The Varieties Of Capitalism : The Institutional Foundations Of Comparative Advantage

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The varieties of capitalism approach, developed by Hall and Soskice in their influential work, ‘Varieties of Capitalism: The Institutional Foundations of Comparative Advantage’ emphasizes the notion that the manner in which firms sort out the coordination problems that they encounter, differs across political economies. They identify five broad realms in which firms must build relationships in order to solve the coordination issues which are vital to their core competencies. These five spheres include industrial relations, corporate governance, inter-firm relations, vocational training and education, and employees. Liberal Market Economies (LMEs) and Coordinated Market Economies (CMEs) can be viewed as the two prototypes representing the two ends of a continuum of national political economies. In LMEs, “…firms coordinate their activities primarily via hierarchies and competitive market arrangements. (…) Market relationships are characterized by the arm’s-length exchange of goods or services in a context of competition and formal contracting...” (Hall and Soskice, 2001, p8) On the other hand, in CMEs, “… firms depend more heavily on non-market relationships to coordinate their endeavours with other actors and to construct their core competencies. These non-market modes of coordination generally entail more extensive relational or incomplete contracting, network monitoring based on the exchange of private information inside networks, and more reliance on collaborative, as
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