[MUSIC]

So, where do these variations, in terms of things like family ownership?

In terms of things like, pyramidal structures, actually come from?

And a clue is offered by a strand of work started off by

Peter Hall and David Soskice decades ago, on Varieties of Capitalism.

What Hall and Soskice noted were that there seemed to be a pattern,

in which company, in which countries that afforded labor a great deal of protection,

through employment protection legislation,

were unlikely to have very robust stock markets.

And conversely countries with low levels of labor protection,

were more likely to have relatively robust stock

market financing of of stock market financing of their companies.

And so, it's worth thinking about what might be going on here.

Perhaps it, it's the case that when employment protection laws, confer so

much power on labor.

That nobody wants to be literally the last in line,

as a small shareholder without any managerial control,

in terms of receiving dividends, payouts, from the firm.

So one can sort of specify such arguments,

as to why one might actually see this negative relationship that Hall and

Soskice were apparently the first to uncover, but

one doesn't need to accept any particular explanation to note this basic pattern.

now, what Hall and Soskice, themselves tried to do with this basic pattern,

was separate countries into two groups.

So, their dichotomy was between the countries colored in red,

on this particular slide, which they dubbed liberal market economies with

a high level of reliance on market mech, mechanisms, relatively little

coordination through other means, and coordinated market economies.

Where, in addition to markets, there is much more recourse to administer pricing,

long term relationships,

etc in determining the terms of economic transactions.

So, Holland Soskice asserted that, you know, not only is there a trade

off between vibrant stock markets and employment protection leg, legislation.

But in fact, com, countries can be clearly classified into two different groups,

based on where they plot out on a grid like this one.

One doesn't have to accept their dichotomy to realize that

there's something interesting in this relationship.

And that the relationship extends, well beyond the relatively arrow measure of

employment protection that Paul and Soskice used.

And beyond their relatively small sample of mostly advanced countries, that were

the focus of, of advanced countries that were the focus of their work.

So this is exhibit 3A, from the reading assigned from this session, that actually

imports data from other countries for which they are also available,

into the basic schema that we saw on the previous slide.

The new countries are listed all in black and prompt two observations.

First of all, Hall and Soskice's original focus on advanced economies,

clearly ruled out as did other artifacts of their sampling mechanism,

many of the countries that we see as really being most extreme.

In terms of pushing employment protection legislation.

So, the basic dimension of variation along the horizontal access, that Hall and

Soskice stressed to us in the previous slide

is actually even more interesting than they would have us believe.

Given the amount of dispersion that we see on this dimension and given that they

were picking up only a fraction of that actual dispersion, with the sample.

The second thing, that stands out from this expanded sample of company,

countries is you still see something like this negative relationship,

between stock market capitalization as a percentage of GDP.

As a measure of reliance on stock markets for external financing and

employment protection legislation, along the horizontal axis.

So, there does seem to be a trade off although again obviously, there's room for

some variations around it.

So, Switzerland and Luxembourg are both significantly higher than

the regression line would imply for this data, for

this scatter chart, simply because they're financial centers, so forth, and so on.

So what Hall and Soskice did, and this is a dichotomization of that.

One would may or may not accept, but that at least highlights some useful tensions

between different types of administrative arrangements, is that they contrasted,

what would be different about firms operating in a classic liberal

market economy, like the US or UK versus firms

operating in a classic coordinated market economy like France or Spain.

And, they actually tracked through a substantial number of differences,

that one might expect in that regard.

Most obviously starting with the capital side,

ownership is going to be more dispersed, almost by

definition in an LME environment, than in a coordinated market economy environment.

Financial disclosure will be more important to those disbursed shareholders.

And short term share price movements are going to

be proportionately more important.

And there's a likelihood of more action, in terms of the market,

for corporate takeovers et cetera.

On the labor side again by definition,

weaker labor protections in liberal market economies.

Weaker trade union and industry/employer associations.

Much more of a reliance of decentralized market mechanisms.

Shorter job tenures, as people job hop from one job to another.

Less training, as a result of those job-hopping proclivities.

And finally, as a flow through of all of that,

an emphasis on the part of workers on developing general skills, that can be

applied across a range of employers in terms of industries or companies.

In contrast, you can see why coordinated market economies would be

systematically different, in all those respects.

So, those are just some examples of why, what kind of system one operates in

may on average, have significant influence on how business is actually conducted.

And we can easily see ways of adding other areas beyond capital and

labor to this consideration of what's different between,

economies that privilege labor in some sense and

economies that privilege stock markets or external equity financing.

So to take another example,

that will make this even more vivid, think about the earnings that

are reported by firms operating in different kinds of environments.

So, in Civil Law environments in countries, in continental Europe, say.

Where the legal tradition is really descended from Roman civil law,

and involves relatively detailed translation of governmental

rules into specific policies, with a minimum of judicial interpretation.

Earnings are treated very differently in those kinds of systems.

Then they are in the traditional Anglo American kind of system,

that often commands more attention.

So in the civil law countries, with their emphasis on

long term relationships amongst different stakeholders.

Earnings as applied to be divided equitably amongst a whole bunch of

different stakeholders public disclosure isn't nearly as

important because the whole system isn't anchored in external investors, and

the internal investors like the families or

the banks, can probably get their information directly from the company.

And pay outs earnings are closely linked to payouts.

And so what basically happens is that, you know,

large reserves are maintained above the bottom line.

And then what gets declared at the bottom line in, terms of net, net income.

Really reflects preferences about how to distribute the total pool

that is available, rather than what an economist would think of as net earnings.

And, if this seems very abstract, it's worth remembering that,

you know, these differences are well recognized and

have huge impacts on how stock markets react to accounting information.

So, we already know from other work in accounting,

that stock markets really make, re, react more to negative surprises.

That those in some respects often have more information content than

increases in accounting income, for instance.

What's interesting is how much the sensitivity varies across

different groups.

In common law countries like the U.S. and

the UK where earnings reported accounted earnings do in fact come closer

to economic measures of earnings or income or profit.

There is a huge negative reaction to negative accounting surprises.

But in continental code or civil law countries or, again, in East Asian

systems which are closer in legal terms to some of those continental systems.

Even the negative accounting earnings re news doesn't really have

much of a negative impact on the stock price,

because everybody recognizes that earnings is a number that is usually managed,

with a view to some of those other considerations that we were talking about.

Ensuring the right levels of payouts to different stakeholders,

rather than simply reflecting economic measures of gains or loss.

So, all this should start to suggest why it's really

important from an international business perspective.

To understand these differences across different national systems.

Let me just recap once again, what some of the uses might be.

So, for instance, even if you or your company isn't interested in

going overseas, if you're just interested in understanding a foreign company.

Presumably, it's helpful to understand if, for instance,

you're trying to decipher its earnings information or its financial reports,

what kind of system the company is from, because as the little example of

reaction to negative accounting news, that I just put up showed.

Earnings mean very different things, in different kinds of systems.

And that presumably should affect the attention one should

pay to bottom line earnings,

as opposed to some above the reserve more gross kind of earning measure.

So that's, even if you don't want to go overseas,

if you're interested in trying to figure out something about a foreign company.

Understanding something about its administrative context,

is clearly important.

Second understanding foreign administrative content,

context becomes even more important if, you're making foreign investments, or

deciding how to make them.

So, think of a US company going from it's

classic liberal market economy, stand alone economy to Brazil,

which is a coordinated market economy with lot's of pyramids, interlocks, etcetera.

Trying to decide whether to invest in Brazil and if so,

whether to, you know, how to partner or deal with local firms?

Can be very, very complicated for a U.S. firm, that assumes that the administrative

context in Brazil is just like the administrative context in the U.S.

and in fact an academic paper by Susan Perkins.

Confirms that firms heading from

LME environments into CME environments, like Brazil,

tend to really have problems with their joint-venture partners, because they don't

understand the multilayered, interlocking nature of those joint-venture partners.

In a way that subsequently leads to disagreements about how cash was,

might have been tunneled out of the enterprise etc.

Third and most important and most urgent, if you are thinking

of working overseas, it's not just cross cultural intelligence you need.

You also need some understanding of differences in administrative systems.

So again to take an example I have a lot of friends from the U.S.

who've worked for various stents as expatriates in Europe.

And, I'm always amazed at the extent to which the mental and

emotional energy of otherwise very intelligent individuals,

gets consumed by diatribes against the crazy,

French employment system or the crazy, Spanish employment system.

And while those employment systems do have a lot of restrictions, that make

it hard to operate the way one of my friends would operate back in the US.

It's probably better to recognize, that these employment systems are interlocking

parts of broader national systems that are unlikely to change entirely

to resemble the U.S. system anytime soon, with the corollary that it's better

accepting the system, the systems as they exist and trying to work within them.

Rather than simply decrying them, as obviously dysfunctional.

And so, if you're working overseas,

you really need to understand the administrative context.

You really need to understand, who owns the key firms, what role the banks and

the government play, if you're going to have any hope of operating nearly as

effectively as an insider in those environments.

And so this deeper level of analysis of national administrative differences

dichotomize by Holland Soskice into liberal market

economies versus coordinated market economies, actually is very important,

at trying to make sense of some of the variations in business structure and

practice that we see around the world.

[MUSIC]

5. Patterns in the differences

Globalization of Business Enterprise

Rencontrer les enseignants