Authors Iain Begg | Gabriel Glöckler | Anke Hassel ... - The Europaeum

actors happens through hierarchical and market mechanisms, while in
Coordinated Market Economies (CMEs, e.g. Germany) coordination
happens primarily through non-market mechanisms, which include, for
example, relational or incomplete contracting, networks cooperation, and
monitoring. LMEs and CMEs are two stylised configurations in which the
highest degree of coherence between different institutions such as the
labour market, the financial sector, and corporate law, is reached. As a
consequence, firm relations and corporate strategies vary systematically
across these ideal types of capitalism. In the real world, most countries
are situated in the space between these two archetypes, clustering around
one or the other.
An important corollary of this theory is that seemingly distinct spheres of
the economy, such as for example labour law and financial regulation, are
closely connected. Under ideal conditions, there will be a high degree of
complementarity between these spheres. For example, if investors have
access to information about the internal operation of firms, thus basing
their decisions on networking, reputation and long-term relations, their
decisions are likely to be less influenced by short-term performance
and profitability. A “patient” model of corporate finance allows firms to
support expensive vocational training programmes for their employees,
which in turn increases productivity levels. A highly specialised workforce
is likely to generate incremental, small-scale innovation on processes
and products. The protection of employees against dismissals, under
this framework, complements the other institutions because long-term
relations with employees reduce the chances that other firms poach a
well-trained worker. In other words, in CMEs, employment protection
legislation is not a source of rigidity generating higher-than-optimal wage
levels. On the contrary, it becomes a way to insure the investment in
human capital undertaken by firms.
If investors do not have access to information networks, as is the case
in LMEs, firm financing will happen primarily through the stock market.
Balance sheets and short-term performances will drive investor decisions
and a fluid labour market will allow employment to follow capital
allocation. Firms will tend not to provide vocational training, and the state
will have a lesser role in vocational training and education. Employees
will tend to develop general skills, more widely adaptable, rather than
industry-specific skills, which prevail in CMEs. This logic of institutional
complementarities is confirmed by empirical observations. Data show that
countries with a comparatively higher value of stock market capitalisation,
such as for example Denmark, and the United Kingdom, have more
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