Due to the rapid globalization process, the issue of whether policies and social economic institutions are diverging or converging across various nations has developed to be a controversial issue. There are various pieces of literature that have been developed for the studies of comparative institutional systems. One of the most significant approaches is the varieties of capitalism approach which has been widely discussed. The varieties of capitalism approach focus on how firms have taken their relation views within the operations of the firms (Schneider, 2008). This has argued the coordination of firms with the various actors such as trade unions and governments as a major success factor.
The coordination’s encompasses five aspects that involve vocational education, industrial relations, corporate governance, training and relations with employees. However, the solution to these types of coordination’s has differed in terms of market economies. Thus, Hall and Soskice (2003) suggested that there are two major ways through which this coordination can be achieved relying on strategic interaction and market competition with institutions. Judging through the ways by which these economies can be coordinated the economies can be divided into Liberal market economies LMEs and coordinated market economies CMEs (Schneider, 2008). This paper is intended to show the comparative institutional systems perspectives and how the companies have been able to operate within them to offer a comparative advantage.
The varieties of capitalism approach have led to distinctions between two varying coordination modes. Ideally, national systems have differed in the way through which they organize labor, capital, and the product markets. These have offered economic actors with varying constraints, opportunities and institutional resources. The simple approach to the variations of capitalism involved the coordinated market economies and the liberal market economies. The liberal market economies such as the UK, Canada, and the UD have relied primarily on prices and markets to coordinate the economic activities. Their decentralized employee relation system has allowed employers a considerable choice of the design of work and HR practices. Ideally, the unions in these countries have been able to negotiate contracts within the establishments which has offered a considerable variation on HR practices. On the other hand, coordinated market economies, in theory, have relied on political processes of persuasion, negotiation and consensus building for the establishment of pay systems and work. Within such a centralized industrial relation system, it is evident that unions have also been able to negotiate lower wage across firms, occupations, and industries.
Coordinated market economy
The coordinated market economy is whereby industrialist or management handles the varying issues that they face within its operations through different channels and as well take long-term view within the market situations (Hall, 2015). Some of the issues that have been faced by the management include IR issues and governance of the company. Companies under the coordinated market economies are considered to be advantaged various things such as stability within their environment, fewer ideas that may disrupt the operations of the business and that firms are able to specialize in varying niche areas. The CMEs have been considered to rely heavily on firms’ interactions with various institutions within the economy. The key features of CMEs include a well-established capita market, use of market contracts and mechanisms to control their relations with buyer firms and suppliers.
Liberal market economy
The liberal markets are considered as free market economies. In this case, the issue of coordination among organizations and their employees, investors, and customers are resolved over market mechanisms. The LMEs are characterized by comparatively decentralized industrial relations system that entails collective bargaining that takes place at the workplace level. Due to the dominance in the market, the LMEs have characteristically exhibited adversarial and short-term relations among various economic actors who include the international institutions and government. In the field of human resource management, it is evident that poor training and development, as well as limited systems of employee involvement and participation, are present. Despite the fact that LMEs are characterized by adversarial and short-term relations they also possess a high capacity of economies and capacity with a comparative advantage through the development of new industries and products.
Liberal markets economies are practiced in countries that are developed in economies like UK, USA, Canada, and Australia. Coordinated market economies are in countries like Germany, Japan, and Scandinavian economies, the Netherlands, Austria, and Switzerland. Liberal markets economies have equity-based, large stock markets whereas the coordinated markets economies are credit-based (Farndale and Brewster, 2014). The liberal markets are easy for investors as they can switch assets leading to short-term profits while the coordinated are dependent on banks and take a direct role in corporate decision-making. The Liberal markets tend to be competitive and contract based while the coordinated markets are collaborative and are best in the long term, high trust relations across supply chain firms.
The Liberal markets economies have unstable vocational training systems as large firms prefer to come up with their own systems as opposed to giving their contribution to occupational systems (Bosch and Charest, 2009). In coordinated markets economies, on the other hand, tend to have their firms contribute into the highly developed vocational training systems mostly in sectoral level. The Liberal Market Economies determine their wages based on the workplace or the level of the firm whereas the coordinated markets are more centralized as they involve national level or sectoral levels (Harcout and Wood, 2009).
Liberal markets tend to put their reliance on numerical flexibility. They work on a policy of hire and fire that causes a lot of mistrust between the employers and the employees ( Pistor 2009). The coordinated markets, on the other hand, have a strong trusting relationship between co-workers. Their reliance is mainly on functional flexibility. Liberal markets intervene as little as possible and ensure free and fair markets while coordinated markets entail authority delegation by the corporate actors like trade unions and the employers’ organizations.
The coordinated market economy has relied on formal institutions which have been able to regulate and coordinate the market and the interaction between employees, suppliers, financiers, and customers as well as other firms. The CMEs rely on coordination’s that are of nonmarket forms that include bargaining, negotiation, and collaboration (Slater and Tonkiss, 2013). In this case, the bargaining relationships between the employers and employees and a sharing power on the firms are relatively inflexible internal labor markets, high coordination degree among the employers and heavy investment for skills formation. This indicates that CMEs rely much more on cooperative and consensual relations among enterprises and their respective banks and among their social partners. Coordinated market economies have been viewed to be more successful in the generation of high wage, high skills and productivity employment due to their combination of the employees’ rights and skilled labor within the firm.
The LMEs highly rely on the market competition mechanism. Liberal markets have been considered to rely on various competitive markets. Ideally, in this case, the economic actors are only short-term relationships that are mediated by markets. In these economies one is able to get competitive labor markers with restricted collective bargaining, a high degree of managerial prerogative and highly established capital markets. They are characterized by well-established markets and use of market contracts and mechanisms in the coordination of the few long-term commitments by workers to employers and employers to workers (Slater and Tonkiss, 2013). Ideally, in this case, the firms tend to organize their actions via competitive market hierarchies and engagements. The market relationships are considered in the context of formal contracting and competition. To respond to the price signals produced by the markets, the economic actors are able to adjust their willingness to demand and supply goods. Due to the continued reliance of markets the liberal market economy has been suited to promote various strategies of radical innovation thus are able to compete successfully in high risk and high tech sectors.
The fact that each market has its own static properties, the CMEs static properties are experienced through relations among and between different stakeholders within the market. The CMEs have been characterized by the relatively long-term relations between the economic actors who have been able to relatively cooperate. Within the HRM practices, the CMEs offer high levels of job security, good development and training records, cooperative relations and great employer’s associations. These cooperative and long-term relations have offered the CMEs with a great competitive advantage within the economy. They have been considered to be good at production of high value-added and quality goods and at process innovation.
Due to the fact that each of the markets has their static and dynamic properties, the LMEs static properties are seen in employment trends, an adaptation of changes and hierarchy structure in the market. In the liberal markets, the big firms are able to access and gain capital through the public markets which are the bond and stock market. This indicates that the long-term relationships for continental economies are less relevant in this case.
Radical and incremental innovation
Radical innovation is considered one that has a great consequence on the market and also on the economic activities of the firms in that market. Contrastingly, the incremental innovation concerns existing services, product, organization and process or method through which performance has been increasingly upgraded or enhanced. Ideally, incremental innovation is considered as a dominant form of innovation (Akkermans, Castaldi and Los, 2009). The nature of technological change and the rate of innovation increasingly differ from one sector to another and across different time periods and countries. It is clear that the different innovation strategies in different market economies are likely to contribute to success in varying product markets.
Liberal markets have been known to specialize in radical innovations, for instance, the pharmaceuticals and biotechnology. It is evident that the LMEs have approached innovations in a different lens as compared to the CMEs. Ideally, their specific practice is considered as innovation through a mission orientation. In LMEs innovation, knowledge and technology are transferred throughout the economy through a constant rotation with skilled employees from one firm to another (Hall, 2015). Ideally, it is evident that most of the new technologies have attempted to create radical innovation through development of competencies along a widely surrounding model (Silicon Valley model) that surrounds the staffing, financing, and creation of employee incentives within firms.
On the other hand, the Coordinated market economies have relied on incremental innovation. Goods that are characterized by incremental innovations within the CMEs include high-quality consumer products and engines. On the CMEs, the diffusion of technology, innovation, and knowledge is conducted through sectoral cooperation that involves all companies within a given industry. The CMEs innovation practices are considered as innovation via fundamentals where they favor technical training rather than general one and heavily rely on applied research. They reveal a certain advantage through the spreading of newly discovered technologies through existing business structures, therefore, enabling large companies to be able to maintain certain worldwide competitiveness and impact the international technology and innovation trends.
The liberal and coordinated market economies have their various competitive advantages that favor the companies that are inclusive of their economies (Benner and Lofgren, 2009). The liberal market offers cost competition and the infrastructure for radical innovation to the companies whereas the coordinated markets offer higher levels of specific skills, wage moderation and the capital that is long term. Companies in liberal market economies tend to gradually grow as there are radical innovations every now and then (Hall, 2015). Coordinated markets embrace steady improvements that are encouraging to the companies that indulge in the coordinated market economy (Akkermans and Castadi, 2009).
Companies that indulge in coordinated market economies are prone to have real influential powers over particular organization within the respective industry. Coordinated markets tend to have low levels of inequalities as issues that can possibly because problems are dealt with by organizations and solved before they cause any serious issues (Schneider and Soskice, 2009). The Liberal markets economies are flexible for companies where they can switch their investments and earn themselves short-term profits that does not need bank interventions.
Liberal markets economies involve the shareholders in decision making and the workforce giving a positive outlook to the shareholders for being involved. This also allows a variety of ideas to be spread through the organizations and the best of decisions arrived at. The coordinated market economies involve specific members of management appointed by the supervisory board that ensure the long-term development of the company more than their own personal preferences.
Coordinated market economies have been considered to have advantages due to the fact that it is generally stable as compared to the liberal markets. The coordinated market economy offers firms with greater advantage of stability in terms of environment. This is due to the fact that they are able to run sufficiently with less market orientation companies thus being able to have sufficient stability within their environment of operation. Additionally, there are lesser innovations and ideas that disrupt the businesses thus being able to control their operation with less disruptive innovation within their operations. Ideally, the fact that there is a minimal market-related focus on the business in terms of daily disruption that occurs within the market to try out new ideas, innovations, and ways, they are able to operate efficiently.
Firms relying on the coordinated market firms do not get a day to day disruptions for instance in the US economy where everything is based on the long-term relationship. Specifically, the new startup businesses find it hard to break into the system since they are not able to access capital and they are not able to win contracts from the firms within the coordinated market economies. This is seen as an advantage to the firms which are able to specialize and have benefits of incremental innovation.
Specialization in niche areas
The most acknowledged benefits of the coordinated market economies to the firms are that they can be able to specialize in extremely narrow production niches thus leading to incremental innovation. Another advantage gained by firms relying on coordinated market economy is specialization into certain niche areas. They are able to specialize in various niche areas due to the fact that there is less disruption occurring or coming. For instance, the German companies which have highly relied on the coordinated market economy which has enabled them to specialize in precision manufacturing.
Long-term relationship benefits
In coordinated markets, there is a dense network that is led by the long-term relationship across the firms, trade associations and business as well as investors that have allowed effective governance and monitoring performance thus enabling firms to gain a competitive edge due to increased productivity and commitment of employees in their operations (Hall, 2015). It has also offered reliable private information that is related to the operation of the companies thus reducing the need for investors in making decisions. Considerably it has enabled firms to be able to rely on more incremental innovation and development strategies and as well led to firms aiming at higher financial goals and retain skilled workers even at the times of economic downturns.
The fact that companies relying on coordinated market economies are able to retain employees and enhance vocational training within the firm, employees are able to gain more knowledge and skills which has boosted their productivity and performance within the firm. Additionally, they have reduced the cost of labor due to lower turnover and high unemployment and employment protection (Harcourt and Wood, 2007). The firm-specific training has offered a competitive edge due to the fact that it has facilitated the development of a workforce that has a high level of skills and knowledge in the industry-specific operations that are important and necessary for quality production strategies and diversified mass strategies. The long-term relationships have also offered companies high levels of investment and increased industry-specific skills that have improved the institutional structure within the established lines of productions within different firms.
Liberal market economy
A liberal market economy is considered to have competitive advantages to the firms that rely on this kind of market economy. A liberal market economy promotes the sales of goods and products with little or no control where coordination is done through market mechanisms.
Freedom of innovation
Liberal markets support disruptive innovation that allows firms to innovate new ideas and development of new products and services (Benner, and Lofgren, 2009). The firms do not depend on coordination by government institutions or agencies and this is able to provide new products and services. They are able to study the demands of their consumers and research more on the popular trends and changes in the markets and thus being able to meet the demands of the consumer through innovation and improved technology for efficient production. Ideally, innovation is considered as a breed of competition among the firms whereby the different firms are able to improve on their current innovation on products through adding better features on the current products and services.
Liberal markets are considered to be very competitive. Ideally, most of the industries are assumed to perfectly compete and use their resources efficiently to ensure that they are profitable. Additionally, the ultimate decision to what is to be produced is made by the consumers of the products within the market mechanism. These have increased more efficiency among the firms who are able to grow productivity and also ensure that they have met the demands of the consumers within their markets (Farndale, Brewster and Poutsma, 2014).
Firms and business are able to produce what the consumers want thus gaining more advantage in terms of satisfying consumers wants. It is important to understand that the consumer is the sovereign of the company and thus the consumers are able to choose from a large choice of products and services. There are no restrictions on what the firm will produce and thus the producer controls the market in terms of resource allocation.
The fundamental differences between the coordinated and liberal market economy can be summarized in a way that in coordinated market economies they focus mainly on the non-market relationships for coordination while the liberal market economies competitive and hierarchies market engagements bring together and organize the activities of the firms. Conclusively, both market economies offer competitive advantages to the firms that rely on them and also the regulation of market and activities of the business.
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