Variation of Capitalism - Essay Example

 Table of Contents Introduction 2 Variation in Capitalism 2 Several types of Managerial Capitalism 6 The CME and LME approach 8 Conclusion 10 Reference list 11 Introduction Capitalism is a system in the economy in which, industry, trade and production are owned and controlled by private organizations, and they run for profit. The primary motive of capitalism is to accumulate capital and sustain in a competitive market (Worldsocialism, 2014). However, with the globalization of management structures and the integration of global economic systems, all the economic systems in the world are supposed to follow a standardized structure, but in actuality that is not the case. There are several variations in the economic structures in the world, as well as in the practices of capitalism. This study is focused on the variation of the capitalism all over the world, and also the reason as to why such phenomenon is occurring. It also concentrates on the analysis of current systems of economic institutions in a comparative manner, and how they developed in different ways during industrialization. It identifies the processes of coordinating and controlling economic activities in light of different institutional contexts and the effect of globalization on capitalism and organizations (Hessen, 2008). Variation in Capitalism The effort of converging to a single and effective type of market economy, from the late 19th century has been diminished by the substantial variations among the dominant firms, practices of employment, supplier-customer relationships. As the global economy continues to become more integrated, the societies having different institutional arrangements will eventually continue to develop and create a variation in the economic systems (Allen, 2004). The variations are on the grounds of economic and social capabilities in particular sectors and industries. As a result, a country becomes specialized in one sector but lacks in the other. The UK economy in the late 20th century was strong in financial services and architecture; on the other hand, they were weaker in construction and assembly line manufacturing (Kang, 2006). The institutional subsidiary systems which govern the capital and labour market shape the capitalist models, and when they act in a calibrated manner they reinforce all the sub systems. The sub systems like the labour market, financial system, inter-firm relationships, training system, etc. act in a mutually supportive way, this phenomenon is known as the “comparative institutional advantage.” The comparative advantage system creates specific ways to adjust any incoming changes (Porter, 1990). Many researchers of the 20th century had stated that, the flexible production for target markets is much superior to mass production for homogeneous mass market. This contrast is also relevant in the economic organization systems. The reason as to why the economic organizations have developed to create a variety of capitalism structures is as follows. The underlying process includes the ways in which several patterns of industrialization are created in contrast to institutional context. The pattern in which capitalism is developed in Germany, Britain and Denmark differed largely, as a result of varied political systems and also the institutions which govern the agricultural production and distribution. The state agency structure, financial organizations and the labour market continue to diverge in these countries in order to create distinct forms of economic organization (Norberg, 2003). The “comparative-business-system” approach explains why and how forms of economic organization differ and diverge in specific ways. The economic relationships and activities are constituted socially and are institutionally variable. The ways in which competitive process operate and both of the actors (relationships and activities) involved, vary significantly in societal context. The dominant institutions govern the economic decision making and their actions are inherently structured. These decision making processes vary across different conventions. The business-system framework agrees with several organizational forms and also supports comparison of coordination processes, production system types and business groups (Whitley, 1999). The Structure The structure of varieties of capitalism is based on place, time, cultural differences, etc. An organization operating in a particular country (place) may have different industrial support or infrastructure. In order to operate in that region, the firm needs to adapt to its environment. Moreover, different nation has different norms and culture. A firm which has come to a foreign land to do business has to be accustomed about the host countries cultures, in order to avoid social disputes. Porter’s Diamond Model of Comparative advantage In a global context, every organization enjoys an added advantage while doing business in their homeland. This is known as comparative advantage and can be explained by Porter’s diamond model. Source: (Recklies, 2001) Factor conditions: This includes the production factors like infrastructure and labour force, which are important for competition in certain industries. Demand conditions: This describes the demand of certain products manufacture in the home country. Firm strategy and structure: This describes the domestic competition in a country among the existing established firms. Supporting Industries: This describes the impact of complementary industries that provides support to the existing industries. Several types of Managerial Capitalism Chandler (1977) describes the management coordinated “big businesses” in the USA. This type of capitalism is known as Competitive Managerial Capitalism, where large management bureaucracies combined the mass production with mass marketing and mass distribution. The products were standardized and relatively homogenous. The throughput time and cost was reduced by specialized machinery and partially skilled workers. It also involved differentiation of managers and asset owners, integrated managerial control of production sites, investment in research and development and a gradual movement towards multi divisional structured organization (Chandler, 1993). In contrast, the Personal Capitalism of Britain was dominated by family owned firms. They invested little in research and development of new products and services. The marketing strategies and management systems were barely improved. They relied on cartels, private associations and federations for managing risks (Thelen & Steinmo, 1992). The Cooperative managerial capitalism of Germany was a combination of some aspects of the Competitive Managerial Capitalism of US and some of the Personal Capitalism of Britain (Deeg, 2001). They had large hierarchies in the management and integrated production systems and also they had family controlled system and inter organizational cooperation. German firms competed more on the product quality than on the price. These three varieties of managerial capitalism were differentiated in terms of four aspects. Firstly, the extent to which the organizations formed large management bureaucracies to manage wide range of activities. Secondly, the differentiation of managers from owners. Thirdly, the extent to which large scale production is integrated with mass marketing. Finally, the degree on which the competition was based on economies of scale and scope. Lazonic (1998), in his more general approach, formulated three varieties of capitalism, which differ by ways in which economic activities are integrated – a) proprietary (British), b) managerial (American) and c) collective (post war Japanese). Proprietary capitalism was controlled by horizontally and vertically specialized firms, who coordinated the input and output by market contracting. They had little capacity to pursue innovative strategies and focused their control over work processes. The managerial form of capitalism is controlled mainly by horizontally diversified and vertically integrated organizations, which were run by a hierarchy of salaried managers. They worked to develop their own innovation by establishing research and development laboratories and usually competed in the mass market. Work process were highly mechanized and controlled through formal rules. Collective capitalism showed higher level of integration of economic activities through long term relationships among firms within networks and business groups. Moreover, in this type of capitalism, the commitment between employee and employer went further down the hierarchy; as a result, it encouraged employees to improve products and services on a continued basis (Kang, 2006). The CME and LME approach The variation of capitalism can also be approached by two major types of models. These models are formulated based on the extent to which a political economy is coordinated. The CME (Coordinated Market Economy) is dependent on non-market relationships, commitments, collaborations, etc. On the other hand, the LME (Liberal Market Economy) involves competitive relations, formal contracting and relation of supply and demand with price signalling (Hall & Soskice, 2001). In the Liberal Market Economy, the fluidity of labour market suits well with clear access to stock market and profit imperatives, which makes LME a “radical innovator” in sector like software, bio technology, corporate finance, etc. The concept of LME is based on “switchable assets”, i.e. the assets can be realized by diverting in multiple purposes. On the other hand, the Coordinated Market Economy (CME) involves long term employments, behaviour bound by rules and strong ties between banks and firm. These aspects make CME an “incremental innovator.” The concept of CME is based on assets of “specific or co-specific” nature, i.e. the value of the assets depend on the cooperation of others (Hall, 1986). Effect of Globalization on Capitalism. The developed economies are going through profound changes. New sectors are created by technological revolution, like Information technology, biotechnology, and telecommunications. These sectors are changing business practices all over the economy. A new trend of managerial innovations has adopted new forms of client relationships, quality control, team management, inventory management, etc. The business activities are shifting to services sector from industrial sector. The declining cost of communication and transportation facilitates more liberal trade across borders. The variation of capitalism approach explains the notion of the comparative institutional advantage in both the liberal and coordinated market economy. However, the variety of capitalism questions all the assumptions of the conventional globalization. It points out that the institutions all over the world are not necessarily run on the same system. On contrary, it also suggests that in both the cases of LME and CME, firms develop distinctive processes and strategies to capitalize the institutions available for both market and non-market coordination in the global economy. It has been proved with evidence that firms in different economies behave differently, while they face same kinds of challenges (Bunch, 2011). Thus, globalization cannot bring identical response from them. Although, globalization encourages outsourcing of cheap labour, but a firm can also derive competitive advantage in their home country, that supports certain types of intra- and inter- organizational relationships. A lot of firms are reluctant to give it up, just to reduce wage costs. Companies are less mobile due to comparative institutional advantage. The LME based firms are more likely to move their operations overseas to avail cheaper labour, than the CME based companies. This is because, the LME based companies already coordinate their activities using market structures of other under developed nations. On the other hand, the CME based companies employ corporate strategies which rely on high level skills and infrastructure that is hard to find elsewhere (Murphy, 2007). Conclusion Capitalism across the globe varies as different nation follows different management systems. This is primarily because; each nation operates their management system which varies in a societal context. The major organizations that shape the economy of the nation follow an inherent management structure, which is dissimilar in different countries (Jessop, 2014). They refrain from using standardized structure, because it may contradict with the inherent culture of a particular economy. Moreover, each economic institution enjoys a comparative advantage while it operates on its homeland following its own regulations. The variety of business environment across the globe makes it difficult for the companies to operate in a foreign land, so in order to avoid that the company should follow all the legal and regulatory frameworks of the country. It should understand the local culture and make certain necessary changes in the business process to adapt it with the foreign environment. 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[online] Available at: < http://bobjessop.org/2014/03/28/rethinking-the-diversity-and-varieties-of-capitalism-on-variegated-capitalism-in-the-world-market/ > [Accessed 25 October 2014] Kang, N., 2006. A Critique of the Varieties of Capitalism Approach. ICCSR Research Paper Series, 2006 (45) Murphy, R. P., 2007. Capitalism and Globalization. [online] Available at: [Accessed 25 October 2014] Norberg, J., 2003. In Defense of Global Capitalism.Cato Institute, Washington D.C Porter, M., 1990. The Competitive Advantage of Nations, Macmillan, London Recklies, D. 2001. Porter’s Diamond – Determining Factors of National Advantage. [online] Available at:< http://www.themanager.org/pdf/diamond.pdf > [Accessed 25 October 2014] Thelen, K., and S. Steinmo.,1992. Historical Institutionalism in Comparative Politics. Cambridge University Press, Cambridge Whitley, R., 1999. Divergent Capitalisms. Oxford University Press, Wellington Square Worldsocialism, 2014. What is Capitalism? 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