Before examining comparative and international HRM in detail, it is necessary to examine the sources of cross-national variety in employment policy and practice. Accordingly, this part of the chapter examines the institutional distinctiveness of NBSs, and provides some historical and contemporary analysis of how global pressures impact on NBSs to create pressures for convergence towards the US business system.
The global economy is an amalgamation of independent national states. While the majority of these states are broadly capitalist – they are based on a system of production that emphasises the market as the main mechanism for exchange, consumption and distribution – each has followed a distinctive and unique pathway to industrial capitalism. The economic, political and social characteristics of individual market economies are shaped by and embedded within a social system that provides them with distinctively national characters.
These national characteristics impact on and inform the manner by which business systems operate. For example, for much of the twentieth century the US economy was characterised by a business system that emphasised very large vertically integrated firms engaged in the mass production and mass marketing of highly standardised products. In contrast to this, the British business system emphasised less standardised craft production by smaller, less integrated specialist firms which produced goods for distinct and more differentiated markets.
Other economies, for example the German and Japanese economies, followed different paths that emphasised either high-quality system production or the production of standardised products that were continuously improved through the use of quality programmes. In order to appreciate these different routes that characterise national patterns of competitiveness it is necessary to specify the institutional character of national business systems. These national patterns are likely directly to influence patterns of human resource management and industrial relations; this point is further developed in subsequent parts of this chapter.
A key theoretical theme of institutional analysis is the persistence of differences in the organisation and activities of the state, capital, labour and financial systems in different national economies. The economic and political strategies of state actors and those who represent the interests of capital and finance and organised labour are embedded within a social system of class relations, institutional regulation and culture that characterizes their national qualities.
Hence the US, British, German or Japanese business system exhibits a series of distinctively national characteristics that shape the strategies and structures of US, British, German or Japanese firms, including their particular approaches to the management of human resources. The institutional characteristics of national business systems impact on firms in terms of their corporate strategies, both domestically and in terms of internationalisation. Equally, the role and make-up of financial capital will have some impact on corporate strategies, as will the industrial relations system.
So, institutional analysis suggests that economic, political and social processes and structures particular to one business system are embedded within a national institutional framework. The contemporary make-up and operation of NBSs results from historical developments, in particular the route taken to industrialisation and the role of the state in this process, specifically, whether the state encouraged the development of nonmarket patterns of coordination or if the state encourages market patterns of regulation.
It follows from this that national patterns of industrial organisation in and between the state, industrial and finance capital and labour are embedded within enduring institutional frameworks. These frameworks of national regulation – markets, non-market institutions or some combination of the two – enable and constrain corporate strategies, the strategies of organised labour and those of the national state. Therefore capital, labour and the state within a particular business system operate within a web of relationships characterised by significant differences in terms of the presence or absence of social institutions that regulate activities beyond the confines of market institutions.
As the following subsections further amplify, by demonstrating what is special or particular about one type of business system, it is possible to consider different national features – the comparative analysis – of economic, political and social institutions that regulate economic organisation within distinct NBSs, in particular the management of human resources. To summarise, empirically and historically, national business systems represent distinctive patterns of economic organisation. Theoretically, observable differences and similarities between NBSs stem from the constitution and role of regulatory institutions in and between capital, labour, the state and the financial system.
The literature on business systems is extensive and wide-ranging in coverage and in the context of an introductory chapter such as this it is necessary to confine our discussion and review of this literature to three central sources, Lane (1995), Whitley (2000) and Hall and Soskice (2001). While these contributions cover much common ground, they provide subtle variations in the description, evaluation and conceptualisation of business systems and the institutional depth and embeddedness of national patterns of regulation. Thus, the bases upon which they compare NBSs differ in formulation, particularly in terms of how these contributions measure the effects of NBSs on labour market regulation, education and training, patterns of corporate governance, innovation and corporate strategy.
Lane – national industrial orders
Lane (1995) examines patterns of stability and change in the British, French and German business systems. Her approach follows the theoretical specification outlined above to argue that national patterns of industrial organisation are embedded in society, but distinguishes between economic and social embeddedness in the creation of national industrial orders. For Lane the degree of social embeddedness, that is, the depth and scope of non-market institutions, defines patterns of divergence in national regimes.
For example, Lane contrasts the British system with that of the German system to argue that Britain’s industrial order is characterised by the dominant position of finance capital and voluntary market-driven relationships within and between capital and labour. Because the capital-based financial system is largely unregulated by intermediary institutions beyond the immediate market actors, a pattern of arm’s-length short-termism ensues, encouraging firms to make low-risk investments in capital and labour.
This pattern of self-regulation by economic actors is reproduced in other areas of the British business system: training and development is largely in the hands of employers (see Keep and Rainbird, 2000); equally, many areas of the employment relations system such as the wage–effort bargain and collective bargaining arrangements have traditionally been beyond extensive social regulation by the state, see Hyman (1995).
In contrast, Lane argues that the German business system exhibits a production rather than a financial orientation that creates a closer integration between the interests of capital and labour. For example, many aspects of employment relations are regulated by social institutions such as works councils for consultation and information-sharing. Equally, a nationally regulated system of vocational education and training emphasises skill development in accordance with the needs of industry.
These factors combine with a credit-based finance system that encourages closer links between financial institutions and industry than found in the UK and fosters longer-term time frames for capital provision and investment returns as distinct from short-term pressures for shareholder value that are more pressing in the UK. The essential difference between the regulation of capital, labour, training and the provision of finance in Britain and Germany is that while the British state has traditionally encouraged market regulation by immediate actors, the German state has encouraged and institutionalised a network of local and national institutions beyond the market.
In the contemporary period the British business system is developing some examples of social regulation such as the regulation of working time beyond the confines of collective bargaining. Equally, the German business system is subject to some deregulation of social institutions, for example those controlling hostile takeovers by foreign firms and aspects of the employment relations system. However, the differences between the two business systems remain deeply embedded.
In summary, Lane outlines patterns of divergence that highlight the impact of social institutions beyond the control of immediate market actors to illustrate the different capacities of British and German firms and businesses to respond to external shocks and emergent international developments. Essentially, the absence of social institutions beyond the market for capital, labour, the regulation of corporate governance, training and development etc. create a short-term framework for order and stability in the British business system. In contrast, the presence of social institutions stimulates a longer-term framework in the German business system.
Whitley – divergent capitalisms
Whitley (2000) provides a more wide-ranging examination of national business systems through a comparative framework of analysis that identifies critical variations in coordination and control mechanisms across divergent forms of capitalism to identify different forms of business system. While the depth and scope of Whitley’s contribution is significant, the limitations of space prevent a comprehensive review of his material. However, the major discerning elements of his approach are examined.
Whitley (2000), who argues that there are persistent differences in capitalist organization across national business systems that reflect distinctive development pathways pursued by different nations, further consolidates the institutionalist approach developed by Lane (1995). Within particular national business systems institutions persist over time, that is, they are embedded by the interaction of social groups and actors at critical historical junctures within the process of industrialisation. Institutions and patterns of institutional relationships persist until the emergence of significant developments, either internally or externally, creates pressures for institutional restructuring.
For example, for European states the emergence of the EU as a centralizing agency for economic, political and social policy has created pressures for institutional change; as Chapter discusses, these pressures are particularly manifest in the UK’s case in the area of individual and collective employment rights. Equally, the emergence of the euro has created pressures of institutional convergence across EU states that use the euro, for example centralised monetary and fiscal policy, a process that limits the institutional freedom of central banks in member states as well as the taxation policy of national governments.
Whitley visualises national business systems as economic control and coordination mechanisms for firms and work systems where patterns of national institutional distinction create different varieties of capitalism. By this, Whitley suggests that owners and controllers of capital (e.g. shareholders and managers, labour, the state and the national financial system) create divergent capitalisms whereby institutional actors (i.e. capital, labour, the state and the financial system) will cooperate and compete in different ways in different capitalisms.
For example, as the following subsection demonstrates in more detail, historically, US firms tend to be large, vertically integrated and employ mass production techniques. In contrast, British firms have tended to be smaller, locally dominant but vertically disintegrated, utilise craft production and skilled labour as opposed to deskilled labour associated with volume mass production. These historical pathways to economic development reflect and reinforce distinct patterns of institutional interrelationship within capital, labour, the state and the financial system.
For example, in both the United States and the UK firms tend to grow and finance investment from retained earnings, indicating an arm’s-length relationship with financial institutions. Equally, the central state plays only a marginal role. In the USA this mainly consisted of the development of an anti-trust framework to prevent cartels, reinforcing the tendency for firms to grow by acquisition and merger.
In the UK, on the other hand, for much of the twentieth century the state was concerned to control access to British and imperial markets – protecting them for British firms. These types of relationship contrast strongly with those found in Germany and Japan where institutional actors operate within a more coordinated framework, particularly in terms of finance, training and development systems and employment relations.
Whitley also identifies that while patterns of national competition and coordination appear functional for the institutional actors, the pattern of relations creates conflicts within and between different fractions of capital, notably finance capital and industrial capital. However, the embeddedness of institutional relations creates a pattern of institutional and organisational routine that is difficult to dislodge.
For example, in the UK, despite criticisms that the institutional structure of the British state creates an arm’slength relationship to capital and labour, a series of voluntary arrangements continues topersist. Equally, in Germany the institutional embeddedness of the employment relations system, the quality but comparative slowness of its systems of vocational training and bureaucratic regulations over corporate governance, particularly acquisition and merger by foreign capital, each result in the charge that the German business system is institutionally inflexible and over-regulated.
Yet in both the British and the German case the measures that might be required to reform these routine criticisms tend to be resisted by institutional actors. For example, in the face of the failure of the EU to provide pan-European legislation and associated procedures for hostile takeovers by foreign capital, the German parliament legislated on the issue. This arose after lobbying from the auto and chemical sectors whose aim is to prevent another external hostile takeover similar to Vodaphone’s acquisition of Mannesmann.
The legislation reinforces the defensive role of the Vorstand (Board of Directors) in such situations, see Clark et al. (2002). In comparison, in the UK ‘better’ regulation of capital and labour on the EU model of social partnership has met with heavy resistance from interest groups representing capital such as the IoD, CBI and British Chambers of Commerce. Each of these argues that institutional regulation, supported by the force of law, over either capital or the labour it employs, is bureaucratic and creates excessive red tape, preferring instead voluntary or deregulated patterns of control and coordination that promote employer best practice.
In summary then, Whitley (2000) conceives business systems as nationally distinctive patterns of economic coordination and control. The institutional make-up of these NBSs varies, to demonstrate divergence of interconnection between institutional actors such as capital owners and providers, managers, customers and suppliers, employees and the financial system. Relationships vary from being organisationally integrated to disintegrated and separate.
Ultimately, Whitley (2000) distinguishes between national business systems in terms of, first, institutional pluralism, particularly in relation to the interests of labour in the employment relations system, and second, the role of the state in terms of active or passive coordination of institutional actors, particularly capital. Hall and Soskice (2001), whose contribution is summarised below, further develop this approach.
Hall and Soskice – comparative patterns of institutional advantage
In some respects, Hall and Soskice (2001) cover much the same ground as Whitley (2000) and Lane (1995). However, they develop the institutional approach further by examining how a broadly defined distinction between liberal market economies (LMEs) and coordinated market economies (CMEs) creates different national patterns of corporate strategy and associated patterns of institutional comparative advantage. Within national pathways, distinct patterns for the organisation of production develop.
A key factor that differentiates LMEs and CMEs is the presence of external institutions beyond the market mechanism for the regulation of the labour market, education and training and corporate governance. Clearly, in a similar vein to Whitley’s (2000) arguments, the presence of such institutions depends in large measure on the capacity of the state to develop and maintain regulatory regimes.
As a result of differences in national pathways to capitalist development, national-level differences persist. In both types of economy firms necessarily face coordination problems in terms of their relationship to employees – their skill base and vocational training – and other firms in terms of inter-firm cooperation and competition. In LMEs firms tend to face and manage coordination problems on the basis of markets and hierarchies, that is, they make a rational choice as to whether to enter into market relationships for, say, skilled labour or manage the process internally, see Williamson (1975).
Coordinating the activities of capital on the basis of markets or hierarchies creates arm’s-length – contractually and economically separate – relationships with other institutional actors. For example, in LMEs dominated by market and hierarchy relations the provision of investment funds tends to be capital based whereby the provision of funds operates within an open market. Here capital providers and institutional investors such as pension fund managers and venture capitalists make funds available on a short-term basis that in turn requires firms to secure relatively rapid returns to the investors.
By association, ensuring shareholder value for investors creates short-term time horizons for firms. In contrast to this, in CMEs the provision of investment funds tends to operate on a credit basis whereby investors take greater interest in the firms where they invest, often taking up share ownership and participating in the management of the enterprise. Equally, in Germany and Japan for example, there is less of an active free market for equity capital, with many shares in firms being retained by the founders of the firm, the local state, and capital providers in national institutions such as Japan’s MITI (Ministry of International Trade and Investment).
The lesser presence of a free market for equity capital in CMEs and the presence of more credit-based investment funds encourage a pattern of interrelated institutional action. For example, fewer pressures for shareholder value enable firms to concentrate on product market development and R&D over longer time frames than those typical of LMEs. In summary, the presence or absence of non-market institutions creates or inhibits capacities to exchange information and monitor institutional actors beyond the confines of the market. For Hall and Soskice (2001) the institutional make-up of particular nation-states is distinctive and marked by their historical development in two respects.
First, institutions are created and formalised by market action or statutory action to establish their operating procedures – liberal or coordinated. Second, what Whitley (2000) terms institutional routine creates a set of common expectations that legitimizes liberal or coordinated action among institutional actors. We can see these differences quite clearly in relation to the reactions of national airlines to the events of 11 September 2001. The reaction of US and British airlines was immediate, announcing redundancies and reductions in operating capacities, measures that were necessary to protect share price and calm institutional investors.
In contrast, Air France, Lufthansa and Iberia reacted in a more measured manner. A combination of negotiated reductions in working hours and wages, cancellation of options for new units and the cancellation of some routes maintained employment levels over the short term. The lesser presence of shareholder value pressures combined with more coordinated institutional responses led by the French, German and Spanish states protected employment across the sector, as did more coordinated responses in European works councils, see Clark et al. (2002).
As Hall and Soskice (2001) concede and as Broadberry (1997) and Clark (2000) demonstrate, both types of market economy are capable of providing satisfactory levels of long-run economic performance, but with different patterns of distribution in civil society. However, the predominant patterns of distribution and corporate strategy will differ, as will degrees of innovation. For example, LMEs exhibit more radical patterns of innovation, labour market regulation tends to be more flexible, labour markets more mobile and restrictions on redundancies are fewer.
Equally, equity markets provide for ready funds for venture capital and patterns of corporate organisation are more fluid whereby firms can be broken down into smaller customer-focused trading units – reengineered, downsized etc. – very rapidly. This pattern of market regulation tends to create radical patterns of innovation, for example the rapid growth and proliferation of low-cost airlines, the dot-com investment revolution and rapid changes of corporate ownership more generally.
For example, during the past six years, Go Fly was a subsidiary of British Airways, then an independent operator resulting from a management buyout and is now part of the easyJet group.
In contrast to this, CMEs exhibit more incremental innovation based on longer-term product development and brand building that emphasises quality and continuity, not necessarily short-term improvements in market share based on outperforming the market in order to satisfy institutional investors and provide rapid shareholder value.
However, recently pressures have built in CMEs such as Germany, centred around the charge that the business system is inflexible and over-regulated, with institutional inertia preventing rapid innovations. The patterns of corporate strategy and corporate innovation associated with LMEs and CMEs create different patterns of institutional competitive advantage, with the locus of difference represented by the degree of institutional support actively promoted by the state beyond the coordinating mechanism of markets and hierarchies.
As Hall and Soskice (2001) argue, if each market type is capable of sustaining satisfactory levels of economic performance it must be the case that the patterns of institutional routine and regulation (market or non-market) in different systems of production create common expectations in the face of criticism of national regimes. For example, the reaction of LMEs and CMEs to globalisation is likely to be radical and incremental respectively.
The institutional structure of LMEs supports radical innovation whereas the institutional structure of CMEs is more likely to seek institutional modification to, and institutional regulation of, emergent global pressures. In each case the different type of economy is likely to modify its own systems of institutional regulation in order to sustain respective patterns of competitive advantage. This suggests that the pressures of globalisation are unlikely necessarily to transform national business systems.
We can see these divergent pressures within the European context where the British state and capital have reacted violently against EU-wide regulatory measures such as the Information and Consultation Directive and the Agency Workers Directive. Hence national business systems and associated approaches to the management of industrial relations and human resources may remain distinctive within the global business system.
Britain, Germany and Japan
The analysis of national business systems has thus far been theoretical, focusing on the impact of market and non-market patterns of institutional regulation in and between institutional actors such as capital, labour, the state and the finance system, with only passing reference made to the details of particular business systems. In this section the historically embedded features of four business systems are briefly detailed and summarized in terms of the arguments developed by Lane (1995), Whitley (2000) and Hall and Soskice (2001).
Subsequent parts of this chapter examine how the institutional characteristics of the four business systems are likely to impact on patterns of HRM within these systems and within multinational corporations that originate in one of these systems. The empirical and historical specification of the features of capitalist development in the four business systems is presented in summary bullet-point form and in each case draws on substantive works on this issue by Best (1990), Chandler (1977, 1990) and Lazonick (1991).
While Best and Chandler concentrate on institutional features that distinguish business systems, Lazonick examines these differences in terms of patterns of industrial dominance and decline within business systems. The bullet-point summaries identify historically embedded institutional features in the four business systems, the effects of which remain significant in the contemporary operation of each business system, and their respective systems for industrial relations and the management of human resources.
Chandler (1977, 1990) and Lazonick (1991) characterise the historical development of the US business system and its subsequent patterns of institutional coordination as a competitive managerial capitalism or a managerial capitalism exhibiting the following features. In some cases we have added qualification to the points if they are subject to recent developments.
Earlier, this process saw the emergence in the automobile sector of three large firms, Chrysler, Ford and General Motors, a process replicated in many other sectors such as railroads, aircraft manufacturing, steel etc.
Sometimes referred to as personal capitalism, the British system exhibits much individualism within its institutional framework and in he contemporary period is seen as a very flexible, open and deregulated economy dominated by domestic and foreign multinational firms. In addition, the British business system exhibits a thriving small to medium size enterprise sector that reprises many of the historically embedded features summarised below.
Whitley: Institutional actors coordinate by market relations, organisational capabilities developed and maintained by professional management. Institutional pluralism, beyond the market very limited, contemporary focus of business system short-termism and shareholder value.
Hall and Soskice: Liberal market economy, highly developed stock and capital markets reinforce market relations and institutional separation.
The German system is often referred to as more institutionally coordinated than the US and British business systems. The historically embedded features listed below were challenged by defeat in the First World War and occupation after the Second World War and again by reunification in 1989. However, many of these features remain present.
Lane: Financier dominated, short-termist individualist business system.
Whitley: Market relations dominant, limited institutional pluralism.
Hall and Soskice: Liberal market economy, capable of radical innovation; however, comparatively low level of institutional regulation in capital and labour markets, education and vocational training often prevents effective implementation and longer-term operation of corporate strategies.
Lane: Productivist-based system with collectivist orientation.
Whitley: Significant degree of institutional pluralism, especially in industrial relations system; active institutional regulation by the central and local state acts as a constraint on short-termist inclinations of capital.
Hall and Soskice: Coordinated market economy, sustained competitive advantage in manufacturing sector, exhibits incremental change and innovation.
The Japanese business system is sometimes referred to as a collective form of capitalism, one that reflects particular historical features of Japanese society which in turn are one explanation for the success of Japanese approaches to the organisation of capitalist production. Less than a hundred and fifty years ago Japan was a feudal pre-capitalist society; hence,as a late-industrialising nation, its rise by the 1980s to a world-class manufacturing economy feted and emulated by US and British businesses is all the more remarkable.
Japan’s feudal system was characterised by two elements each of which has a bearing on the process of successful industrialisation, particularly in the period since 1945. Diligence and self-sacrifice epitomised by the mason-like samurai are embedded features of Japanese society that have been reinvented as cultural and institutional explanations for Japanese economic success. Diligence manifests itself in the hard-working ‘live to work’ culture of many Japanese workers, a culture that is reinforced by willingness and an ability to identify with common or collective goals in the workplace.
The presence of dedicated, diligent and collectively oriented but not oppositional workers has led some observers to argue that the Japanese business system exhibits both mutuality and highdependency relations within and between institutional actors representing the interests of capital, labour and the state, a pattern of relations clearly absent in the British business system (see Oliver and Wilkinson, 1988).
In addition to the importance of cultural and historical factors that effectively incorporate workers within capitalist production relations, Japanese economic success in the postwar period is also attributable to a method of organising of production, centred on a system of flexible mass production, the Kanban system of just-in-time production pioneered by Kiichiro Toyoda. Just-in-time systems produce precise, defect-free quantities just in time for the next stage of production. For success, such systems require total commitment by the workforce and suppliers and usually operate in conjunction with TQM that is driven by customer needs and expectations. JIT and TQM represent two parts of a process – if only the precise amount is produced at each stage, any quality defects halt production.
As Wada and Shiba (2000) point out, it is remarkable that JIT and TQM were heralded as innovations in production superior to those of mass production techniques when both were developed by Toyoda precisely because low capital levels precluded the luxury highstock levels and inspection teams. It was Toyoda’s inability to compete head-on with US mass production that stimulated what became termed JIT and TQM and in the contemporary period both highlight embedded features of Japanese feudal society – diligence, self-sacrifice and identification with collective goals in situations of mutual dependence – that have come to be seen as features that are embedded within the Japanese business system and which also contribute to its following characteristics.
This summary of the historically embedded features of different business systems characterizes the long-term nature of individual systems. The characteristics and institutional approaches within systems – market, individualist and separate or non-market collectivist and integrated – change only slowly. Significant restructuring necessitates substantial institutional reform that is likely to be challenged and contested by institutional actors.
The evidence suggests that business systems retain many institutional characteristics even when subject to dramatic interventions such as those experienced by Germany and Japan following Allied occupation and reconstruction following the Second World War. Equally, British membership of and further integration within the EU has to date had only a marginal impact on the character and institutional operation of the British business system.
Further, globalisation, while for some representing the harbinger of convergence between business systems, has yet to undermine the divergent nature of national business systems. As other parts of this chapter demonstrate, the persistence of national characteristics extends to policies and strategies for the management of human resources, underpinning our concern to emphasise the importance of not only the emergence of international HRM within multinational firms but the significance of national approaches to HRM that suggest the importance of comparative approaches.
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