Strategy & Policy

Strategy

• Vision - Overall view of society• Orientation• Ideology

• Goals• Policies

Orientation

• Free Market vs. Government Coordination• Developmental vs. Welfare

• Nationalist vs. Globalized vs. Regional• Business vs. Labor• Consumption vs. Investment• Open vs. Closed

Hayek: 1945

• Economy made up of millions of humans in wildly varying quickly changing circumstances.

• Allocating resources to match the demands of particular places and time has great value.

• Eliciting the subjective value of those opportunities is uncertain.

• No single individual or institution could possibly process that much information.

Prices as Information• Centralized planning cannot provide an efficient

co-ordination mechanism.• Market system provides decentralized means to

allocate resources to time and place. • “The most significant fact about this system is …

how little the individual participants need to know in order to be able to take the right action. …., only the most essential information is passed on and passed on only to those concerned.”

• All necessary information is contained in prices.

Prices solve allocation problem

• Assume either: 1) new use of tin appears; 2) source of tin goes offline.

• Doesn’t matter which and most people don’t need to know which. All that matters is prices will rise.

• This gives information to users of tin to shift toward substitutes and users of substitutes for tin to shifts to substitutes and so on.

• Everyone automatically gets info on a need to know basis.

I am a Pencil• I am a lead pencil—the ordinary wooden pencil

familiar to all … who can read and write…I am seemingly so simple… Yet, not a single person on the face of this earth knows how to make me.

Link

Price Gouging

Polanyi: Great Transformation

• During 19th century, self-regulating markets dominated society. In 20th century, free market ran its course, ending in depression and war.

• Market society was justified under the rubric of “Laissez faire” essentially “leave it alone” masking its true nature.– As if self-regulating markets were a natural

outcome i.e. what would happen without society.– Ahistorical

Historical Economic Structure

• Traditionally, economy was embedded within social structure and fell into three basic forms.1. Autarky – Household production and Subsistence2. Centralized – Allocation by chief/lord/headman3. Gift Giving – Ritualized voluntary exchange of

value. • Markets existed but were strictly limited by

society, served as a tool of society.

Industrial Revolution: First Transformation

• Disruptions of 17th Century, led to construction of philosophy and legal system necessary for market system.

• Self regulating markets are necessarily part of a system of interacting markets through all of the commodities in the economy.

• Inevitably, markets must include those for false commodities: 1) Money; 2) Labor; 3) Land.

False Commodities

• Labor and land are false commodities in that their production cannot respond to market signals.

• Labor and land are the essential elements of society itself. Subjecting them to self-regulating markets means disembedding economy from society.

• Inevitably society will push back against market dominance of society for self-protection.

Varieties of Capitalism

• Orientation and the Firm• Four spheres in which firm interacts with

society. 1. Financial Markets (corporate governance);2. Industrial Relations (regulating wages and

working conditions);3. Intrafirm relations (access to inputs and

technology & institutional customers) 4. Education and Training

Corporate Governance

Labor Relations

Education&

Training

InterfirmRelations

InternalStructure

Of the Firm

Two types

• LME – Liberal Market Economies– External relations are typically governed by arms-

length, competitive markets• CME – Coordinated Market Economies

– External relations often governed by modes of co-operation.

– Institutions of co-operation have more specific nature.

USA Prototypical LME

1. Corporate Ownership – Management teams represent atomized shareholders; disciplined by buyouts.

2. Labor relations – Fluid labor relations, right to hire and fire; limited unions or firm level negotiations.

3. Training – Formal education, general skills. 4. Inter-firm Relations – Anti-trust legislation,

reputation based relationships. No technology transfer.

Germany Prototypical CME

1. Corporate Governance – Patient capital, large or institutional shareholders. Rules & institutions prohibit takeovers. Stakeholder governance.

2. Labor relations – Work councils, national and industry level negotiations; employment protection.

3. Training – Apprenticeship systems; job or firm specific skills.

4. Inter-firm Relations – Research consortia; supplier relationship. Anti-trust legislation, reputation based relationships. No technology savings

External Relations and Internal Structure

• LME’s give rise to firms with strong hierarchies. Managerial decisions unencumbered by non-market factors. Market pressure requires focus on immediate profitability.

• CME’s have consensus decision making with stakeholder relations in all directions impacting choices.

Institutional Complementarities

• Cooperative relationships in one area make cooperation in other areas more advantageous.

• Ex. Workers with more job stability more likely to invest in specific skills.

• Ex. Systems of cross-holdings of securities creates a greater likelihood of long-lasting relationships with suppliers.

• Ex. Firms that co-operate with technology sharing more likely to form groups to train new workers .

• Ex. Consensus model of corporate governance more likely to lead to cooperative model of labor relations.

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Varieties and Comparative Advantage

• Many varieties may co-exist in symbiotic relationship.

• Institutional structure may offer comparative advantage which can lead to specialization in particular goods.

• SME’s advantage in producing goods requiring long-term investment, continuous upgrading, specific skills.

• LME’s advantage in producing goods requiring radical innovation.

Examples from Link • Varieties of Capitalism and Innovation: Patenting in LME

concentrated in industries (pharma, infotech) typified by radical shifts, patents cite deep research; patenting in CME concentrated (auto, machine tools) typified by continuous improvement, patents cite previous patents.

• Industry Standardization – German industry organization able to enforce specific detailed standards [A4 paradigmatic example]; UK standards focus on process prinicples.

• BA vs. Lufthansa. BA thrives during periods of radical market disruption. Lufthansa thrives at more stable periods.

Nature of Japanese Competition, 2000

• Inter-firm Relations:– Large Japanese business groups, Horizontal Keiretsu,

organized around small number of city banks, share financing, personnel, distribution networks.

– Vertical Keiretsu: LT relationship between industrial firms and family of suppliers.

– Gov’t encourages research consortia and sometimes cartels. Anti-trust week.

• Corporate Governance:– System of cross-shareholdings within business groups make

it difficult for equity investors to replace management. – Bank financing more important than bond financing.

Porter, Michael E., and Mariko Sakakibara. 2004. "Competition in Japan " Journal of Economic Perspectives, 18(1): 27-50.

Japan, cont.

• Labor Relations– Legally, socially difficult to fire long-term workers– Company unions play a role in corporate

management• Training

– Firm specific human capital – Seniority based compensation

Competitive Outcomes

• Low returns on capital• Firms emphasize market share, maintenance

of employemnt• Intense domestic competition in some sectors

especially those internationally successful ones.

• Sectors with government sponsored cartels or planning, low competition, low success

Main Bank SystemCorporate Cross-HoldingAnti-Takeover Legislation

Firm Specific On-the-Job

Training

Keiretsu,Limited Anti-trust

Research Consortia

Lifetime EmploymentFirm level unions

Banks support & Coordinate group

Group cross-holding supports management

Knowledge Sharing through consortia & councils

Talent sharingSpecialized Workers

Incentives to acquire training

Japanese Variety of Capitalism

Credibility

Measuring Coordination

• Big Picture Measure• Objective Measures

Link

Capital Markets

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Labor Relations

Weeks of severance pay for redundancy of experienced workers % of Work Force: 10 years tenure or More

Technically Oriented Education

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Technical Training

Technical/vocational enrolment in secondary (ISCED 2 and 3) as % of total On-the-Job Training, Global Competitiveness Ranking (in World)

Link

Policies

• Development Strategy– Industrial Policy– Competition Policy

• Fiscal Policy• Financial Policy