10 Herrmann (2019)

location-specific institutional advantages

• vary from location to location

• entrepreneurs need to build competitive advantages in line with the comparative advantages of their institutional environment

definition institutions (North)

• formal and informal “rules of the game”

• provide economic agents with incentives and constraints

• induce stable patterns of behaviour

formal institution

e.g. tax codes, social insurance systems, law and order

informal institution

e.g. trust, power distance, uncertainty avoidance

varieties of capitalism (VoC) framework

• country typologies based on the degree of coordination in a given national economy

• two distinct forms of coordination

  • strategic (relational)

  • arm’s-length

• three types of resources businesses need to operate

  • labour

  • finance

  • know-how

coordination VoC

degree of relationship-specific assets invested, such as investments in firm-specific or industry-specific skills

characteristics liberal market economy (LME) VoC

• finance: equity-based, short-term, dispersed ownership

• ownership: shareholder primacy, hostile takeovers

• inter-firm: arm’s-length, competitive, weak associations

• labour: flexible, weak unions, general skills

• skills: general education, high-tech innovation

characteristics coordinated market economy (CME) VoC

• finance: debt-based, long-term, large blockholders

• ownership: stakeholder model, supervisory boards

• inter-firm: strategic, cooperative, standard-setting

• labour: regulated, strong unions, firm-specific skills

• skills: vocational training, incremental innovation

source of competitive advantage (VoC)

• countries compete through exports

• tend to be succesful in different types of industries/market niches

  • different economic sectors

  • different corporate strategies within a sector

  • different patterns of innovation

economic sectors (VoC)

• manufacturing vs. services

• old vs. new economy

• electronics vs. pharmaceuticals

corporate strategies within a sector (VoC)

• diversified quality production vs. Fordism (mass production and consumption)

• quality vs. price competition

patterns of innovation (VoC)

• radical innovation: creating genuinely new goods or services

  • need: flexibility of investments, support of risk taking

• incremental innovation: improving existing goods though better quality or higher efficiency

  • need: supporting firm-specific investments, cooperative relationships

• imitation: competing by reproducing known goods at lower cost

role of institutional complementarity (VoC)

• different institutional elements (labour-market, finance, legal institutions) are interdependent and form configurations

• key implication: “multiple equilibria”

  • same practice may have opposite effects in different contexts

  • no one-size-fits-all approach to organizational or institutional design

  • path dependence as non-ergodic form (e.g., hard to reverse patterns or move to a different state)