Governing the Modern Corporation: Capital Markets, Corporate Control, and Economic Performance

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There is a strong relation between share prices and managerial performance and hence market for corporate control is a new corporate governance mechanism. As shareholders respond to poor managerial performance through exit, the lower share prices created incentives for outsiders to accumulate control rights, replace the management team and restructure the under performing company.

These outsiders can recoup their investment through a share price premium. Markets for corporate control can thus be defined in terms of transactions for control over a company's shares and occur through a variety of methods: open market purchases, block purchases, tender offers, negotiated share swaps or contest over the control of proxy rights Bittlingmayer Markets for corporate control- Substitute for Corporate Governance?

Markets for corporate control is an effective tool for disciplining poor management. It is a generalized threat of takeover which places management under greater discipline by institutionalizing a feed back mechanism between corporate decision making and the stock market. It increases the scope of shareholder voice, since shareholder exit leads to the threat of takeover.

The impact of Markets for corporate control- Global Scenario. During the 's, U. The Administration loosened the laws and widen the scope of takeovers contributing to an unprecedented wave of takeovers during 's in USA but it did not work long. Even, Manne anticipated the enormous impact of takeover 0 i distribution of wealth by staking: "Given the fact of special tax treatment for capital gains, we can see how this mechanism forcontrol of badly run corporations is one of the most important "get-rich-quick" opportunities in our economy today.

Implication of Markets for Corporate Control. Management may react negatively to takeover threats by implementing costly defensive strategies such as golden parachutes or poison pills and by seeking legal protection from takeover. It may adopt short term devices by increasing share prices thereby sacrificing beneficial long term projects and investments. Further, takeovers can change the position of other stakeholders and thus undermine trust and cooperative relations.

Further, a lot of criticisms are associated with markets for corporate control viz:. The Stock Market may often value corporation below their true market value. Takeovers are often motivated by profit seeking redistribution of stakeholders' wealth that makes little positive contribution to long term company performance.

The transfer of wealth from stakeholders to shareholders accounts for a large proportion of takeover premiums and leads to net losses of efficiency due to breaches of trust. Employees face the dangers of assets being stripped from target company, employment being rationalized and employment agreements being renegotiated. Markets for corporate control are an effective disciplinary device than either monitoring by institutional investors or by the board of directors.

But every time intensity of the mergers and acquisitions market is not by itself evidence of a powerful disciplinary device at work. It can be promoting empire building or tax minimization. As legal, advisory and financing costs constitute an average 4 per cent of purchase price, it is expensive way of implementing corporate governance. But it does not mean I that it should not be accepted. It is indeed difficult to comment that it is a substitute for corporate governance but indeed it is most effective tool for implementing corporate governance in organizations.

Further, besides markets for corporate control, product market competition can also be proved as an effective driver of corporate governance. Firms which will be incapable to adopt corporate governance policy will be replaced by competitors. Product market competition can, to some extent Act to reduce the scope for managerial inefficiency and opportunism. Competition can provide a benchmark by which performance of the company can be judged when compared to performance of other company in a similar sector but as its effects are slow, it forces inefficient company to file bankruptcy.

Two approaches are there to analyze the effects of markets for corporate control. To examine the share prices of target and acquiring firms around the announcement date of takeover. To look at post take over performance of merged group Le. If takeovers are a means of resolving problems associated with inefficient management, or with other efficiency gains then the ex-post performance of the merger group should be better than the weighted average of the ex-ante performance of the acquiring and target firm prior to the takeover.

To conclude, it is rather the threat of takeover of management than actual takeovers that seems to act as an effective device for improving performance. She is editor of a couple of professional magazines and hold different positions as Chairman, Secretary, Director in various professional bodies. She has participated and contributed in various seminars and presented various professional papers. Search this site. Navigation Home. Areas of Practice. About us. Usefull Links. Introduction "Investor protection is a key to financial development and economic growth".

Concept of Corporate Governance Corporate Governance has been traditionally associated with the "principal-agent" or "agency" problem. Diversity, human and social capital within the board High engagement in board processes 4. Presence of large block shareholders 5. Shareholder activism 6. Breadth and depth of public information disclosure 7. Breadth and depth of private information sharing 8. Independence of the external auditors 9. Competence of the audit committee Long term performance-related incentives Transparent and independent control of the remuneration committee An active markets for corporate control This all appeared an integral part of the irresistible rise of globalisation and financialisation that was advancing through the regions of the world in the late s and early s, with apparently unstoppable force.

Governing the modern corporation : capital markets, corporate control, and economic performance

Economies, cultures and peoples increasingly were becoming integrated into global markets, media networks, and foreign ideologies in a way never before experienced. It seemed as if distinctive and valued regional patterns of corporative governance would be absorbed just as completely as other cultural institutions in the integrative and homogenising processes of globalisation. The increasing power of global capital markets, stock exchanges, institutional investors, and international regulation would overwhelm cultural and institutional differences in the approach to corporate governance.

Yet just as there are many countries that continue to value greatly the distinctions of their culture and institutions they would not wish to lose to any globalised world, people also believe there are unique attributes to the different corporate governance systems they have developed over time, and are not convinced these should be sacrificed to some unquestioning acceptance that a universal system will inevitably be better. The field of comparative corporate governance has continued to develop however, and a different and more complex picture of governance systems is now emerging.

The objectives of corporate governance are more closely questioned; the qualities of the variety and relationships of different institutional structures are becoming more apparent; the capability and performance of the different systems more closely examined; and different potential outcomes of any convergence of governance systems realised. While capital markets have acquired an apparently irresistible force in the world economy, it still appears that institutional complementarities at the national and regional level represent immovable objects Jacoby, ; Deeg and Jackson, ; Williams and Zumbansen, ; Jackson and Deeg, ; Clarke, ; Clarke a.

This is not to argue the immutability of institutions which of course are continuously engaged in complex processes of creation, development and reinvention in the economic, social and cultural context in which they exist. However, what is at issue is the causation and direction of these institutional changes.

From the convergence perspective they are a logical result of adopting the superior Anglo-American institutions of corporate governance and financial markets. From the perspective of those who respect and understand the reasons for institutional diversity and value the outcomes of this diversity, institutional change is a more autonomous process embedded within economies and societies, which may indeed have to negotiate some settlement with international market forces, but strive to do so while maintaining their own values.

Coffee argues that while the law matters, legal reforms follow rather than lead market changes. Gilson 10 offers a more robust view of the force of functional convergence:. Path dependency, however, is not the only force influencing the shape of corporate governance institutions. Existing institutions are subject to powerful environmental selection mechanisms. If existing institutions cannot compete with differently organized competitors, ultimately they will not survive. Path dependent formal characteristics of national governance institutions confront the discipline of the operative selection mechanisms that encourage functional convergence to the more efficient structure and, failing that, formal convergence as well.

While more viable illustrations of functional convergence could readily be found, it could be argued that this approach is largely another route to the convergence thesis rather than an alternative. Indeed, functional convergence, since it is easier to achieve than institutional convergence, could prove a quicker route to shareholder value orientations. The convergence thesis is derived essentially from the globalisation thesis: that irresistible market forces are impelling the integration of economies and societies.

Globalisation represents a profound reconfiguration of the world economy compared to earlier periods of internationalization.


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A major driver of the globalisation phenomenon has proved the massive development of finance markets, and their increasing influence upon every other aspect of the economy:. Financial globalisation, i. From the s on, the increase in cross-border holdings of assets outpaced the increase in international trade, and financial integration accelerated once more in the s… The past decade has also seen widespread improvements in macroeconomic and structural policies that may to some extent be linked to a disciplining effect of financial integration.

Moreover, there is evidence that financial linkages have strengthened the transmission of cyclical impulses and shocks among industrial countries. Financial globalisation is also likely to have helped the build-up of significant global current account imbalances. Finally, a great deal of the public and academic discussion has focussed on the series of financial crises in the s, which has highlighted the potential effects of capital account liberalisation on the volatility of growth and consumption.

European Commission, The complex explanation for this massive financialisation of the world economy is pieced together by Ronald Dore thus:. What is resulting from this insistent impulse of the increasingly dominant financial institutions are economies and corporations increasingly dependent upon financial markets:. Global integration and economic performance has been fostered by a new dynamic in financial markets, which both mirrors and amplifies the effects of foreign direct investment and trade driven integration.

Financial innovations and financial cycles have periodically impacted substantially on economies and societies, most notably in the recent global financial crisis Rajan, ; Clarke, a. However the new global era of financialisation is qualitatively different from earlier regimes. Global finance is now typified by a more international, integrated and intensive mode of accumulation, a new business imperative of the maximisation of shareholder value, and a remarkable capacity to become an intermediary in every aspect of daily life van der Zwan, Hence finance as a phenomenon today is more universal, aggressive and pervasive than ever before Krippner, ; ; Epstein, ; ; Dore, ; Davis, ; van der Zwan, These financial pressures are translated into the operations of corporations through the enveloping regime of maximising shareholder value as the primary objective.

Agency theory has provided the rationale for this project, prioritizing shareholders above all other participants in the corporation, and focusing corporate managers on the release of shareholder value incentivized by their own stock options. In turn this leads to an obsessive emphasis on financial performance measures, with increasingly short term business horizons Lazonick, ; ; Clarke, ; Clarke, A vital dimension of the increasing financialisation of the world economy is the growth of capital markets, and especially the vast growth of equity markets, where volatility has been experienced at its furthest extremities.

What this demonstrates is the overwhelming predominance of Anglo-American institutions and activity in world equity markets, and how to a great extent these markets reflect largely Anglo-American interests, as the rest of the world depends more on other sources of corporate finance. This pre-eminence of equity markets is a very recent phenomenon. Historically, the primary way most businesses throughout the world including in the Anglo-American region have financed the growth of their companies is internally through retained earnings. In most parts of the world until recently, this was a far more dependable source of capital rather then relying on equity markets.

Equity finance has proved useful at the time of public listing when entrepreneurs and venture capitalists cash in their original investment, as a means of acquiring other companies, or providing rewards for executives through stock options. Equity finance is used much less frequently during restructuring or to finance new product or project development Lazonick, In Europe and the Asia-Pacific however, this capital was in the past provided by majority shareholders, banks, or other related companies to the extent it was needed by companies committed to organic growth rather than through acquisition, and where executives traditionally were content with more modest personal material rewards than their American counterparts.


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The euphoria of the US equity markets did reach across the Atlantic with a flurry of new listings, which formed part of a sustained growth in the market capitalisation of European stock exchanges as a percentage of GDP. A keen attraction of equity markets for ambitious companies is the possibility of using shares in equity swaps as a means of taking over other companies thus fuelling the take-over markets of Europe.

This substantial development of the equity markets of France, the Netherlands, Germany, Spain, and Belgium and other countries began to influence the corporate landscape of Europe, and was further propelled by the formation of Euronext, and the subsequent merger with the NYSE. Indeed, as the regulatory implications of Sarbanes Oxley emerged in the United States from onwards, the market for IPOs moved emphatically towards London, Hong Kong and other exchanges. Though the US total share of global stock market activity remained at 50 per cent in , the IPO activity had collapsed.

The more relaxed regulatory environment of the UK and other jurisdictions clearly for a time at least proved attractive in an ongoing process of international regulatory arbitrage. Any such mergers represent a further US bridgehead into the equity markets of Europe, rather than the converse.

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Along with the growth in market capitalisation in European exchanges occurred a gradual increase also in trading value. It appears that contemporary equity markets inevitably will be associated with high levels of trading activity, as a growing proportion of trading is algorithmic high frequency computer generated.

Following the global financial crisis, regulatory intervention in finance was perceived to be more robust in Europe and the UK, and less so in the United States with the slow pace of the introduction of the monumental Dodd-Frank Act. In this context the attractions of the New York Stock Exchange and Nasdaq returned, and by reached once again the levels of IPO financing in the dot-com s era, far exceeding the amounts raised in the London and Hong Kong markets combined Financial Times, 29 September As equity markets come to play a more powerful role in corporate life in Europe, Japan and other parts of the world, a set of assumptions and practices are also disseminated which may confront long standing values and ideals in the economies and societies concerned.

Specifically, the ascendancy of shareholder value as the single legitimate objective of corporations and their executives, usually accompanies increasing dependence upon equity markets. Dore cites a Goldman Sachs study of manufacturing value added in the United States, Germany and Europe in general, which concluded that:. The share of gross value added going to wages and salaries has declined on trend in the US since the early s. In fact, for the US, this appears to be an extension of a trend that has been in place since the early s… We believe that the pressures of competition for the returns on capital available in the emerging economies have forced US industry to produce higher returns on equity capital and that their response to this has been to reserve an increasingly large share of output for the owners of capital.

Young, Multiple voices are urging Japanese managers to go in the same direction. The transformation on the agenda may be variously described — from employee sovereignty to shareholder sovereignty: from the employee-favouring firm to the shareholder-favouring firm; from pseudo-capitalism to genuine capitalism. They all mean the same thing: the transformation of firms run primarily for the benefits of their employees into firms run primarily, even exclusively, for the benefit of their shareholders… It means an economy centred on the stock market as the measure of corporate success and on the stock market index as a measure of national well-being, as opposed to an economy which has other, better, more pluralistic criteria of human welfare for measuring progress towards the good society.

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However part of the price of restoring confidence to the markets was the hasty passage of the Sarbanes Oxley legislation and increased regulation of corporate governance. Yet Sarbanes Oxley apparently did little to curb the animal spirits of some fringes of the US financial institutions that ultimately impacted on the world economy. Nonetheless despite the strenuous intervention of the G20, Financial Stability Board internationally and the Dodd-Frank legislation in the US intended to restrain the most dangerous impulses of financial institutions, the strength and vigour of capital markets seems destined to continue to advance globally without adequate regulation or oversight Clarke and Klettner, ; Avgouleas, While each of the regional systems of finance and corporate governance remains in the post-financial crisis period weakened and to a degree disoriented, the substance and rhythm of institutional varieties continues: in Germany there remains an incomplete form of market liberalization, and resilient elements of the social market economy Jackson and Sorge, ; in France, while the neo-liberal reforms have undermined social alliances and the pressures for institutional change increase, social commitments continue Amable et al.

Despite the recurrent crises originating in Anglo-American finance and governance in this period, and in the background the continuing reverberations of the global financial crisis, the confidence the market based system was the only way forward has continued almost undaunted in government and business circles, certainly in the Anglo-American world Clarke, a.

Underlying the resurging energy of advancing equity markets and the proliferating corporate governance guidelines and policy documents appearing in such profusion over the last two decades is an implicit but confident sense that an optimal corporate governance model is indeed emerging:. An optimal model with dispersed ownership and shareholder foci… The OECD and World Bank promote corporate governance reform… Influenced by financial economists and are generally promoting market capitalism with a law matters approach, although for political reasons, they do not advocate too strongly market capitalism and allow for other corporate governance systems i.

Pinto, Other authorities are less diplomatic in announcing the superiority of the Anglo-American approach that other systems must inevitably converge towards. Two US eminent law school professors Hansmann and Kraakman in an article prophetically entitled The end of history for corporate law led the charge of the convergence determinists:. Despite very real differences in the corporate systems, the deeper tendency is towards convergence, as it has been since the nineteenth century.

The core legal features of the corporate form were already well established in advanced jurisdictions one hundred years ago, at the turn of the twentieth century. Although there remained considerable room for variation in governance practices and in the fine structure of corporate law throughout the twentieth century, the pressures for further convergence are now rapidly growing.

Chief among these pressures is the recent dominance of a shareholder-centred ideology of corporate law among the business, government and legal entities in key commercial jurisdictions. There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value.

This emergent consensus has already profoundly affected corporate governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as well. The irony of this profoundly ideological claim the most recent in a long historical lineage of similar appeals , is that it attempts to enforce the consensus it claims exists, by crowding out any possibility of alternatives.

This is not an isolated example, but the dominant approach of much legal and financial discussion in the United States, where as McDonnell insists the prevailing view is:. The American system works better and that the other countries are in the process of converging to the American system. Though there is some dissent from this position, the main debate has been over why countries outside the United States have persisted for so long in their benighted systems and what form their convergence to the American way will take.

The scholarly discussion has converged too quickly on the convergence answer. Where a definition is offered in the convergence literature for an optimal corporate governance system it invariably relates to accountability to shareholders, and often to maximising shareholder value which became an increasingly insistent ideology in Anglo-American analyses of corporate purpose. The narrow financial metrics relating to maximising shareholder value often are presented as the only valid measures of an optimal corporate governance system, when there are deeper and wider measures that could be employed in the estimation of business performance.

Business success might be measured in longevity, scale, revenue, sales, employment, product quality, customer satisfaction, or many other measures that might be found relevant in different societies at different times. Certainly the measures of business success employed in Europe and Asia are quite different from the Anglo-Saxon world, and would embrace wider stakeholder interests. In considering efficiency there is the question of how well the governance system solves agency problems; how well the system facilitates large scale coordination problems; how well the systems encourage long-term innovation; and how they impose different levels of risk on the participants.

Distributional equity is another important value, but again is difficult to measure. For many distributional equity suggests increased prosperity should provide for an increased equality of income and wealth, but others find this less compelling. In some instances, equity may conflict with efficiency: it could be argued the US system is more efficient, but inevitably results in greater inequality. Alternatively equity may be associated with more collaborative creativity. Finally there is the value of participation, both in terms of any contribution this may make to the success of the enterprise, and as an end in itself in enhancing the ability and self-esteem of people.

Corporate governance systems affect the level of participation in decision-making very directly, whether encouraging or disallowing active participation in enterprise decision-making McDonnell, 4. Arguably each of these values is of great importance, and the precise balance between them is part of the choice of what kind of corporate governance system is adopted. Yet there appears increasingly less opportunity to exercise this choice:.

The universe of theoretical possibilities is much richer than a dominant strand of the literature suggests, and we are currently far short of the sort of empirical evidence that might help us sort out these possibilities. Most commentators have focused on efficiency to the exclusion of other values. Moreover, even if convergence occurs, there is a possibility that we will not converge on the best system. Even if we converge to the current best system, convergence still may not be desirable.

McDonnell, 2. In the past these critical political choices on which system of governance provides the most value in terms of efficiency, equity and participation have been made and defended. In contrast European social democracy has tended to favour other stakeholder interests, particularly labour, as a system that promotes welfare among all citizens and attempts to prevent wide disparities.

In turn this can be viewed as a reaction to the historical rise of fascism and communism Pinto, Fligstein and Freeland 21 adopt a similar historical view that the form of governance is a result of wider political and institutional developments:. In this way characteristic institutions of the US economy can be traced back to distinctive political and regulatory intervention, resulting for example in historically distributed banks, diversified companies, and the dominance of the diversified M-form corporations. In contrast in Europe and Japan the regulatory environment encouraged a very different approach:.

Regulatory policy in the United States had the unintended consequence of pushing U. In other words, modern regulatory policy in the U. The implications for corporate governance are straightforward: corporations favour shareholders in the U.

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Jacoby, 8. A very different reading of these events is offered by Rajan and Zingales , who argue that widely dispersed shareholders is related to the development of liquid securities markets and the openness to outside investments, while it was not social democracy but protectionism that kept European and Japanese markets closed from competition with concentrated ownership.

As financial economists they favour the globalisation route to open market based competition, which they see as the way to unsettling local elites, achieving dispersed ownership, raising capital, and improving corporate governance. Following a different line of analysis the substantial empirical evidence of La Porta et al. Law and regulation may impede or promote convergence or divergence. In many countries without adequate laws guaranteeing dispersed shareholder rights, the only alternative appeared to maintain control through concentrated ownership.

This led to the conclusion that the law determined the ownership structure and system of corporate finance and governance. Jurisdictions where the law was more protective encouraged the emergence of more dispersed ownership Pinto, Coffee extends La Porta et al. In contrast in civil law systems the state maintained a restrictive monopoly over law-making institutions for example in the early intrusion of the French government into the affairs of the Paris Bourse involving the Ministry of Finance approving all new listings.

Coffee concludes that it was market institutions that demanded legal protection rather than the other way around:. The cause and effect sequence posited by the La Porta et al. They argue that strong markets require strong mandatory rules as a precondition. Although there is little evidence that strong legal rules encouraged the development of either the New York or London Stock Exchanges and there is at least some evidence that strong legal rules hindered the growth of the Paris Bourse , the reverse does seem to be true: strong markets do create a demand for stronger legal rules. Both in the U.

Eventually, as markets have matured across Europe, similar forces have led to the similar creation of European parallels to the SEC. In each case, law appears to be responding to changes in the market, not consciously leading it. Coffee, 6. In the search for explanations some have attempted a philosophical approach including Fukuyama who conceives of business organisations as the product of trust, and the different governance systems as built of different forms of trust relations.

Regarding the social foundations and development of ownership structures and the law, other writers have examined the correlations between law and culture. Licht examines the relevance of national culture to corporate governance and securities regulation, and explores the relationship between different cultural types and the law:.

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In working towards a cross-cultural theory of corporate governance systems, Licht demonstrates that corporate governance laws exhibit systematic cultural characteristics. Dividing shareholder protection regimes according to groups of culturally similar nations is informative.

The evidence corroborates the uniqueness of common law origin regimes in better protecting minority shareholders. However, statutes in the English Speaking cultural region offer levels of protection to creditors similar to the laws in the Western European or Latin American regions. Our findings cast doubt on the alleged supremacy of common law regimes in protecting creditors and, therefore, investors in general.

Finally, we find that analyses of corporate governance laws in Far Eastern countries, a distinct cultural region, would benefit from combining an approach that draws on cultural value dimensions and one that draws on legal families.

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Licht, Licht concludes that corporations are embedded within larger socio-cultural settings in which they are incorporated and operate. Cultural values are influential in determining the types of legal regimes perceived and accepted as legitimate in any country, and serve as a guide to legislators. Berglof and von Thadden suggest the economic approach to corporate governance should be generalised to a model of multilateral interactions among a number of different stakeholders. They argue that though protection of shareholder interests may be important, it may not be sufficient for sustainable development, particularly in transitional economies.

Licht concludes:. Every theory of corporate governance is at heart a theory of power. In this view, the corporation is a nexus of power relationships more than a nexus of contracts. The corporate setting is rife with agency relationships in which certain parties have the ability power unilaterally to affect the interests of other parties notwithstanding pre-existing contractual arrangements.

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In the present context, corporate fiduciaries are entrusted with the power to weigh and prefer the interests of certain constituencies to the interests of others beyond their own self-interest. Given the current limitations of economic theory, progress in the analysis of the maximands of corporate governance may be achieved by drawing on additional sources of knowledge.

Licht, 6. Optimal corporate governance mechanisms are contextual and may vary by industries and activities. Identifying what constitutes good corporate governance practice is complex, and cannot be templated into a single form. One needs to identify the strengths and weaknesses in the system but also the underlying conditions which the system is dependant upon Pinto, 31; Maher and Andersson, The institutions that compose the system of corporate governance and complement each other consist not just of the law, finance, and ownership structure. Complementarities may extend to such things as labour relations and managerial incentive systems.

The commitment to permanency promotes extensive firm-specific training, which contributes to flexible specialisation in the production of high quality goods. In contrast in the United States employer training investments are lower than in Japan and Germany, employees are more mobile, and there is less firm-specific skill development.

Similarly, in the US fluid managerial labour markets make it easier for ousted managers to find new jobs after a hostile takeover. In contrast, in Japan management talent is carefully evaluated over a long period of time through career employment and managerial promotion systems. He continues with a warning to those who might wish to randomly transplant particular institutional practices into other countries:.

Hostile takeovers also would be disruptive of relations with suppliers and key customers, a substantial portion of which exist on a long term basis. In Germany and, especially, in Japan, there is less vertical integration of industrial companies than in the United States or the United Kingdom. Rather than rely primarily on arms-length contracts to protect suppliers and purchasers from opportunism, there is heavy use of relational contracting based on personal ties, trust, and reputation.

Personal ties are supported by lifetime employment; the business relations are buttressed by cross-share holding. In short, imitation across path-dependent systems is inhibited by the cost of having to change a host of complementary practices that make an institution effective in a particular national system. Another way of understanding this Jacoby suggests is through the concept of multiple equilibria, which leads to the conclusion there is no best way of designing institutions to support stability and growth in advanced industrial countries:.

Multiple equilibria can arise and persist due to path dependence, institutional complementarities, bounded rationality, and comparative advantage. Sometimes multiple equilibria involve functionally similar but operationally distinctive institutions, such as the use of big firms as incubators in Japan versus the U. Other times different institutions create qualitatively different outcomes.

That is, a set of institutions, including those of corporate governance, may be better at facilitating certain kinds of business strategies and not others. Companies — and the countries in which they are embedded — can then secure international markets by specializing in those advantageous business strategies because foreign competitors will have difficulty imitating them. For example, the emphasis on specific human capital in German and Japan is supportive of production based technological learning, incremental innovation, and high quality production, all areas in which those economies have specialized.

By contrast, the U. In short, there are substantial gains to be reaped from sustaining institutional diversity and competing internationally on that basis.

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