Varieties of Capitalism and Opportunities for Development: How Institutional Arrangements in the Developed World Shape Economic Opportunities for Developing Countries

This paper argues that the national arrangements of capitalism in developed countries shape economic outcomes not only domestically but also have an impact on the economic opportunities of developing countries with which they interact.  The paper’s main finding is that liberal market economies (LMEs) offer greater economic opportunities for developing countries through greater access to technology and to upgrading within production networks than do the coordinated market economies (CMEs).  Analysis of patent data and sectoral case studies on the global electronics and auto industries will provide evidence of the differential opportunities presented to the developing countries by LMEs and CMEs.

The institutional arrangements that structure these outcomes are multiple.  The differences in industrial relations and educational systems lead to more generalized skills in LMEs and these in turn facilitate more movement of activities offshore and encourage outsourcing to third parties.  The equity-based, “impatient” capital of LMEs leads to pressures to lower costs in the short-term that just enhance the incentives for offshoring and outsourcing whereas CMEs’ patient capital would dull any such pressures.  Corporate governance and inter-company relations being more long-term and insider-oriented in CMEs in conjunction with the more employee voice in the industrial relations system create higher barriers than exist in LMEs to the purchasing/leasing of valuable technology assets by outsiders, particularly foreigners. 

The patent data will demonstrate the greater movement of R&D activities by LME’s firms to the developing world than those of CMEs.  The case studies will explore the institutional dynamics at the sectoral level and demonstrate both the greater willingness to offshore and outsource activities to the developing world, which help build industrial capabilities in the offshoring/outsourcing locations, and the greater willingness to part with technology to developing world partners on the part of the LMEs.  This paper will not assume that offshoring/outsourcing of activities automatically results in enhancing the developing world’s industrial and technological capabilities.  Instead, the case studies will provide evidence of where offshoring/outsourcing led to increased capabilities in the developing world and this evidence will show a general partner of greater capability-enhancement from interacting with LMEs in both industrial sectors.