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Journal of International Business Studies (2008) 39, 540–561

& 2008 Academy of International Business All rights reserved 0047-2506 $30.00
www.jibs.net

Comparing capitalisms: understanding


institutional diversity and its implications
for international business

Gregory Jackson1 and Abstract


Richard Deeg2 This paper examines the role of institutional analysis within the field of
international business (IB) studies. Within IB, institutions matter, but the view of
1
Department of Management, King’s College institutions tends to be ‘‘thin’’, utilizing summary indicators rather than
London, UK; 2Political Science Department, detailed description, and thus approaches institutions as unidimensional
Temple University, Philadelphia, USA ‘‘variables’’ that impact on particular facets of business activity. This paper
argues that IB research would be usefully advanced by greater attention to
Correspondence: comparing the topography of institutional landscapes and understanding their
G Jackson, Department of Management, diversity. A number of alternative case-based approaches are outlined that
King’s College London, 150 Stamford draw on a growing ‘‘comparative capitalisms’’ literature in sociology and
Street, London SE1 9NH, UK.
political science. The paper develops a number of empirical examples to show
Tel: þ 44 20 7848 4466;
E-mail: gregory.2.jackson@kcl.ac.uk
the utility and limits of these approaches for IB scholars.
Journal of International Business Studies (2008) 39, 540–561.
doi:10.1057/palgrave.jibs.8400375

Keywords: comparative thinking; case theoretic approaches; institutional theory;


economic sociology; business and society; MNE–host country relations

INTRODUCTION
Scholars of international business (IB) know that ‘‘institutions
matter’’, but how they matter remains a hotly contested question.
Multinational enterprises (MNEs) operate in different business
environments and face challenges in strategically locating them-
selves and adapting to the diversity of institutions across countries
and regions. MNEs bring different home country endowments in
the way of routines, standard practices, and capabilities, but operate
in diverse host country environments where very different sets of
institutional constraints and opportunities may exist. MNEs’
experience in emerging markets, including central and eastern
Europe, has highlighted the importance of institutions for under-
standing business strategy and performance across national borders.
The theoretical and methodological approaches to studying
institutions remain diverse, and draw variably from different fields
of social science, such as economics (Aoki, 2001; North, 1990),
sociology (Powell & DiMaggio, 1991; Streeck & Thelen, 2005), and
political science (Immergut, 1998; Thelen, 1999). Indeed, the very
Received: 4 February 2006
Revised: 27 September 2007
meaning of institutions remains contested, and despite much
Accepted: 4 December 2007 interdisciplinary cross-fertilization, institutional theory remains
Online publication date: 27 March 2008 characterized by an eclectic set of approaches.
Comparing capitalisms Gregory Jackson and Richard Deeg
541

Institutions may be defined as the ‘‘rules of the holistic analysis of institutions within a specific
game’’ (North, 1990) or more broadly as regulative, national ‘‘case’’.
normative, or cognitive parameters (Scott, 1995) A key contribution of the CC approach is the
that influence organizations in various ways. IB analysis of non-market forms of coordination. Rather
scholars have studied institutions in terms of how than treating institutional diversity in terms of its
diverse regulatory rules and legal norms impact on ‘‘distance’’ from the norms of an MNE’s home
transaction costs for MNEs (Brouthers, 2002) or country or ideal-typical liberal markets, the CC
expose firms to politically related hazards (Delios & approach has developed a theory of comparative
Henisz, 2000). Institutions offer different degrees institutional advantage in which different institu-
of support for market exchange (e.g., between tional arrangements have distinct strengths and
advanced capitalist economies and transitional weaknesses for different kinds of economic activity.
or emerging economies) by securing property rights By stressing the social embeddedness of firms or
or protecting investors (Djankov, Glaeser, La Porta, other economic actors (Granovetter, 1985), institu-
Lopez-de-Silanes, & Shleifer, 2003). Institutions tions are seen not only as constraints but also as
also create uncertainty for MNEs owing to the resources for solving key problems of economic
‘‘distance’’ between home and host country institu- coordination through non-economic, value-
tions (Kostova, 1999) or between cultures (Hofstede, rational sets of commitments. The CC approach
1980). IB scholars have thus stressed how institu- may be seen as an institutional theory of the supply
tions create incentives and constraints on strategic side of the economy that examines how institutions
choice (Ingram & Clay, 2000), and link MNEs’ shape the supply of inputs (e.g., skills, capital)
success with the adaptation of their strategy or collectively available to firms and the legitimate
structure to the institutional environments in forms of coordination or governance that deter-
diverse host countries (e.g., Wan, 2005). While mine their usage. This approach has been well
institutions matter, the view of institutions in IB suited to explain the distinct comparative advan-
tends to be ‘‘thin’’ in utilizing summary indicators tages of countries such as Japan, based on incre-
rather than detailed description, and thus mental innovation and flatter organizations, or the
approaches institutions as unidimensional ‘‘vari- United States, based on more radical innovation
ables’’ that influence particular facets of business and network forms of organization, such as in
activity. Silicon Valley (Aoki, 2001).
Despite a renewed focus on institutions, IB The IB and CC approaches to institutions thus
research has devoted surprisingly little attention have very different theoretical assumptions,
to comparing the topography of institutional land- methodological predilections, and analytical foci.
scapes and understanding their diversity. Compara- However, we argue that a strong potential for cross-
tive approaches to studying business exist in fields fertilization exists. While IB has contributed much
such as industrial sociology (Dore, 1973; Sorge & to understanding how firms deal strategically with
Warner, 1986), political economy (Katzenstein, institutions, this perspective misses important
1985; Shonfield, 1965), economics (Aoki, 1988, ways in which institutions impact on MNEs,
Greif, 2005), and even business studies itself and particularly how strategy is shaped by institu-
(Chandler, 1990; Porter, 1990). More recently, a tionally available resource capabilities and govern-
new body of literature, which we define as ance structures. Whereas IB sees institutions as
comparative capitalisms (CC), has gone beyond these producing generic sets of constraints related to
approaches to examine how institutions across broad constructs such as ‘‘distance’’, in fact MNE
several economic domains interact to form distinct strategies are shaped by the nature and interactions
national constellations or ‘‘varieties’’ of capitalism between particular home and host country institu-
(Amable, 2003; Crouch & Streeck, 1997; Hall & tions studied in the CC approach (Sorge, 2005).
Soskice, 2001; Whitley, 1999). Institutions exist Conversely, the CC approach may benefit by
in distinct national configurations or types that drawing on IB to better understand how
generate a particular systemic logic1 of economic MNEs engage in institutional arbitrage and diffu-
action and competitive advantages related to sion, strategically manage their global value
complementarities among those institutions. The chains, and thereby create regime competition
emphasis is on how and why institutions differ that may trigger institutional change. A more
across countries, often starting from a ‘‘thick’’ firm-centered perspective will help move beyond
description of institutions (see Redding, 2005) and debates about convergence or persistent divergence

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
542

of national institutional systems and enable an bolic management and the like. We also suggest
approach to institutional change that is more that many recent contributions of the CC literature
dynamic by taking account of the tensions bet- are consistent with this approach.
ween global and local forms of organization, as
well as their incremental adjustment and potential
hybridization. INTERNATIONAL BUSINESS: VARIABLE-BASED
In this paper, we examine how institutions have APPROACHES TO INSTITUTIONAL ANALYSIS
been studied in the IB and CC literatures respec- In this section we examine how IB scholars have
tively along four key dimensions: applied institutional theory, and highlight some
common features of this approach. Table 1 com-
 how firms are embedded in institutions;
pares different strands of this literature along four
 institutional configurations at the national level;
dimensions: how firms are embedded in institu-
 the approach to competitive advantage; and
tions; the major institutional differences posited
 understanding of institutional change.
across countries; the approach to competitive
In the next section, we show how the IB literature advantage; and understanding of institutional
has approached institutions as a constraint on change. Notably, IB scholars have taken MNE
MNE activity through transaction costs, differing strategy as the basic unit of analysis and sought to
resource environments or institutional distance. understand institutions as ‘‘variables’’ or particular
The focus is on how MNEs can best ‘‘fit’’ or adapt dimensions that constrain or impact on the cost of
their strategies to diverse institutional settings, IB activity.
which are taken largely as given. The third section An important focus of the IB literature is on how
examines how institutions are studied within the host country institutions shape the mode of entry
CC literature along the same four dimensions, of foreign businesses by creating restrictions, costs or
stressing how institutions are studied within the hazards for MNEs (Brouthers, 2002; Meyer, 2001).2
context of distinct ‘‘types’’ of capitalism that reflect Institutions, such as legal restrictions on foreign
diverse forms of coordination, patterns of author- equity ownership, may affect timing, location, or
ity, or governance. The fourth section contrasts entry mode decisions in different ways. For exam-
and seeks to reconcile these two approaches. ple, MNEs are likely to choose a wholly owned
One essential methodological difference is that subsidiary as contractual hazards increase (i.e., the
the IB literature has approached institutions largely incentives for opportunistic behavior by counter-
as ‘‘variables’’ or single parameters that constrain parties) or joint ventures as political hazards in-
business decisions. Meanwhile, the CC literature crease (Henisz, 2000). Peng (2003) also argues that,
has emphasized how institutions must be analyzed where formal institutions supporting markets are
in the context of a particular ‘‘case’’ as part of ‘‘underdeveloped’’, MNEs will rely more on
wider, non-random configurations of institutions joint ventures than on wholly owned subsidiaries
that directly influence or constitute the capabilities as a way of dealing with informal institutional
of businesses themselves within different national constraints. More generally, firms may adopt
forms of capitalism. informal network-based organization either as a
We argue further that IB and CC may usefully response to less advanced or incomplete institu-
inform one another. CC may contribute to the tional infrastructure (Peng & Heath, 1996) or as an
study of MNE strategies by stressing the country- adaptation to persistent cultural patterns such as
specific nature of how MNEs export, adapt, or particularistic social ties used in the absence of
arbitrate between diverse sets of institutions. This universalistic, impersonally ordered institutional
suggests placing more focus on national economies ties (Pearce, Branyiczki, & Bigley, 2000). Institu-
as a unit of analysis, and asking how distinct tions, such as the legal system, thus vitally impact
‘‘cases’’ of institutional diversity shape both market on the costs of using markets, such as the stock
and non-market forms of business coordination. market (La Porta, Lopez-de-Silanes, Shleifer, &
Likewise, IB may also contribute to studies of Vishny, 1998) or different forms of labor (Djankov,
institutional change in the CC literature in ways La Porta, Lopez-de-Silanes, & Shleifer, 2002). In
that generate a more dynamic theory of institu- sum, this approach draws usefully on transaction
tional change. Here IB has much to say about issues costs economics in understanding how institutions
of strategic choice and organizational adaptation of impact on market behavior (see also Henisz &
firms, such as through learning, decoupling, sym- Williamson, 1999).

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Comparing capitalisms Gregory Jackson and Richard Deeg
543

Table 1 Institutional approaches within the IB literature

View of institutions Country patterns/institutional Comparative advantage Institutional change


configurations

Costs None. Degree of market development Fit of strategy or structure to Institutions taken as given
Constraint on strategy (e.g., developed vs emerging context of transaction costs
economies)
Resources None. Degree of resources (e.g., Fit of strategy to exploit or Institutions taken as given
Constraint on strategy developed vs emerging economies, complement context of
institution vs factor-led developing resources
economies)
Distance None. Degree of pair-wise difference Fit of strategy to minimize or Institutions taken as given
Constraint on strategy matters compensate for high distance;
conversely, low distance
enhances transferability and
lower costs

Institutions may also be seen as resources that Kwok (2002) argue that high levels of corporate
influence the strategic development of firm-specific debt are negatively related to a country’s level of
resources and the likelihood of success of different Schwartz’s conservatism and mastery values. Others
corporate strategies (Wan, 2005). Resources may be argue that the ‘‘distance’’ or difference between
more ‘‘plentiful’’ or ‘‘deficient’’ in different country home and host country cultures is important for
environments, and create opportunities for firms to MNEs’ entry mode choice, international diversifica-
utilize different types of firm-specific capabilities, tion strategies, and performance (see Tihanyi,
such as competitive market-based resources or non- Griffith, & Russell, 2005). Here cultural difference
market-based resources that strengthen the internal increases the cost of entry, decreases the efficiency
or political capacity for control. Resource environ- of operations, and hampers the ability of firms to
ments of countries are differentiated according to transfer core competencies or home country prac-
the level of institutional infrastructure, such as tices (Barkema & Vermeulen, 1997; Brouthers &
between developed and emerging economies, as Brouthers, 2001).
well as between institution-driven and factor- While the cultural literature is less concerned
driven emerging economies. In short, firm-specific with concrete differences in how business is
resources should ‘‘fit’’ the particular resource organized, the concept of ‘‘distance’’ has also been
environments of a host country. This perspective developed in institutional theory to study issues of
draws closely on the resource-based view (RBV) cross-national diffusion and transplantation of
of the firm (Barney, 1991), and links RBV with practices. Institutional distance has been measured
institutional theory (Wright, Filatotchev, Hoskisson, in terms of broad country-level institutional pro-
& Peng, 2005). files that capture the relative distance between
A final IB approach sees institutions in terms of countries, and apply this to study issues such as
the institutional distance between home country and cross-national transfer (Kostova, 1999; Kostova &
host country business practices. Much work on Roth, 2002). Notably, this literature goes beyond
cross-national differences has been influenced by the emphasis on regulative aspects of institutions
cultural value theory, which drew heavily on the that affect transaction costs or resources, and
work of Hofstede and cross-cultural psychology integrates normative and cognitive aspects of
(Hofstede, 1980; Schwartz, 1994). This work stresses institutions. For example, Gaur, Delios, and Singh
underlying differences in values that affect beha- (2007) use the World Competitiveness Yearbook to
vior in business across a wide range of areas. obtain seven indicators of regulative aspects (poli-
Researchers have attempted to identify a small tical transparency, anti-trust regulation, intellectual
number of universal dimensions to culture.3 These property protection, judicial system efficiency,
cultural dimensions are often linked with different fiscal policy, inflation, and market dominance in
business outcomes. For example, Chui, Lloyd, and key industries) and seven indicators of normative

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
544

aspects (responsiveness of the political system to 1983). In terms of methods, institutions influence
economic challenges, bureaucratic corruption, gov- MNEs along single dimensions, such as costs,
ernment’s attitude towards economic realities, resources, or distance, that vary from high to low.
transparency towards citizens, political risk, Institutional diversity is measured in terms of
bureaucratic hindrance to economic development, conventional continuous variables that can be
and the independence of local authorities). This applied within conventional statistical techniques.
approach has thus greatly broadened the range of For example, regulative institutions are often
dimensions and measures used to conceptualize measured in terms of the severity of legal restric-
institutions, and integrated these into composite tions on business activity in different countries,
notions of institutional distance or measured either as perceived by business (Brouthers, 2002) or
degree of similarity across a wide array of scored ranked based on objective criteria (Djankov et al.,
indices of institutional development (Delios & 2002). Measures of institutional distance go beyond
Beamish, 1999; Gaur & Lu, 2007; Wan & Hoskisson, single measures to encompass a wide range of
2003). Institutional distance is hypothesized to regulative, normative or cognitive institutions, but
increase transaction costs, making it harder for aggregate these institutional indices into single
MNEs to obtain reliable information, and discoura- measures of distance between home and host
ging investment into institutionally distant coun- country scores. However, the use of highly aggre-
tries. Conversely, governments may treat MNEs gated measures and linear-based statistical techni-
differently if they are more ‘‘foreign’’. Other work ques elides the possible importance of particular
has stressed that the impact of institutional dis- combinations of institutions, as opposed to the
tance may vary according to different aspects or simple linear degree or ‘‘distance’’ as a total sum
dimensions of institutional distance, and that of vectors. Consequently, IB has discussed cross-
investors or firms may mediate the impact of national diversity in terms of ‘‘levels’’ of develop-
distance through the accumulation of experience ment (e.g., between advanced and emerging
(Ionascu, Meyer, & Estrin, 2004). To this end, economies) or the relative ‘‘distance’’ between pairs
Ghemawat (2001) proposes an integrative perspec- of countries, rather than institutions as particular
tive on difference that includes cultural distance, configurations or ‘‘types’’ of cases at the country
administrative or political distance, geographic level.
distance, and economic distance. Third, institutions impact on the competitive
Drawing on Table 1, we propose some common advantage of firms through their ‘‘fit’’ or adaptation
characteristics in how the IB literature has used to different institutional environments. Firms are
institutional theory. First, the IB literature stresses argued to be more successful if they adapt to or
how regulative, normative or cognitive institutions develop capabilities that complement the risk, cost
constrain the strategic choices of MNEs. In parti- or resource environments of different countries. For
cular, institutions influence the transaction costs example, MNEs may substitute hierarchy for mar-
involved in using markets in different countries kets in distant or underdeveloped institutional
(Henisz & Williamson, 1999) and the different environments, or develop capabilities that comple-
risks associated with diverse country environments ment those different resource environments (Wan,
(Brouthers, 2002). Likewise, high degrees of institu- 2005). Firm-specific factors, such as organizational
tional ‘‘distance’’ are associated with additional capacities, experience and learning, influence the
costs for coordinating IB activity. MNEs or informal success of firms in adapting to different institu-
institutions may serve as functional substitutes tional environments (Delios & Henisz, 2000).
for ‘‘incomplete’’ development of formal institu- However, the IB literature is less clear about how
tions or ‘‘institutional voids’’ characterized by ‘‘the institutional diversity impacts on the capabilities of
absence of specialist intermediaries, regulatory firms to pursue different types of strategy or forms
systems, and contract-enforcing mechanisms’’ of innovation. Non-market forms of coordination,
(Khanna & Palepu, 2006: 62). This choice-within- such as through ownership control or networks, are
constraints approach to understanding institutions treated largely as a substitute for ‘‘deficient’’
has been discussed widely elsewhere (Ingram & market-oriented institutions.
Clay, 2000). Finally, in stressing firms’ strategic responses to
Second, institutions are studied largely as single institutions (see more generally Oliver, 1991), the
‘‘variables’’ that impact on firms rather than in IB literature has paid relatively little explicit atten-
relation to specific national ‘‘cases’’ (Ragin & Zaret, tion to how institutions change and evolve. Where

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
545

change is acknowledged, it is seen as driven by or change of diverse institutions. In the next


competition based on the relative efficiency of section, we argue that recent comparative institu-
alternative institutions. Alternatively, institutions tional analysis has developed a substantially differ-
are taken as given through exogenous political and ent, ‘‘case’’-based approach that goes a long way to
cultural factors that tend to be viewed as stable. For redress these gaps and thereby offers a substantial
example, politics may entrench vested interests contribution to the IB literature.
for particular groups and hence lead to high levels
of stability or path dependence (Bebchuk & Roe, COMPARATIVE CAPITALISM: CASE-BASED
1999). COMPARISONS OF INSTITUTIONS-AS-
In sum, the IB literature has demonstrated the CONFIGURATIONS
importance of institutions, such as host country Comparative studies of business have a long
context, for the strategy and performance of MNEs. tradition in sociology and political science, and
A major contribution of IB is to see how MNEs deal contributed a substantial body of knowledge about
strategically with institutions by adapting their the diversity of employment (Streeck, 1992),
strategy and structure in the face of ‘‘deficient’’ or financial systems (Zysman, 1983), and corporate
distant institutions. However, a number of critical governance (Aguilera & Jackson, 2003) across
observations can be made. First, the view of countries. The CC literature represents an attempt
institutions in IB remains rather ‘‘thin’’ in stressing to synthesize such comparisons of particular insti-
how institutions constrain strategic choice. Firms tutions as ‘‘building blocks’’ into a broader theore-
remain largely unitary, rational, and self-interested tical approach to understanding national systems.
actors with stable preferences, although con- Institutions are viewed as being systemically inter-
strained by institutional rules and norms. Less dependent configurations, rather than in isolation
attention is given to conceptualizing how institu- (Aoki, 1994). That is, the ways in which firms solve
tions socialize the diverse sets of actors related to coordination problems in different domains (e.g.,
the firm (managers, employees, owners, partner finance, labor, management, inter-firm relations)
firms), or shape the interests and the interactions are seen as functionally interdependent in funda-
among those stakeholders, and hence the capabil- mental ways that may create strategic complemen-
ities of firms to pursue different strategies. Second, tarities among different sets of institutions
the variable-based approach views institutional (Milgrom & Roberts, 1990, 1994). The resulting
diversity as variation along discrete parameters at internal cohesion among institutions leads to non-
a high level of aggregation. This approach neglects random ‘‘types’’ or patterns of institutions at a
the potential for interactions among these different national level and particular endemic strategies at
institutional dimensions that give rise not just to the firm level. However, since Albert’s (1993)
differences of degree, but to fundamental differences popular characterization of Rhineland vs Anglo-
in kind, where the impact of one institution may Saxon capitalism, the question of how to categorize
depend very much on the presence or absence of and compare different ‘‘types’’ of capitalism remains
particular other institutions. Institutional effects hotly debated.
are themselves unlikely to be universal. Third, IB In this section, we examine how the CC literature
has consequently conceived of comparative advan- has approached the study of institutions in order to
tage in a somewhat narrow sense of ‘‘fit’’ between identify the common features within this literature
firm strategies and institutional environments. and its respective differences from the IB literature.
However, this literature says surprisingly little We focus on three representative approaches: the
about the advantages of the institutional arrange- varieties of capitalism approach; the national
ments themselves (Porter, 1990), apart from the business systems approach; and the governance
degree to which they support market activity. approach. Table 2 summarizes these approaches
Despite the aforementioned work linking institu- along the same four dimensions discussed in the
tions to resources and the RBV of the firm, IB has no previous section. We argue that these literatures
explicit theory linking institutions to the coordina- have several common elements that distinguish the
tion problems facing firms across a variety of CC approach: studying institutions as resources for
functional domains, such as finance, human non-market forms of coordination; comparison of
resources, or managerial capabilities. Finally, given institutional configurations that stresses their
the emphasis on the effects of institutions, the IB integrity as national cases; a theory of comparative
literature has little explicit theory about the origin institutional advantage for different types of

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
546

Table 2 Institutional approaches within the CC literature

View of institutions Country patterns/institutional Comparative advantage Institutional change


configurations

Coordination Liberal vs coordinated market Resources for radical vs Path dependence due to
Resource for strategy economies incremental innovation complementarities
Specific vs general asset-based
strategies
Coordination and coherence Six types: Firm-level based on Path dependence due to
Legitimate authority K fragmented coordinating, learning, and complementarities and
K coordinated reconfigurational capabilities traditions of state authority
K industrial district consistent with institutional
K compartmentalized context
K state-organized
K highly coordinated
Governance Infinite types Resources for different sectoral Path dependence, but change
Power relations with external advantages or product niches through incremental
enforcement diverging in quality, price and adjustment and recombination
standardization. of institutions is possible
Also different macroeconomic
levels of inequality

economic activity; and a broad notion of institu- institutional structure of the political economy
tional path dependence. provides firms with advantages for engaging in
The CC literature often sees institutions in terms specific kinds of activities’’ (Hall & Soskice, 2001:
of resources for strategic coordination across different 32). In liberal economies such as the US, UK, or
institutional domains. Firms seek to develop core Canada the market plays the dominant role in
competencies and dynamic capabilities, but the coordinating economic behavior, and the state
pursuit of these competencies and capabilities remains an arm’s length enforcer of contracts.
requires firms to develop and manage successful LMEs share the following characteristics across the
relationships with other micro-agents, as in trans- four key institutional domains: short-term orien-
action cost (Milgrom & Roberts, 1990; Williamson, tated company finance; deregulated labor markets;
1975) or principal–agent approaches. But whereas general education; and strong inter-company com-
new institutional economics conventionally sees petition. Here firms are most successful when they
institutional structure as following firm strategy pursue production and market strategies that seek
(e.g., firms create structures that are efficient for to exploit easily transferred assets. This, in turn,
them), strategy is seen as being constrained by imparts these national systems with an institu-
institutional structures and thereby leads to differ- tional advantage in radical forms of innovation. In
ent firm behavior across institutional settings (Hall coordinated economies such as Germany, Sweden,
& Soskice, 2001: 14–15). On this basis, Hall and or Austria firm behavior is strategically coordinated
Soskice (2001) distinguish two basic types of to a larger extent through non-market mechanisms.
production regime (capitalisms): liberal market CMEs utilize long-term industrial finance, coopera-
economies (LMEs) and coordinated market economies tive industrial relations, high levels of vocational
(CMEs). This ‘‘varieties of capitalism’’ typology is and firm-specific training, and cooperation in
based on the relative extent of market coordination technology and standard-setting across companies.
through investment in transferable assets vs strategic This institutional context gives firms incentives
coordination through investment in specific assets. and capabilities to pursue production and market
Hall and Soskice link their analysis closely to the strategies that seek to exploit the advantages of
economic functions of institutions for firms in ways non-transferable or specific assets. CME institutions
that articulate a very parsimonious theory of provide competitive advantage for incremental
comparative institutional advantage, wherein ‘‘the forms of innovation.

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Comparing capitalisms Gregory Jackson and Richard Deeg
547

A central theoretical claim is that models of economic activities, and in the organization of, and
capitalism display strong complementarities interconnections between, owners, managers,
between the four institutional domains (Soskice, experts, and other employees’’ (Whitley, 1999:
1999: 110). Institutions facilitating strategic (or 33). While similar to Hall and Soskice in its
market) coordination in one domain also support emphasis on the importance of institutional con-
similar forms of coordination in other domains. For figurations and complementarities, this approach
example, short-term finance requires quick entry includes more sociological variables, and discusses
and exit from business activities, and the value of the internal make-up of firms (see also Redding,
this type of finance is mutually enhanced by 2005), such as ownership control and sectoral vs
industrial relations systems that allow inexpensive intersectoral coordination. This allows a more fine-
hiring and firing of labor. Intrinsic complementa- grained distinction among different forms of non-
rities across different institutional domains suggest market coordination and even different sorts of
that institutions should not be distributed ran- hierarchy within firms. This framework utilizes
domly, but cluster into two cohesive types.4 In fact, eight comparative dimensions:
additive measures of strategic coordination have
 the means of owner control (direct, alliance, or
been used in ways similar to the variable-based
market);
approaches in IB, though with an emphasis on
 the extent of integration of production chains by
interaction effects (Hall & Gingerich, 2004). Inter-
ownership (low, medium, high);
mediate or ‘‘mixed’’ cases are predicted to under-
 the extent of integration of industrial sectors
perform ‘‘pure’’ LME or CME types (Hall & Soskice,
through ownership;
2001; Kenworthy, 2006). This suggests a U-shaped
 the extent of alliance coordination of production
relationship, where countries that cluster near
chains;
either of the bipolar institutional types of pure
 the extent of collaboration between competitors;
coordination will have better economic perfor-
 the extent of alliance coordination of sectors;
mance than intermediate cases. Moreover, the
 the extent of employer–employee interdepen-
institutional complementarities within LMEs or
dence; and
CMEs are argued to be a source of path dependence
 the extent of delegation to and trust of employees.
and a high degree of institutional stability. These
claims have led to several criticisms regarding In moving beyond dichotomous classification,
the two-dimensional CME vs LME typology, includ- the business systems approach identifies six ideal
ing its neglect of the state (Ebbinghaus, 1999; types. Two types are broadly market-oriented:
Schmidt, 2002) and the problems of reconciling fragmented systems are dominated by small firms,
the theory of complementarities with the empirical and compartmentalized systems such as the US have
observations of mixed cases or change in capitalist large and integrated firms competing with each
systems (Allen, 2004; Blyth, 2003). other in arm’s length markets. Four other types
A second CC approach conceptualizes institu- cover a variety of non-market forms of coordina-
tions in a more Weberian fashion as patterns of tion, in terms of industrial districts (e.g., the ‘‘Third
legitimate authority that give rise to different forms Italy’’), highly coordinated systems (e.g., coordination
of coordination within and across business firms. via ownership and horizontal alliances, such as
Comparisons of East Asia emphasized differences in Japanese keiretsu), collaborative systems (e.g., Germany
how business groups in Japan, South Korea and based on sectoral associations), or state organized
Taiwan evolved in relation to state and its efforts to systems (e.g., France) with strong ownership control
establish or maintain legitimate political rule among large firms, but supported through state
(Biggart, 1991). Some authors differentiated coor- subsidies for credit. These are linked to a more
dination along horizontal and vertical dimensions varied notion of competitive advantage based on
in order to identify at least three types of capital- the degree of innovation, as well as the capacity for
ism: alliance capitalism, dirigiste capitalism, and flexible adaptation.
familial capitalism (Orru, Biggart, & Hamilton, National business systems are argued to have
1997).5 Richard Whitley incorporated these forms path-dependent features rooted in their institu-
of authority into a systematic approach to compar- tional coherence and strategic complementarities
ing ‘‘national business systems’’ as ‘‘distinctive for firms. However, Whitley is careful to distinguish
patterns of economic organization that vary in their the institutional environment (e.g., states, financial
degree and mode of authoritative coordination of systems, skill development, and trust and authority)

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Comparing capitalisms Gregory Jackson and Richard Deeg
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from the internal aspects of firm organization. Thus just as sectoral differences in technology and market
conditions give rise to differences in industrial order within
Whitley (2005) points to varying degrees of diver-
countries, national differences produce different govern-
sity in internal firm organization within national ance regimes within sectors. Differences in governance
business systems, arguing that the character of the within sectors are often recognizable as national differences
state determines the degree of institutional coher- in that they follow a similar logic across sectors.
ence and homogeneity in firm behavior across the
national economy. Liberal states act as market Later comparisons used the collection of govern-
regulators with minimal intervention, allowing ance mechanisms to identify the distinctiveness or
firms to be more diverse in their strategies. Thus even uniqueness of different national models
Silicon Valley firms, deeply enmeshed in various (Crouch & Streeck, 1997). When national typolo-
forms of network coordination (Saxenian, 1994), gies are employed, these tend to be derived from
coexist with vertically integrated manufacturers in empirical and inductive methods for grouping
Detroit producing within a nexus of arm’s length countries, rather than economic theory or ideal
market relationships. Meanwhile, promotional types. For example, Amable (2003) undertook a
states tend to homogenize firm strategy because cluster analysis of institutional indicators related to
they direct economic activity and organize interest product market competition, labor market institu-
groups in order to achieve either developmental tions, finance/corporate governance, social protec-
goals (developmental state) or social harmony tion/welfare state, and the education/training
(business corporatist state). Consequently, the system. This yielded five types or clusters of
emphasis on path dependence is counterbalanced capitalism: market-based, social-democratic, conti-
to some extent by seeing the degree of institutional nental European, Mediterranean, and an Asian
constraint as variable cross-nationally and over model.7 Unlike the traditional variable-based
time. So change is possible, but within some approaches of IB, cluster analysis has an inductive
broader boundaries – which resonate with recent emphasis on how variables combine at the level of
notions of institutional meta-traditions (Sorge, national cases, and links these cases with different
2005). performance outcomes empirically. Here CC has
A final CC approach sees institutions in terms of moved beyond the comparison of firm strategies in
mechanisms or processes of governance (Crouch two or more countries toward statistical or set-
& Streeck, 1997; Hollingsworth & Boyer, 1997; theoretical analyses that directly link institutions-
Hollingsworth, Schmitter, & Streeck, 1994). Institu- as-configurations to diverse economic outcomes
tions are compared in terms of how they embody (see Boyer, 2004; Kogut & Ragin, 2006).
different generic coordination mechanisms, such The concept of institutional complementarity has
as markets and hierarchies (Williamson, 1975). This remained important within the governance
approach addresses additional coordination mecha- approach, but applied in a less rigid way and linked
nisms, which are either ignored or conceived to a wider notion of comparative institutional
differently in the IB literature, such as social advantage. Comparative institutional advantage
networks (Powell, 1991), community norms (Aoki, was initially studied in terms of the production
2001), associations (Streeck & Schmitter, 1985), and strategies of firms, such as differences between
state intervention (Shonfield, 1965). These six basic Fordist mass production and alternative patterns of
governance mechanisms describe the degree to flexible specialization or diversified quality produc-
which power is distributed horizontally or exercised tion. Later, Boyer (2004) utilized set theoretical
vertically (as in Whitley) and the degree to which analysis based on qualitative comparative analysis
self-interest vs social obligations (each reflects a to demonstrate a link between successful ‘‘technol-
different ‘‘logic of appropriateness’’) governs eco- ogy-led growth regimes’’ in ICT sectors and at least
nomic actors.6 three distinct clusters or institutional configura-
Unlike other CC approaches, the governance tions, including a Scandinavian cluster. Cross-
approach has increasingly moved away from utiliz- country differences are again reflected in sectoral
ing broad national-level typologies. Early studies performance profiles, but produce some different
compared industrial sectors rather than nations substantive results in terms of country patterns and
(Hollingsworth et al., 1994), and often found the particular sets of complementarities argued to
substantial variation across sectors within single drive performance. The governance approach
countries. Yet Hollingsworth & Streeck (1994: 272) further stresses the distributional consequences of
conclude that capitalist diversity. For example, national corporate

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Comparing capitalisms Gregory Jackson and Richard Deeg
549

governance models have different normative con- develop different internal capabilities and founda-
ceptions of who should control the corporation, tions for competitive advantage across countries.
different distributions of value-added among the For example, strong insider control and blockhold-
corporate stakeholders (De Jong, 1996; Dore, 2000), ing owners may facilitate strategies based on
and broader differences in the levels of inequality investment in specific types of human assets
(Rueda & Pontusson, 2000). Countries such as because these owners may better protect the unique
Sweden, Germany, and Japan were able to achieve contributions (firm-specific skills, dedicated capital,
excellent economic performance and maintain etc.) that each type of actor must make (Gourevitch
much more egalitarian patterns of income distribu- & Shinn, 2005).
tion than Anglo-Saxon models of capitalism. Thus Second, the CC literature conceptualizes various
different systems of capitalism may produce differ- institutions within an economy as being interde-
ent levels or patterns of social exclusion. pendent and often complementary. This approach
In sum, the CC literature encompasses diverse is fundamentally different from IB approaches
approaches to institutions, the dimensions of based on institutions as single variables, because it
comparison, and the resulting comparative typo- shows how different domains of the economy are
logies, which range from dichotomous ideal types functionally interrelated within one another, and
to seeing each national case as a unique configura- give rise to specific, non-random configurations of
tion. More recent literature has also continued to capitalism. Complementarity may be defined as
identify additional dimensions and typologies situations where the difference in utility between
when looking at transitional economies (Holscher, two alternative institutions U(x0 ) U(x00 ) increases for
Tomann, Lane, & Myant, 2007). Other influential all actors in the domain X, when z0 rather than z00
theorists prefer to approach comparative institu- prevails in domain Z, and vice versa. If these
tional analysis without aiming at broad national conditions, known as ‘‘super-modularity’’, exist,
typologies, but developing middle-range theoreti- then x0 and z0 (as well as x00 and z00 ) complement
cal models that map diversity within domains and a each other and constitute alternative equilibrium
limited number of bilateral linkages between them combinations (Aoki, 2001; Milgrom & Roberts,
(Aoki, 2001). While not trivializing these differ- 1990). Complementarities do not imply economic
ences (see Jackson & Deeg, 2006), we argue that efficiency in any absolute sense, but a process of
several common features of the CC approach can be interaction and mutual reinforcement. In terms of
identified. research methodology, CC studies often rely on
First, institutions influence the identity and comparisons of how firms perform or adjust to
interests of economic actors, and hence the devel- similar pressures in two or more national ‘‘cases’’.
opment of firm resources and capabilities. Unlike For example, different forms of employee voice
the emphasis on institutions as constraints as in IB, may impact on firm-level innovation patterns
this literature links a supply-side theory of institu- (Wever, 1995) or strategies of outsourcing to over-
tions to resource-based theories of the firm (Barney, seas production plants (Berger and The MIT
1991) or economic theories of the firm that stress Performance Center). Likewise, institutional inter-
tacit skills based in informal organization, routines, actions have been studied using methods of set
etc. (Nelson & Winter, 1982; Penrose, 1959). Start- theoretical methods or cluster analysis to examine
ing with the embeddedness of actors in a particular outcomes in relation to different empirical combi-
social context (Granovetter, 1985), CC scholars pay nations of institutions (Boyer, 2004).
close attention to how private economic actors Third, the CC literature treats institutional diver-
(e.g., firms, networks, associations) are socially sity as having comparative institutional advantage in
organized and interact within one another – a supporting different sorts of economic activity.
‘‘thick’’ view of institutions that takes account of Rather than focusing on the degree of fit or
the diverse identities and interests of actors across adaptation of firms to any given institutional
countries, including investors, employees, unions, environment, CC analyses the concrete institutions
managers, firms, and business groups (Redding, themselves in describing the affinities between
2005). Firms are seen not as unitary actors, but different institutions and patterns of strategy and
as coalitions among different types of investors, performance. Competitive advantage is described
employee and manager, whose interactions are in relation to business strategies and production
shaped by various institutions outside the firm niches described by variations in price, quantity
(Aguilera & Jackson, 2003). In turn, firms may and quality, for example, mass vs customized

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
550

product market strategies (Herrigel & Wittke, 2005; seemingly opposite approaches to studying institu-
Sorge, 1991).8 Others frame competitive institu- tions. Table 3 summarizes and contrasts these main
tional advantage in terms of differences between features.
incremental innovation and radical innovation IB sees institutions from a firm-centered perspec-
strategies (Lehrer, 2000; O’Sullivan, 2000; Vitols, tive that emphasizes how institutions constrain
2002). Despite some criticism of this dichotomous MNE strategies by creating costs for market-
approach to patterns of innovation (Taylor, 2004), oriented exchange or the transfer of home country
other related typologies and methods have pro- practices. Where institutions are too ‘‘distant’’ or
duced encouraging empirical results (Boyer, 2004). ‘‘underdeveloped’’, MNEs must substitute their
The CC literature has also extended beyond the own resources and power for control in order to
firm to address questions of macroeconomic per- adapt and actively manage the institutional envir-
formance, growth, unemployment, inequality, and onment. CC scholars view institutional effects
the welfare state (Hall & Gingerich, 2004; Rueda & more broadly as influencing actors’ identities,
Pontusson, 2000). interests, and capacities for action. Institutions
Fourth, the CC approach sees institutional shape the supply of inputs, such as different sorts
change as being a path-dependent process (Arthur, of finance or human capital, collectively available
1989). Contrary to notions of convergence on a to firms. Institutions also shape the internal
single model of best practice, the CC literature governance of firms by shaping the power of
stresses how common competitive pressures are different stakeholders and capacity for market and
refracted through different sets of institutions. non-market forms of coordination across different
Institutional change is therefore slow and incre- functional domains. Consequently, institutions
mental, based on the existing institutional endow- endow firms with different capabilities and a
ments. In the CC approach, path dependence relates fundamental diversity.
to complementarity-generated advantages of exist- These different theoretical perspectives on insti-
ing institutions, and the high costs to change these tutions have strong methodological implications
even when adapting to new challenges. Of course, related to studying cross-country differences. IB
path dependence may have other roots in culture or studies institutions as variables that impact on
political institutions (Pierson, 2000), but comple- firms, and measures institutions in terms of broad
mentarity adds a further dimension to this story differences of degree. For example, IB studies often
since institutional change will alter the functional focus on MNEs, usually from a single home
interdependence of institutions in different country, and how these adapt to a wide range of
domains, either making change more difficult or host country environments, which are measured
leading to knock-on effects from initial changes. along a particular dimension. CC scholars approach
institutions in the context of national or subna-
RECONCILING INSTITUTIONAL DIVERSITY tional ‘‘cases’’ where institutions form an inter-
AND IB dependent whole. This literature stresses dif-
The preceding sections have demonstrated that the ferences in kind, and the units of analysis are
IB and CC literatures have divergent and even typically firms within two or more particular contexts,

Table 3 Two views of institutions compared

Literature View of institutions Country patterns/institutional Comparative advantage Institutional change


configurations

IB Constraints on Variables that impact on individual Fit of strategy to cost context Path dependence due to
rational action firms Firm performance vested interests or
Countries as differences of degree cultural inertia
(e.g., developed vs emerging,
distance)
CC Influencing actors’ Cases of national economies that Different sources of Path dependence due to
identities and impact the dominant characteristics of comparative advantage complementarities
interests firms within a population Firm and national economic
Countries as distinct ‘‘varieties’’ of performance
advanced capitalist economies

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Comparing capitalisms Gregory Jackson and Richard Deeg
551

such as the Japanese and German economies or (in his case, revenue management systems). One
other broad ‘‘types’’ of economy. CC scholars path was the evolutionary capability regime (Lufthansa),
compare how firms in different countries adjust to where firms acquire new capabilities incrementally
similar pressures in order to explore to what extent within the bounds of long-term employment and
institutional differences impact on strategy. For existing skills; the other is a revolutionary capability
example, Goyer (2006) compares how large firms in regime (British Airways), where firms acquire cap-
Germany and France responded to various pres- abilities in a discontinuous manner that involves
sures for corporate governance reform, including high employee turnover and reorganization
demands of foreign investors. Owing to differences imposed by managers. Since both regimes rely on
in the forms of worker power and their relationship complementarities among several institutions for
to management, German firms responded to these success, the mixed strategy of Air France led to an
pressures mostly by increasing corporate transpar- inferior outcome.
ency to external investors, whereas French firms In the remainder of this section, we argue that
responded with more radical corporate reorganiza- these fundamental differences between the IB and
tions that enhanced profitability. Conversely, the CC approaches to institutions also suggest several
choices of foreign investors were also conditioned opportunities for cross-fertilization in addressing
by these national institutions. Whereas foreign several major substantive debates relevant to both
hedge and mutual funds preferred investment in literatures. Both fields of study face a similar dual
French firms because higher managerial autonomy task of understanding how MNEs strategically
led to more rapid improvements in share perfor- engage in economic, financial, and organizational
mance, pension funds showed no such preference linkages across countries, as well as how they adapt
because their long-term investment strategies are to the diversity of institutions across those coun-
more compatible with German institutions. tries and regions. Here the CC approach has much
Further differences concern issues of competitive to offer IB in terms of understanding institutional
advantage and institutional change. IB sees compe- diversity, but equally the internationalization of
titive advantage as a firm-level phenomenon that firms and markets is actively transforming the
results from a ‘‘fit’’ of strategy to an institutional nature and profile of institutional diversity
context, resulting in higher performance. Firms described in the CC literature. Consequently, the
undergo isomorphic adaptation to institutions or CC approach needs to develop a more dynamic
compensate for institutional deficiencies. Institu- view of institutions and firms that is better
tions are largely taken as given, determined by equipped to understand the evolving interdepen-
exogenous political or cultural forces. Hence the IB dencies between them in an international context
literature has tended not to focus on questions of (Sorge, 2005). Here we take two sets of examples in
institutional change. The CC literature sees compe- order to develop this point further: MNE strategies
titive advantage in terms of resources and capabil- and institutional change.
ities, as in the resource-based view (RBV) of the
firm. However, CC stresses that resources are not MNE Strategies
only firm-specific and idiosyncratic as in RBV, but MNEs seek competitive advantage through at least
institutionally shaped capabilities for different sorts three distinct types of strategy:
of strategy and forms of coordination. Institutions
(1) aggregation of activities based in a home
shape capabilities across several interrelated
country or the export of home country practices
functional domains, such as finance, corporate
abroad to achieve standardization and econo-
governance, industrial relations, skill formation,
mies of scale and scope;
innovation, and so on. This theory suggests many
(2) adaptation to diverse host country environ-
pathways to high performance based on alternative
ments; or
constellations of institutions, given that different
(3) arbitrage through selective specialization of
market and non-market forms of coordination will
activities in different locations (Ghemawat, 2007).
lead firms to have different competitive strengths
and weaknesses in pursuing different sorts of As discussed in the second section, IB scholars
production strategy or patterns of innovation. For have shown that the success of different strategies
example, Lehrer (2000) studied three European depends on the specific types of national insti-
airlines and found two divergent but equally tution, such as the degree of development (Lee
successful paths to developing new firm capabilities & Beamish, 1995) or ‘‘distance’’ from the host

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
552

country (Ghemawat, 2001). While IB explores depends upon particular functional linkages with
single institutional effects ceteris paribus and other institutions.
achieves a high level of theoretical generalization, Second, institutional diversity impacts on the
the CC approach stresses that MNEs are affected by ability of MNEs to adapt their strategy to host
the whole institutional configuration of host country institutions or the expectations of interna-
countries and consequently that the results of tional investors. Home country institutions con-
such generalizations may be quite misleading strain adaptation owing to the influence of
owing to the interactions with other complemen- regulations and norms, as well as the distribution
tary institutions. of power among different stakeholders. For exam-
We argue here that a greater focus is needed on ple, as stakeholder-oriented firms from Germany
country-specific aspects of MNE strategies, for undergo internationalization, they tend to adapt to
example by comparing specific countries such as Anglo-American shareholder-oriented institutions
China or South Korea or different types of country through legitimacy-seeking symbolic management
based on their clusters of institutional character- and decoupling of shareholder-value practices from
istics as identified in the various CC approaches. other ‘‘core’’ stakeholder-oriented practices, such as
Along these lines, we argue that the particular types those related to human resource management (Fiss
and interactions of home and host country institu- & Zajac, 2004). Meanwhile, the strong institutio-
tions influence the form and effectiveness of MNE nalization of shareholder-value in US MNEs leads
strategies mentioned above: agglomeration or these firms to cope with German stakeholder-
export of practices, adaptation, and arbitrage. oriented institutions largely through institutional
First, the CC literature suggests that MNEs cannot avoidance and imposition of home country prac-
easily export ‘‘best practices’’ to the degree that tices outside the boundaries of home country
they conflict with, or lack complementary inputs institutions (Edwards & Ferner, 2002). Thus, despite
from, the institutional environment of a host the same degree of ‘‘distance’’, the particular types
country (Streeck, 1996).9 Rather than seeing diffu- of home country institution lead to very different
sion in relation to generic degrees of difference, as strategic adaptations on the part of MNEs.
in IB, the CC literature stresses the particular This perspective suggests that institutions shape
constellations of differences. For example, Geppert, the divergent interests and power relationships
Williams, & Matten (2003) show that German firms among the different units within an MNC. An
face greater barriers than UK firms in exporting a intensive study of one MNE by Kristensen and
global MNC strategy based on standardized pro- Zeitlin (2005) showed that local actors (production
ducts and processes. German firms’ home country units) sought to exploit the comparative institu-
strategies are based strongly on collective inputs, tional advantages residing in their different home
such as strong apprenticeship-based skill forma- locations, such as those related to factor cost,
tion, which are typically absent in host countries. transaction costs or innovation capacity as identi-
Meanwhile, UK firms base their strategies on a fied in the CC literature. Successful use of local
strong use of markets for external resources or high institutions enabled these units to compete more
internalization of firm-specific resources. Extending effectively within the firm for assignments and
this argument, firms from CMEs may be less able to with outside competitors, that is, they were a
export their home country practices than firms source of competitive advantage. Managers in the
from LMEs. Equally, however, the same logic of home country, meanwhile, were rooted in a
complementarities may even apply within the different institutional context that led them to
category of LME countries. For example, efforts by pursue different strategies for the firm, rather than
US MNEs to transfer their workplace diversity adapt to these local settings. The resulting clashes
policies (race and gender) to UK subsidiaries created endemic potential for strategic conflict, and
resulted in formal adoption but little real change inhibited organizational integration. In this scenar-
in outcomes owing to the conjoined effects of io the firm becomes a series of multiple but linked
various UK institutions surrounding human strategic games between local units or subsidiaries
resource management, including divergent norms and home country headquarters. This outcome also
embedded in legislative and regulatory institutions suggests the impact of institutions on particular
(Ferner, Almond, & Colling, 2004). Thus despite the modes of entry into foreign markets, in this case
US and UK being quite similar countries in cultural through mergers and acquisitions. Since M&A has
and institutional terms, the success of diffusion become an increasingly common mode of entry,

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
553

such ‘‘clashes’’ between different strategic logics change in their fundamental product strategies
rooted in different national institutional settings driven by high quality, product diversity, and
are likely to increase within MNEs. incremental innovation (Börsch, 2007). This line
Third, institutional diversity shapes the potential of argument suggests that internationalization may
for MNE strategies based on arbitrage between reinforce existing national institutional arrange-
different institutional systems. In pursuing arbit- ments and even intensify concentration on specific
rage, an MNE may locate different functional industries or market segments. Other arbitrage
activities in different locations in order to exploit strategies may compensate for weaknesses in existing
the competitive advantages of those institutions. national institutions, either by exit or by the
The embeddedness of MNEs in their home country creation of new strengths. For example, drawing
institutions has a critical influence on the develop- on Hall and Soskice, Witt and Lewin (2007) argue
ment of distinctive competences and capabilities that the slower pace of institutional change among
(Guillén, 2005; Morgan & Whitley, 2003). MNEs CMEs may be associated with higher rates of
may therefore focus certain activities in their home outward foreign direct investment as firms seek to
country in order to utilize certain institutional ‘‘escape’’ institutional constraints of the home
resources. For example, firms in countries with a country. Notably, the effects of such compensating
strong capacity for incremental innovation and strategy may be ambiguous and either stabilize or
diversified quality production, such as Germany or undermine existing national institutions depend-
Japan, may be more likely to retain manufacturing ing on whether new complementarities arise based
in their home country than firms in more LMEs, on new bundling of institutional practices that
because the innovation advantages of the former span across national boundaries (Crouch, 2005).
grow directly out of control over the manufacturing Applying the CC approach to issues of MNE
process. Conversely, MNEs may locate other activ- strategy thus underlines the importance of issues of
ities in host countries with stronger institutional institutional complementarities – that is, the func-
supports for those activities. In this way, arbitrage tional interactions between institutions in a parti-
strategies may lead to new and broader sets of cular case, rather than single institutional variables
institutional complementarities by drawing strate- or global measures of institutional development or
gically on elements of geographically separated distance. The same institution may have very
institutional systems. This argument contrasts with different or even opposite effects when interacting
much of the IB literature, which implies that MNEs with different configurations of institutions. For
should focus on reducing the transaction costs that example, strong employment protection law may
arise from institutional distance or selecting coun- raise costs for businesses on average, but will have
tries that are ‘‘most similar’’. Rather, MNEs may different impacts on human resource strategies
gain advantage by explicitly seeking out ‘‘distant’’ depending upon other complementary institutions.
institutional contexts that favor different sets of Export-oriented German machine tool firms, for
activities or firm capacities (Whitley, Morgan, Kelly, example, meet cost pressures by using other
& Sharpe, 2003). For example, despite their very institutions to support incremental innovation
different institutional environments, German phar- based on highly skilled labor, and by substituting
maceuticals firms have located substantial R&D capital for labor. Conversely, workers will invest in
activities in more LMEs, such as the US, in order to such industry-specific skills only if they have a high
take advantage of comparative institutional advan- level of job security (Culpepper, 2005; Hall &
tages in science-based radical innovation and Soskice, 2001; Iversen & Soskice, 2006; Thelen,
thereby compensate for some weaknesses of Ger- 2004). Yet in other contexts lacking complemen-
man institutions (Lane & Probert, 2006). tary institutions, employment protection laws may
The consequences of institutional arbitrage be associated with declining competitiveness or
remain an under-researched topic. Some arbitrage different sorts of effect. For example, high employ-
strategies may defend comparative institutional ment protection in Spain is associated with high
advantages by preserving the core competences use of labor market segmentation by MNEs and
centered on home country institutions. For exam- strong use of a contingent labor force (Aguilera,
ple, German firms have sought greater access to 2005; Guillén, 2005). In sum, understanding insti-
international capital markets through symbolic tutional complementarities has far-ranging conse-
management and communication with investors, quences for a number of empirical issues of interest
but have been much more reluctant to adopt to IB scholars, such as the impact of the rule of law

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
554

(Pistor, 2005), work practices (Streeck, 1996), or creation and change of institutions. It is here in
corporate finance (Zysman, 1994). particular that the resource-based view of the firm
One criticism of the CC approach is a tendency to found in some of the IB literature, with its emphasis
see firm strategy as being too strongly determined on managerial (firm) autonomy and capacity for
by institutional structures such that strategies creative use of institutions, can be joined with
within a national system tend to become very recent trends in the CC literature to construct an
homogeneous (Crouch, 2005). The CC focus on institutional approach that incorporates insights
national-level institutions has led to a neglect of into the constraining effects of institutions with
meso-level mechanisms within organizational insights into how actors can circumvent or recast
fields that link institutions and organizations, and those institutions toward new ends. Second, a
actually create isomorphic pressures.10 Here IB growing literature has begun to rethink the theore-
scholars have important contributions to make to tical role of institutional complementarity and the
debates with CC, since MNEs do not slavishly nature of institutional linkages.
follow institutional constraints and opportunities. Given its stress on institutional continuity, the
Rather, firms respond strategically towards institu- CC literature has viewed individual actors, espe-
tions in a number of ways (Oliver, 1991). For cially at the firm level, as institutional ‘‘takers’’. In
example, MNEs may actively seek to compensate the last few years this bias has been challenged from
for institutional deficits by developing their own within the CC literature (Campbell, 2004; Crouch,
firm-specific internal capacities (Khanna & Palepu, 2005; Hancké & Goyer, 2005; Morgan, Whitley, &
2006). Likewise, as noted in the case of arbitrage Moen, 2005; Streeck & Thelen, 2005; Vogel, 2006).
above, MNEs may strategically locate different parts Rather than see institutions as equilibria for firms
of their value chain in different countries in order within a matrix of incentives and constraints, firms
to create firm-specific combinations of inputs from can employ institutions as ‘‘resources’’ to solve
different national business systems, such as science- coordination problems or develop specific capaci-
led R&D from the US and incrementally oriented ties. In this perspective economic actors are more or
product development and production from Ger- less continuously experimenting with novel uses
many (Vitols, 2002). and combinations of institutions. When existing
institutions become too constraining, actors will
Institutional Change seek to exit or change them. These processes are
As noted above, both the IB and CC literatures have captured well in a recent study of the internatio-
stressed the view that institutions exhibit path nalization strategies of UK and German corporate
dependence, and national systems tend to be stable law firms (Morgan & Quack, 2005). In both
or slow to change. In rebutting theses of cross- countries firms had to reinterpret and redefine the
national convergence, the CC literature sought to institutional context (e.g., professional standards)
explain aspects of continuity with arguments in which they were embedded in order to overcome
ranging from the imperfect nature of market constraints to cross-border expansion and mergers
competition (Boyer, 2004) to the observation that with foreign law firms. In the 1990s, firms in both
institutions adopted from abroad are always ‘‘trans- countries pursed a strategy of gradual or organic
lated’’ into the local context (Campbell, 2004; internationalization. This later gave way to numer-
Sorge, 2005). However, this emphasis resulted in a ous mergers between large German and UK law
major criticism of the CC literature for its failure to firms, creating new global law firms with distinct
develop a more dynamic view of how institutions capacities to operate within each national institu-
originate and evolve (Deeg & Jackson, 2007). In tional context while creating new capabilities in
other words, a new agenda is emerging to under- international legal services. Casper and Kettler
stand the dynamic relationship between the repro- (2001) find similar processes of firm-led institu-
duction and change of national institutions, on the tional change in a comparison of the UK and
one hand, and processes of international competi- German biotech sectors.
tion and international institution building, on the The CC literature has also sought to identify
other. specific patterns of change. At least three routes of
How has the CC literature responded to the change might be followed: actors might defect from
challenge of institutional change? We can divide behaviors prescribed by institutions (i.e., ignore
this response into two segments. First, efforts them); they can reinterpret existing institutions,
are being made to introduce more agency into the leading to new practices associated with the

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
555

institution while leaving it formally intact; and subnational institutions. For example, the success
actors can change institutions through a formal of clusters within LMEs such as the US derives in
process of reform (Hall & Thelen, 2005). Others have part from modes of local coordination in places like
identified specific mechanisms of incremental Silicon Valley that are difficult – but not impossible
institutional change, such as ‘‘layering’’, in which – to construct within this national institutional
change is accomplished not by eliminating existing context (Casper & Kettler, 2001). Clusters may also
institutions but by creating new, alternative ones develop in even less favorable institutional contexts
that enable actors to pursue different strategies in more CMEs (e.g., software and telecoms around
(Streeck & Thelen, 2005). For example, in several Stockholm or biotech firms around Munich)
European nations laws were enacted in the 1990s through institutional building at the local level,
giving firms the choice of using US-GAAP or the IAS and strategic deviation from predominant patterns
accounting standards in order to facilitate listing on of organization (Casper & Whitley, 2004). These
foreign exchanges. As this gained acceptance, the new economies succeeded, in part, because they
EU was later able to mandate the use of interna- utilized inputs from incumbent sectors that were
tional accounting standards (IAS) for all listed firms more compatible with the national institutional
in the EU (Posner, 2005). context, utilizing these for new and creative
This emerging view of institutions does not purposes. While firm heterogeneity was always, to
dismiss the constraints placed on action by them. one degree or another, a feature of national models,
Rather, it is recognized that institutions do not fully the growth of MNEs does imply that the formal
determine or circumscribe action. Similar points mechanisms of institutionalization at the national
have been emphasized in some IB literature. For level may become more fragmented, and lead to an
example, MNEs engage in direct political pressure overall increase of diversity, particularly as more
to change institutions and suggest diverse patterns coordinated systems liberalize (Sako, 2005).
of change based on the interactions of MNEs with The possibilities for diversity and recombination
diverse political systems (Henisz & Zelner, 2005). of institutional elements within and between
Likewise, MNEs may learn about institutions national systems have also led to re-examination
(Delios & Henisz, 2003), and sometimes combine of the concept of institutional complementarities.
practices from different institutional settings by Institutional complementary was often interpreted
transplantation or reverse diffusion (Edwards, as implying that change will be incremental and
Almond, Clark, Colling, & Ferner, 2005). In a path dependent, because complementarities gener-
similar way, CC scholars have begun to stress how ate increasing returns for firms. Hence piecemeal
the ‘‘gap’’ between institutionalized rules and borrowing of institutions may fail to generate the
situational demands is the space in which actors’ same sorts of efficiency associated with the initial
choices may lead to innovative changes or institu- model (Streeck, 1996). However, if a new practice or
tional entrepreneurship (Crouch, 2005). Competi- institution becomes established, complementarities
tive challenges to MNEs induce regular may generate a compounding effect on the
experimentation with the institutions that govern surrounding institutions, leading to a rapid collapse
them, leading to marginal adjustments that or erosion of other, linked institutions (Lane, 2003).
strengthen the underlying institution and restore While national capitalisms certainly follow dis-
competitiveness, or alter, marginalize, or eliminate tinctive ‘‘paths’’ in a general sense of historical
existing institutions. legacies or meta-traditions (Sorge, 2005), placing
As a result, CC studies now seek to conceptualize too much emphasis on the coherence and com-
national models as having different degrees of plementarities among institutions may lead to
heterogeneity among firms – even in countries overestimating the degree of stability (Crouch,
such as Japan that were known for their very Streeck, Boyer, Amable, Hall, & Jackson, 2005).
uniform and homogeneous sets of business prac- More historically oriented CC work has suggested
tices (Aoki, Jackson, & Miyajima, 2007; Jacoby, that broad types of capitalism are far more dynamic
2004). For example, a growing trend has been the than previously assumed. In particular, different
bifurcation in national patterns of corporate capitalisms were not created as coherent wholes,
finance between large internationally oriented but were the result of political contention (Vogel,
and small firms or different industrial sectors (Deeg, 2006) or unintended results of piecemeal develop-
2005; Schmidt, Hackethal, & Tyrell, 2002; Vitols, ment over long periods of time (Aoki, 2001; Streeck
2005). This perspective harks back to past studies of & Yamamura, 2001). The various institutions

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
556

within a national system are ever only partially governance, innovation and the cross-national
reconciled with one another. Likewise, recent diffusion of business practices.
studies of contemporary transformations of The CC approach suggests that IB could draw
national capitalisms suggest a scope for ‘‘hybridiza- upon a much richer understanding of institutions
tion’’ – a dynamic mixing and matching of and their effects, thereby strengthening its links
institutional elements that changes the character- with other fields of scholarship. A central message
istic linkages and nature of complementarities here is the importance of looking at institutions
between institutional elements (Aoki et al., 2007; within particular combinations or configurations,
Djelic, 1998; Zeitlin, 2000). and exploring the nature of institutional comple-
This work resonates with some recent IB scholar- mentarity and conflicts within those contexts. The
ship on international diffusion. For example, methodological consequences of this move would
studies on the adoption of shareholder value be considerable. It suggests that IB must take
practices by German firms suggest that different stronger account of the country-specific configura-
sorts of firm are more or less likely to adopt them, tions, rather than resorting to broad generalizations
and will often adapt them to the German context about home country and host country effects
(Buck & Shahrim, 2005). If institutions are seen as without regard to the specific countries. In looking
resources that circumscribe but do not determine at particular cases or sets of cases in more detail,
firm strategy, then complementarity must also be new methods are needed to better conceptualize
analyzed at the level of firm-specific bundles of and measure the combinations and interactions of
practices (Fiss, 2007) with regard to the range of institutions in different contexts – rather than
diversity among firms within a national setting and using linear combinations of indices or traditional
the possibilities for institutional arbitrage created factor analysis. Here we have suggested the poten-
by MNEs (Kristensen & Zeitlin, 2005). Thus the CC tial importance of set-theoretical approaches that
literature is coming to recognize that the nature of see organizations and institutions in terms of
linkages among institutions is far more variable various ‘‘bundles’’ of traits, which would be con-
than long assumed. One implication is that better sistent with the notion of ‘‘types’’ of capitalism or
middle-range theories are needed, linking particu- theories of institutional complementarity (Fiss,
lar pairs or sets of institutions (Aoki & Jackson, 2007; Kogut, MacDuffie, & Ragin, 2004; Kogut &
2008), in order to deconstruct the broader com- Ragin, 2006).
plementarities hypothesized in some national Despite the important contributions that CC
typologies, such as those based on CME and LME approaches have to make for IB scholars, we
economies. caution equally a growing challenge in under-
standing not only how institutional diversity
impacts on firms, but also how IB activity influ-
CONCLUSION ences patterns of institutional change. In particular,
This paper has contrasted two approaches to internationalization has changed the characteris-
understanding the impact of institutional diversity tics, boundaries and internal coherence of national
on business, based on the IB and CC literatures. ‘‘types’’ or models of capitalism. The response of
These differences reflect different understanding of CC scholars has been to develop a less rigid view of
institutional embeddedness, differences between how institutions influence firm strategies and a
variable or case-based methodologies, distinct more empirical approach to understanding com-
views of competitive advantage rooted in ‘‘organi- plementarities in light of possible new hybrid forms
zational fit’’ or ‘‘comparative institutional advan- of organization. This literature has some important
tages’’, and different emphasis on institutional commonalities with themes of the IB literature,
change. We have stressed some specific contribu- which has emphasized the range of strategic
tions of the CC literature regarding how insti- responses of MNEs to institutions. Now empirical
tutions influence the capabilities of firms, and a research must substantiate this emerging agenda of
case-based approach to comparison that takes dynamic institutional analysis that brings together
account of interdependencies and complementa- a stronger focus on firm-level IB strategy with a
rities between different institutions. CC thus has case-based analysis of institutions in the tradition
much to offer in terms of understanding how of the CC literature. This approach will be particu-
institutions impact on a wide range of issues that larly important in understanding the emergence of
are central to IB scholars, such as MNE strategy, new ‘‘types’’ of capitalist economy in the transition

Journal of International Business Studies


Comparing capitalisms Gregory Jackson and Richard Deeg
557

economies of central and eastern Europe, as well as of firms. Dirigiste capitalism, as in France and South
China, whose very institutional development has Korea, has institutional domains connected by the
been strongly shaped by the activities of MNEs subordination of the private economy to centralized
(Holscher et al., 2007; Stark & Bruszt, 1998). political influence. Finally, family capitalism, such as in
Italy or Taiwan, is typified by smaller firms that are
ACKNOWLEDGEMENTS strongly segmented across the lines of personalistic
We thank Ruth Aguilera, Keith Brouthers, Tony family networks.
6
Edwards, Anthony Ferner, Witold Henisz, Gary Herrigel, Some authors in this approach take an even more
Mary O’Sullivan, Richard Whitley, and two anonymous explicitly constructivist approach to institutional
reviewers for comments at various stages. choice and change (Campbell, 2004; Herrigel, 1996;
Sabel, 1994).
NOTES 7
However, Boyer (1997: 75) argues that ‘‘the
1
‘‘Logic’’ means the typical strategies, routine process of institutionalization reflects the social and
approaches to problems and shared decision rules political conflict particular to each country’’ and
that produce predictable patterns of behavior by thereby identifies four major variants of capitalism:
actors within the system. market-oriented (Anglo-Saxon countries), Rhineland
2
While MNEs prefer institutions that are largely (Germany, Japan), statist (France, Italy), and social
stable and pose few hazards for their business activities democratic (Sweden, Austria).
8
(Brouthers & Barmossy, 1997), firms may also engage For example, German firms tend to specialize in
in negotiations between investors and state authorities high-quality markets, producing lower volumes of
to change institutions (Henisz, 2000). specialized products that are relatively insensitive to
3
For example, Hofstede has stressed five areas: small differences in price. This ‘‘high-road’’ niche not
power distance, individualism, masculinity, uncer- only accommodates the constraint of high and uni-
tainty avoidance, and recently long-term orientation. form wages in Germany, but also makes use of
More recently, Schwartz has identified six areas: collective inputs such as the broad occupational
conservatism, affective and intellectual autonomy, training of blue-collar workers and cooperative institu-
hierarchy, mastery, egalitarian commitment, and tions of co-determination (Streeck, 1992).
9
harmony. Institutional diversity has similar impacts on the
4
The authors differentiate only briefly between two potential for reverse diffusion, whereby host country
subtypes of CME: in industry-coordinated economies, practices are imported to the home country by an
such as Germany, coordination takes place within the MNE, often undergoing subsequent adaptation or
industrial sector or branch, whereas in group-coordi- ineffective implementation owing to lack of institu-
nated economies, such as Japan or South Korea, tional support (Edwards & Ferner, 2004).
10
coordination takes place across groups of companies. Schneiberg and Clemens (2006) outline a number
These subgroups mirror a distinction between associa- of such linkages in organizational sociology, including
tions versus networks found in the ‘‘governance ties to regulating bodies, certification or legitimation
approach’’ described below. by institutional authorities, conduits for institutional
5
Alliance capitalism, such as in Germany and Japan, models (e.g., inter-organizational networks), and
involves elaborate horizontal linkages between institu- proximity to institutional pressure (e.g., visibility or
tional domains, and cooperation across the boundaries resource dependence).

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United States. Cambridge, MA: Harvard Business School Press.
Whitley, R. 1999. Divergent capitalisms: The social structuring and
Gregory Jackson received his PhD in Sociology
change of business systems. Oxford: Oxford University Press. from Columbia University. He is currently Reader
Whitley, R. 2005. How national are business systems? The role of in Comparative Management and Strategy in the
states and complementary institutions in standardizing sys- Department of Management at King’s College
tems of economic coordination and control at the national
level. In G. Morgan, R. Whitley and E. Moen (Eds), Changing London. His current research concerns comparative
Capitalisms? Internationalization, institutional change, and corporate governance, and the impact of financial
systems of economic organization: 190–234. Oxford: Oxford liberalization on employment outcomes across
University Press.
Whitley, R., Morgan, G., Kelly, W., & Sharpe, D. 2003. The countries. He is a US citizen and has worked
changing Japanese multinational: Application, adaptation and previously in Germany and Japan. He can be
learning in car manufacturing and financial services. Journal of reached at gregory.2.jackson@kcl.ac.uk.
Management Studies, 40(3): 643–672.
Williamson, O. 1975. Markets and hierarchies: Analysis and anti-
trust implications. New York: Free Press. Richard Deeg received his Ph.D. from the Massa-
Witt, M. A., & Lewin, A. Y. 2007. Outward foreign direct chusetts Institute of Technology and is presently
investment as escape response to home country institutional
constraints. Journal of International Business Studies, 38(4): Associate Professor of Political Science at Temple
579–594. University (Philadelphia, US). His current research
Wright, M., Filatotchev, I., Hoskisson, R. E., & Peng, M. W. 2005. focuses on the politics of financial market reform in
Guest editors’ introduction: Strategy research in emerging
economies: Challenging the conventional wisdom. Journal of Europe. He was born in the US and remains a US
Management Studies, 42(1): 1–33. citizen. He can be reached at rdeeg@temple.edu.

Accepted by Anand Swaminathan, Special Issue Editor and Witold Henisz, Special Issue Editor and Departmental Editor, 4 December 2007. This paper has
been with the authors for two revisions.

Journal of International Business Studies

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