According to varieties of capitalism, firms tend to be the core actors within the economy whereby their behavior totals to the national economic performance (Aguilera and Jackson, 2010, p.489). For firms to succeed, the must cooperate with others in different scopes of the political economy so as to; control working conditions and wages as well as to improve industrial relations, raise funds, make sure that workers possess appropriate skills, secure admittance to resources and technology through relationship between firms, compete to get customer in the market and also to improve the relationship between firms and employees (Aguilera and Jackson, 2010, p.490). Assuming a relationship perspective of the firm, this view considers that the best way to be successful in these undertakings is through effective cooperation with other actors. However, the main problems encountering firms are actually cooperation problems with other actors within the economy. Therefore, this paper will discuss the corporate governance institutions and labor market institution in the framework of Varieties of Capitalism.
The framework of Varieties of Capitalism appeals to the difference between the two forms of coordination. For the first one, firms harmonize with other actors generally via competitive markets which are associated with arms-length relationships and formal contracts (Hancké, 2009, 57). In this instance, the equilibrium outcomes are literally determined mainly by the market margins and signals, relative prices, as well as conversant marginalist deliberations. For the second one, the coordination between firms and other actors is via strategic interaction processes structured and shaped by the game theory (Hancké, 2009, p.72). The equilibrium results are dependent on the support from the institution that is present to form a credible devotion, entailing supporting the efficient conveyance, sanctioning, monitoring as well as negotiation of information.
Albeit circumstances of the market, as well as strategic coordination, take place in every capitalist economy, this framework implies that in the core scope of firms’ endeavor, balancing of such two forms of coordination vary in diverse political economies. On the other end, Liberal Market Economies (LMEs) exists, whereby the interrelationship between firms and other concerned actors are cooperated and organized mainly through competitive markets (Dustmann et al., 2014, p.176). Coordinated Market Economies (CMEs) are also in place which involves the mutual engagement of firms in strategized interactions together with trade unions, funds providers and other concerned actors (FGSI Lecture 2, Slide 14). Regardless of a firm coordinating its endeavors via marketing relations or even by means of strategized interaction, they are perceived to be dependent on institutional setting (Dustmann et al., 2014, p.183). In essence, in places where markets are not good yet institutional support is present to form the credible devotions, expectation can be made for the firms to depend more significantly on strategic coordination. In circumstances whereby markets are fluid but the support is minimal for the commitments, firms will tend to depend significantly on market coordination. Moreover, the communication within the institutional setting of every aspect of the economy as well as the cooperation.
Also, market coordination is a well-known approach within neo-classic economics, however, the United States being an archetypal LME. In this instance, the firms come across big equity markets highlighted with high transparency levels as well as discrete shareholding, whereby firms gain their accessibility to external funding relying substantially on a publicly quantifiable concept like market valuation (Chandler et al., 2009, p.49). Nonetheless, regulatory regimes permit hostile annexations which rely on the share price, making managers develop sensitivity when handling matters pertaining to current profitability. Since trade unions are significantly weak as well as weak and minimal protection of employees, labor markets tend to be fluid as wage setting is the main scope that matters in the contract between employees and employers. Due to labor markets being fluid, employees access incentives for investing in primary skills which can be applied in other work activities and since industry cooperation is weak, firms do not have the potential to come up with collective training initiatives which deliberate industry-specific skills (Chandler et al., 2009,p.89). Technological transfers are facilitated mainly through licensing or through an expert’s approval while standards are normally fixed through market races. High-rank managers are enjoying the convenience of their authority to oversee all factors of the firm’s strategy such as layoffs. In this kind of setting, a majority of the kind of interrelationship between the relating firms merge with the actors through competitive markets. Albeit the variation among them existing, Australia, New Zealand, Canada UK, and Ireland are typically found to be LMEs (Chandler et al., 2009, p.99).
A good example of the CME is Germany. German firms are connected with near proximity through thick cross-shareholding as well as influential-employer association networks. Such networks offer a channel for exchanging confidential information thus enabling firms to establish good reputations which facilitate easy access to capital in situations depending significantly on the firm’s reputation instead of share value (Robins, 2011, p.42). Also, managers not quite subtle to present profitability. With the availability of robust trade unions, authoritative work councils as well as strict employment protection, labor markets tend to not to be fluid while job tenancies being longer. In the majority of industries, wage setting is organized through trade unions and also employers’ associations supervising collaborative training initiatives, offering works with precise skills as well as job positions assurance suppose they invest. In other words, industry association contributes a lot to firms in form of setting standards as well as a significant level of technology transfer taking place between firms collaboration (Robins, 2011, p.59). Edged in through authoritative workforce representative, as well as business connections, high-rank managers literally have minimal opportunity for undertaking unilateral action thus firms being rendered to simply abide by the various decision making forms. It is ought to be clear that, for CME firms to undertake their main functions, should get engaged in strategic interaction within different aspects even though the institutions they depend on, as well as the outcome quality, might vary from one state to another. Countries such as Norway, Belgium, Switzerland, Austria, Netherlands, Sweden, Denmark, South Korea, and Finland are generally found to be CMEs (Robins, 2011, p.66).
Corporate governance is such an important aspect under Varieties of Capitalism framework. This is a system whereby a business organization is managed and regulated (FGSI Lecture 3, Slide 3). The corporate governance arrangement stipulates the allocation of rights as well as responsibilities to various participants within the corporation including; managers, shareholders, board, and stakeholders such as creditors, employees, customers, and suppliers and also the society (Delcea, 2015, p.12). In essence, it dictated the rules and procedural actions for decision making in matters concerning corporate affairs. However, it also offers the structure for setting the firm’s objectives as well as ways of arriving at those objectives as well as assessing their performance.
A number of studies on Varieties of Capitalism have been significantly carried out. Literally, in a Mixed Market Economies, it is vivid that labor unions tend to be sturdier as compare to those in LMEs thus being regarded to be Veto players though they are more disorganized than those in CMEs in facilitating coordination when it comes to collective wage bargaining (Delcea, 2015, p.13). Reformation process needs political support for political leaders so as to avoid falling into a stalemate because the coalition establishment is quite complex as compare to CMEs and LMEs. Additionally, business associations, market actors as well as labor unions are similar to CMEs. Nonetheless, the structure that exists between private sectors together with the public sectors makes the potential of the other actors and concerned groups utilizing their authority to in lobbying political actors for sponsorship or safe keeping for coordination to be weak. Because the feebleness in the ability to ensure an effective coordination has to be compensated through government intervention, therefore market actors within the CMEs possess stronger incentives for striving towards a political power by means of patronage relations existing between firms and political actors to be provided for subsidies and sustenance (Delcea, 2015, p.16). In essence, the institutional stability that exists in both CME and LMEs are not due to complementarities but due to corporate governance.
To sum up, it is clear that corporate governance is really substantial for convergence, though the institutional setting is varying from LME and CME. Also, CME counties may be possibly considered to be spending more money as compared to LME countries due to the choice of government intervention. The labor market institutions together with the corporate governance institutions actually play a significant of ensuring effective businesses among firms as they attain their goals and consequentially leading to economic prosperity of the country. Generally, the Varieties of Capitalism seems to determine a country’s economic performance and therefore it is significant to implement its framework at all levels of business management.