orchestrating
publicly subsidized programs to do so. The access to private information about the sector that these associations enjoy helps them ensure that
the design of the programs is effective for these purposes. A considerable amount of research is also financed jointly by companies, often in
collaboration with quasi-public research institutes. The common technical
standards fostered by industry associations help to diffuse new technologies, and they contribute to a common knowledge-base that facilitates collaboration among personnel from multiple firms, as do the
industry-specific skills fostered by German training schemes (Lütz 1993;
Soskice 1997b; Ziegler 1997).
Casper’s chapter in this volume shows that Germany has also developed a system of contract law complementary to the presence of strong
industry associations that encourages relational contracting among companies and promotes this sort of technology transfer. Because of the many
contingencies that can arise in close inter-firm relationships involving
joint research or product development, tightly written, formal contracts
are often inadequate to sustain such relationships. However, the German
courts permit unusually open-ended clauses in inter-firm contracts on the
explicit condition that these be grounded in the prevailing standards of
the relevant industry association. Thus, the presence of strong industry
associations capable of promulgating standards and resolving disputes
among firms is the precondition for a system of contract law that encourages relational contracting (cf. Casper 1997; Teubner in this volume).
In these respects, German institutions support forms of relational
contracting and technology transfer that are more difficult to achieve in
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liberal market economies. One of the effects is to encourage corporate
strategies that focus on product differentiation and niche production,
rather than direct product competition with other firms in the industry,
since close inter-firm collaboration is harder to sustain in the presence of
the intense product competition that tends to characterize LMEs. The
chapter by Estevez-Abe, Iversen, and Soskice examines the linkages
between these product market strategies, skill systems, and social-policy
regimes.
The complementarities present in the German political economy
should be apparent from this account. Many firms pursue production
strategies that depend on workers with specific skills and high levels of
corporate commitment that are secured by offering them long employment tenures, industry-based wages, and protective works councils. But
these practices are feasible only because a corporate governance system
replete with mechanisms for network monitoring provides firms with
access to capital on terms that are relatively independent of fluctuations
in profitability. Effective vocational training schemes, supported by an
industrial-relations system that discourages poaching, provide high
levels of industry-specific skills. In turn, this encourages collective standard-setting and inter-firm collaboration of the sort that promotes technology transfer. The arrows in Fig. 1.3 summarize some of these
complementarities. Since many of these institutional practices enhance
the effectiveness with which others operate, the economic returns to the
system as a whole are greater than its component parts alone would
generate.
1.4 Liberal Market Economies: The American Case
Liberal market economies can secure levels of overall economic performance as high as those of coordinated market economies, but they do
so quite differently. In LMEs, firms rely more heavily on market relations
to resolve the coordination problems that firms in CMEs address more
often via forms of non-market coordination that entail collaboration and
strategic interaction. In each of the major spheres of firm endeavor,
competitive markets are more robust and there is less institutional
support for non-market forms of coordination.
(i) Several features of the financial systems or markets for corporate governance of liberal market economies encourage firms to be attentive to current earnings and the price of their shares on equity markets. Regulatory
regimes are tolerant of mergers and acquisitions, including the hostile
28
Peter A. Hall and David Soskice
Corporate governance
system, permitting LR
finance without publicly
assessible information,
using reputational
monitoring
LR finance allows
credible commitments
to LR security by
employers
Certification
helps assess
company
Allows
viability
consensus
decisionmaking
Education and
training system
which permits sunk
human capital
investments in firms
and sometimes
defined industries
Reduces
risk of sunk
investments
Skilled employees
in powerful position
in companies
Cooperation between
companies needed to
allow reputational
monitoring
Allows credible
commitment
Co-determination
to long-run
provides way to bring
relations
profitability needs into
between
consensus decision-making
companies
Provides
common ind. tech
skills needed for
cooperation based
System of interon common
company relations
Company standard
needs
Makes
consensus
vocational
standard-setting
possible
Industrial-relations
system which provides
employee cooperation
in companies and
wage moderation
allows cooperation,
standard-setting and
technology transfer
Reduces
temptation
to poach
Product market
cooperation lowers
external labour
market competition
Fig. 1.3 Complementarities across subsystems in the German coordinated
market economy
takeovers that become a prospect when the market valuation of a firm
declines. The terms on which large firms can secure finance are heavily
dependent on their valuation in equity markets, where dispersed investors depend on publicly available information to value the company.
This applies to both bonds, share issues, and bank lending.25 Compensation systems that reward top management for increases in net earnings
25
Firms in LMEs tend to rely on bond and equity markets for external finance more
heavily than those in CMEs. However, bank lending in such economies also privileges
publicly accessible, balance-sheet criteria, since banks find it difficult to monitor the less-
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or share price are common in such economies. Liberal market economies
usually lack the close-knit corporate networks capable of providing
investors with inside information about the progress of companies that
allows them to supply finance less dependent on quarterly balance sheets
and publicly available information. The relevant contrast is with CMEs,
where firms need not be as attentive to share price or current profitability in order to ensure access to finance or deter hostile takeovers.
Of course, there are some qualifications to these generalizations. Companies with readily assessable assets associated with forward income
streams, such as pharmaceutical firms with a ‘pipeline’ of drugs,
consumer-goods companies with strong reputations for successful product development, and firms well positioned in high-growth markets,
need not be as concerned about current profitability. New firms in hightechnology fields can often secure funds from venture-capital companies
that develop the resources and technical expertise to monitor their
performance directly and trade ownership stakes in these firms for the
high risks they take.26 On the whole, however, the markets for corporate
governance in LMEs encourage firms to focus on the publicly assessable
dimensions of their performance that affect share price, such as current
profitability.
(ii) In the industrial relations arena, firms in liberal market economies
generally rely heavily on the market relationship between individual
worker and employer to organize relations with their labor force. Top
management normally has unilateral control over the firm, including
substantial freedom to hire and fire.27 Firms are under no obligation to
establish representative bodies for employees such as works councils;
and trade unions are generally less powerful than in CMEs, although
they may have significant strength in some sectors. Because trade unions
obvious dimensions of corporate progress in an environment that lacks the close-knit corporate networks conveying such information in CMEs. Intense monitoring by a loan officer
is feasible only when small sums are involved, since it exposes the bank to problems of
moral hazard that are especially acute in countries where officers can take advantage of
fluid labor markets to move elsewhere.
26
Note that we avoid a distinction often drawn between countries in which firms can
raise ‘long-term’ versus those in which only ‘short-term’ capital is available because this
distinction is rarely meaningful. Many companies in LMEs with established market reputations can raise capital for projects promising revenues only in the medium to long term,
and firms often finance the bulk of their activities from retained earnings. Of more relevance are the rules governing hostile takeovers, whose prospect can induce firms to pay
more attention to corporate earnings and the price of their shares.
27
Partly for this reason, the market valuation of firms in LMEs often depends more
heavily on the reputation of its CEO than it does in CMEs.
30
Peter A. Hall and David Soskice
and employer associations in LMEs are less cohesive and encompassing,
economy-wide wage coordination is generally difficult to secure. Therefore, these economies depend more heavily on macroeconomic policy
and market competition to control wages and inflation (see Franzese in
this volume; Hall and Franzese 1998).
The presence of highly-fluid labor markets influences the strategies
pursued by both firms and individuals in liberal market economies. These
markets make it relatively easy for firms to release or hire labor in order
to take advantage of new opportunities but less attractive for them to pursue production strategies based on promises of long-term employment.
They encourage individuals to invest in general skills, transferable across
firms, rather than company-specific skills and in career trajectories that
include a substantial amount of movement among firms.
(iii) The education and training systems of liberal market economies are
generally complementary to these highly fluid labor markets. Vocational
training is normally provided by institutions offering formal education that focuses on general skills because companies are loath to invest
in apprenticeship schemes imparting industry-specific skills where they
have no guarantees that other firms will not simply poach their apprentices without investing in training themselves. From the perspective of
workers facing short job tenures and fluid labor markets, career success
also depends on acquiring the general skills that can be used in many
different firms; and most educational programs from secondary through
university levels, even in business and engineering, stress ‘certification’
in general skills rather than the acquisition of more specialized competencies.
High levels of general education, however, lower the cost of additional
training. Therefore, the companies in these economies do a substantial
amount of in-house training, although rarely in the form of the intensive
apprenticeships used to develop company-specific or industry-specific
skills in CMEs. More often, they provide further training in the marketable skills that employees have incentives to learn. The result is a labor
force well equipped with general skills, especially suited to job growth in
the service sector where such skills assume importance, but one that
leaves some firms short of employees with highly specialized or company-specific skills.
(iv) Inter-company relations in liberal market economies are based, for
the most part, on standard market relationships and enforceable formal
contracts. In the United States, these relations are also mediated by
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rigorous antitrust regulations designed to prevent companies from colluding to control prices or markets and doctrines of contract laws that
rely heav-ily on the strict interpretation of written contracts, nicely
summarized by MacNeil’s dictum: ‘sharp in by clear agreement, sharp
out by clear performance’ (Williamson 1985). Therefore, companies
wishing to engage in relational contracts with other firms get little assistance from the American legal system, as Casper observes.
In some fields of endeavor, such as after-sales service, companies can
engage successfully in incomplete contracting by building up reputations
on which other parties rely. But extensive reputation-building is more
difficult in economies lacking the dense business networks or associations that circulate reputations for reliability or sharp practice quickly
and widely. Because the market for corporate governance renders firms
sensitive to fluctuations in current profitability, it is also more difficult
for them to make credible commitments to relational contracts that
extend over substantial periods of time.
How then does technology transfer take place in liberal market
economies? In large measure, it is secured through the movement of
scientists and engineers from one company to another (or from research
institutions to the private sector) that fluid labor markets facilitate. These
scientific personnel bring their technical knowledge with them. LMEs
also rely heavily on the licensing or sale of innovations to effect technology transfer, techniques that are most feasible in sectors of the economy
where effective patenting is possible, such as biotechnology, microelectronics, and semiconductors. In the United States, the character of
standard-setting reinforces the importance of licensing. Since few sectors
have business associations capable of securing consensus on new standards, collective standard-setting is rarely feasible. Instead, standards are
often set by market races, whose winners then profit by licensing their
technology to many users (see also Tate in this volume). The prominence
of this practice helps to explain the presence of venture-capital firms in
liberal market economies: one success at standard-setting can pay for
many failed investments (Borrus and Zysman 1997).
In LMEs, research consortia and inter-firm collaboration, therefore, play
less important roles in the process of technology transfer than in CMEs,
where the institutional environment is more conducive to them. Until the
National Cooperative Research Act of 1984, American firms engaging in
close collaboration with other firms actually ran the risk of being sued for
triple damages under antitrust law; and it is still estimated that barely
1 to 7 per cent of the funds spent on research and development in the
American private sector are devoted to collaborative research.
32
Peter A. Hall and David Soskice
It should be apparent that there are many institutional complementarities across the sub-spheres of a liberal market economy (see Fig. 1.4).
Labor market arrangements that allow companies to cut costs in a downturn by shedding labor are complementary to financial markets that
render a firm’s access to funds dependent on current profitability. Educational arrangements that privilege general, rather than firm-specific, skills
are complementary to highly fluid labor markets; and the latter render
forms of technology transfer that rely on labor mobility more feasible. In
Finance available on
publicly assessable
information, all risks,
repuations if publicly
assessable; inside info.
only if monitorable, e.g.
by venture captalists
Credible commitment
difficult for LR relational
sunk investments in
training
Credible
commitment
Unilateral control
difficult for LR
reinforces market in
corporate control; and allows relational sunk
investments
owners to set high-powered
between
incentives
companies
Permits
mobility
and retraining
Lack of sunk training
investments reinforces
market for corporate
control
Education and
training system
permitting
investments in
general skills
Disincentive
for sunk cost
training
Difficult to use other
companies to monitor
inside information
Company
competing
in rapidly
changing
markets
Short-run finance
prevents power bases
developing among
employees
Permits mobility
and retraining
Deregulated labor
markets, low-cost
hiring and firing, no
co-determination rights,
flexible reward-setting
Strong competition
policy; standardsetting via market
competition;
technology transfer
via market (incl.
alliances, rjvs, hires)
Permits tech.
diffusion via
high-skill
labour
mobility
Product market
instability reinforces
labor market
deregulation
Fig. 1.4 Complementarities across subsystems in the American liberal
market economy
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the context of a legal system that militates against relational contracting,
licensing agreements are also more effective than inter-firm collaboration
on research and development for effecting technology transfer.
Special note should be taken of the complementarities between the
internal structure of firms and their external institutional environment in liberal and coordinated market economies. In LMEs, corporate
structures that concentrate authority in top management make it easier
for firms to release labor when facing pressure from financial markets
and to impose a new strategy on the firm to take advantage of the
shifting market opportunities that often present themselves in economies
characterized by highly mobile assets. By contrast, in CMEs, where access
to finance and technology often depends on a firm’s attractiveness as a
collaborator and hence on its reputation, corporate structures that impose
more consensual forms of decision-making allow firms to develop reputations that are not entirely dependent on those of its top management.
By reducing the capacity of top management to act arbitrarily, these
structures also enhance the firm’s capacity to enter credibly into relational contracts with employees and others in economies where a firm’s
access to many kinds of assets, ranging from technology to skills, may
depend on its capacity for relational contracting. Lehrer’s chapter
explores some of these linkages between corporate structure and the
external environment in more detail.
1.5 Comparing Coordination
Although many of the developed nations can be classified as liberal or
coordinated market economies, the point of this analysis is not simply
to identify these two types but to outline an approach that can be used
to compare many kinds of economies. In particular, we are suggesting
that it can be fruitful to consider how firms coordinate their endeavors
and to analyze the institutions of the political economy from a perspective that asks what kind of support they provide for different kinds of
coordination, even when the political economies at hand do not correspond to the ideal types we have just outlined.
It is important to note that, even within these two types, significant
variations can be found. Broadly speaking, liberal market economies are
distinguishable from coordinated market economies by the extent to
which firms rely on market mechanisms to coordinate their endeavors
as opposed to forms of strategic interaction supported by non-market
institutions. Because market institutions are better known, we will not
explore the differences among liberal market economies here. But a few
34
Peter A. Hall and David Soskice
words about variation in coordinated market economies may be appropriate, if only to show that variation in the institutional structures underpinning strategic coordination can have significant effects on corporate
strategy and economic outcomes.
One important axis of difference among CMEs runs between those that
rely primarily on industry-based coordination, as do many of the northern
European nations, and those with institutional structures that foster
group-based coordination of the sort found in Japan and South Korea. As
we have seen, in Germany, coordination depends on business associations and trade unions that are organized primarily along sectoral lines,
giving rise to vocational training schemes that cultivate industry-specific
skills, a system of wage coordination that negotiates wages by sector, and
corporate collaboration that is often industry-specific. By contrast, the
business networks of most importance in Japan are built on keiretsu, families of companies with dense interconnections cutting across sectors, the
most important of which is nowadays the vertical keiretsu with one major
company at its center.
These differences in the character of business networks have major
implications. In Germany, companies within the same sector often
cooperate in the sensitive areas of training and technology transfer. But
the structure of the Japanese economy encourages sharp competition
between companies in the same industry. Cooperation on sensitive
matters is more likely to take place within the keiretsu, i.e. among firms
operating in different sectors but within one ‘family’ of companies. The
sectoral cooperation that takes place usually concerns less-sensitive
matters, including recession cartels, licensing requirements, and entry
barriers as well as the annual wage round (Soskice 1990a). Partly for this
reason, the attempts of MITI to develop cooperative research projects
within sectors have had very limited success; serious research and
development remains the preserve of the laboratories of the major
companies.
This pattern of keiretsu-led coordination also has significant implications for patterns of skill acquisition and technology transfer. Serious
training, technology transfer and a good deal of standard-setting take
place primarily within the vertical keiretsu. Workers are encouraged to
acquire firm- or group-specific skills, and notably strong relational skills
appropriate for use within the family of companies within which they
have been trained. In order to persuade workers to invest in skills of this
specificity, the large firms have customarily offered many of them lifetime employment. And, in order to sustain such commitments, many
Japanese firms have cultivated the capacity to move rapidly into new
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products and product areas in response to changes in world markets and
technologies. This kind of corporate strategy takes advantage of the high
levels of workforce cooperation that lifetime employment encourages. To
reinforce it, Japanese firms have also developed company unions
providing the workforce with a voice in the affairs of the firm.
Japanese firms tend to lack the capacities for radical innovation that
American firms enjoy by virtue of fluid market setting or for sectorcentered technology transfer of the sort found in Germany. Instead, the
group-based organization of the Japanese political economy has encouraged firms there to develop distinctive corporate strategies that take
advantage of the capacities for cross-sector technology transfer and
rapid organizational redeployment provided by the keiretsu system.
These translate into comparative institutional advantages in the largescale production of consumer goods, machinery, and electronics that
exploit existing technologies and capacities for organizational change.
Although Japan is clearly a coordinated market economy, the institutional structures that support group-based coordination there have been
conducive to corporate strategies and comparative advantages somewhat
different from those in economies with industry-based systems of coordination.
The varieties of capitalism approach can also be useful for understanding political economies that do not correspond to the ideal type of
a liberal or coordinated market economy. From our perspective, each
economy displays specific capacities for coordination that will condition
what their firms and governments do.
France is a case in point, and the chapters in this volume by Lehrer,
Culpepper, and Hancké explore some of the implications of this approach
for it. Collaboration across French companies is based on career patterns
that led many of the managers of leading firms through a few elite
schools and the public service before taking up their positions in the
private sector. Lehrer observes that the top managers of many French
firms, therefore, have close ties to the state and weak ties to the rest of
the enterprise. As a result, he argues, they are less likely to pursue the
corporate strategies found in Britain or Germany and more likely to look
to the state for assistance than their counterparts in other nations. Using
the case of vocational training, however, Culpepper shows that there are
clear limits to what states can do in the absence of strong business associations capable of monitoring their members. Hancké examines how
large French firms are adapting to these limits, suggesting that many are
taking industrial reorganization upon themselves, sometimes devising
new networks to coordinate their activities.
36
Peter A. Hall and David Soskice
In sum, although the contrast between coordinated and liberal market
economies is important, we are not suggesting that all economies
conform to these two types. Our object is to advance comparative analysis of the political economy more generally by drawing attention to the
way in which firms coordinate their endeavors, elucidating the connections between firm strategies and the institutional support available
for them, and linking these factors to patterns of policy and performance.
These are matters relevant to any kind of political economy.
1.6 Comparative Institutional Advantage
We turn now to some of the issues to which this perspective can be
applied, beginning with a question central to international economics,
namely, how to construe comparative economic advantage. The theory of
comparative economic advantage is important because it implies that
freer trade will not impoverish nations by driving their production abroad
but enrich them by allowing each to specialize in the goods it produces
most efficiently and exchange them for even more goods from other
nations. It can be used to explain both the expansion of world trade and
the patterns of product specialization found across nations. The most
influential version of the theory focuses on the relative endowment of
basic factors (such as land, labor, and capital) found in a nation and suggests that trade will lead a nation to specialize in the production of goods
that use its most abundant factors most intensively (Stolper and
Samuelson 1941).
However, recent developments have dealt a serious blow to this
account of comparative economic advantage. The most important of
these include the expansion of intra-industry trade and increases in the
international mobility of capital. If the theory is correct, nations should
not import and export high volumes of goods from the same sector; and
there is a real possibility that international movements of capital will
even out national factor endowments. As a result, many economists have
become skeptical about whether comparative advantages really exist, and
many have begun to seek other explanations for the expansion of trade
and the geographic distribution of production.
Some explain the growth of trade, and intra-industry trade in particular, as the result of efforts to concentrate production in order to secure
returns to scale (Helpmann 1984). Others explain the concentration of
particular kinds of production in some nations as the result of firms’
efforts to secure the positive externalities generated by a group of firms
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