Felix Sebastian Bethke

An der Esche 17

53111 Bonn

Tel. 0228/92689756

Varieties of Capitalism in Emerging Economies

EXPOSE

ZUR ERLANGUNG DES AKADEMISCHEN GRADES

EINES DOKTORS DER PHILOSOPHIE (DR. PHIL)

AN DER JOHANN WOLFGANG GOETHE – UNIVERSITÄT

IN FRANKFURT AM MAIN

Betreuer: Prof. Dr. Andreas Nölke

Bonn, Juni 2008

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Index

Index ............................................................................................................................... 2 

1  Preface .................................................................................................................. 3 

2  State of Art ........................................................................................................... 4 2.1  Emerging Economies ............................................................................................. 4 

2.2  Comparative Capitalism ........................................................................................ 9 

3  Research Question ............................................................................................. 12 

4  Research Design ................................................................................................. 13 

4.1  Theoretical Framework ........................................................................................ 13 

4.2  Case Selection ...................................................................................................... 14 

4.3  Concept Specification .......................................................................................... 14 

4.4  Method of Analysis ............................................................................................. 18 

4.5  Data Collection and Coding ................................................................................ 21 

5  Time Schedule .................................................................................................... 22 

6  Bibliography ....................................................................................................... 23 

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1 Preface

The global economy exhibits huge differences in income across countries. The Gross Domestic

Product (GDP) per capita in rich countries such as the USA, Japan, or Germany is greater by a fac-

tor of twenty or more than that of third world countries like Mozambique or Bangladesh. This fact

poses a lot of questions. Why are some countries richer than others? Why are some countries able to

develop their economies, while others are recession-plagued without any signs of hope? And final-

ly, how did some so-called emerging economies manage to catch up and achieve economic devel-

opment?

Emerging economies received growing attention in the past two decades because of their increasing

share in world trade and foreign direct investment and their rising numbers due to the collapse of

the socialist system around the world. According to recent projections by Goldman Sachs1, China’s

economy will move ahead of the US’s by 2027, India’s will catch up with the US’s by 2050 and the

BRIC (Brazil, Russia, India and China) group will surpass the G7 by 2032. It seems that these for-

mer poor countries found a way to level the playing field. Terms like “Newly Industrialized Coun-

tries”, ”Emerging Market Countries”, or just ”Emerging Economies” are used to label those coun-

tries, which are considered to be in a transitional phase between underdeveloped and the developed

status. But the important question is not how to name these countries, rather, how they managed to

close the gap.

Are there any similarities in culture, geography, or political system that enabled the growth process?

Many of the most dynamic countries are in southern and eastern Asia, but countries from other re-

gions also show promising economic development. A recently published emerging markets index2

lists such different countries like China, Mexico, India, Brazil, Poland, Indonesia, and Russia at the

top part of the table. Those countries are not only located in very different geographic regions, but

also differ in terms of economic policy, culture and national history.

It seems like neither certain policies nor the cultural, historical, and geographic factors can explain

the success of emerging economies. Recent studies in the field of comparative capitalism suggest

that economic success is influenced by institutional configurations. The goal of this study is to shed

light behind the conditions of growth and development in emerging economies by analyzing and

comparing their economic institutions.

1 Goldman Sachs: BRICs and Beyond, November 2007. 2 Grant Thornton International: Emerging markets: reshaping the global economy. 2008.

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2 State of Art

In order to conduct a study about the characteristics and conditions of successful emerging econo-

mies, it is necessary to examine the state of art first. Research on emerging economies and compara-

tive capitalism must be reviewed to elaborate the potential of various theories and concepts.

2.1 Emerging Economies The terms “Emerging Economies” and “Newly Industrialized Countries” appeared within the de-

bate on economic development during the mid 1970s. Scholars recognized increasing differentiation

among Third World countries. The long period of growth and dynamics in global trade between

1950 and 1970 made most of the Third World countries irrelevant for the world economy. Howev-

er, some countries in East Asia and Latin America were not affected by this process of marginaliza-

tion and managed to achieve industrialized catch-up development. Those countries were labeled

“Newly Industrialized Countries (NIC)” or “Emerging Economies”. As a result of this differentia-

tion process, many scholars consequently began to question the concept of a unified Third World

(O’Connor 1976; Auty 1979; Wolfe-Phillips 1979; Worsley 1979).

The early literature on the phenomena of emerging economies focused on four different topics.

First, many OECD studies addressed the growing pressure of economic competition Emerging

Economies constitute for the developed World (OECD 1979a, 1979b; Bergmann 1983; Menzel

1983: 31-59).

Second, some researchers discussed the geopolitical consequences that arose from economic growth

of the emerging economies, i.e. if and how the balance of power between the two superpowers USA

and USSR would change. (Eßer / Wiemann 1981; Kraus / Lütkenhorst 1984; Hofheinz / Calder

1982)

A third approach tried to develop concrete methods to measure economic development. Some scho-

lars focused their analysis on the degree of industrialization to determine whether a country belongs

to the developed world or the undeveloped world. The term “Newly Industrialized Countries” was

used to describe countries that did not fit into one of those ideal types. Indicators such as energy

consumption per capita, proportion of the employees working in industry, or development of urban

infrastructure were used to determine the degree of industrialization. Other researchers centered

their analysis on socio-economic indicators to decide whether a country should be defined as an

emerging economy. In this concept, industrialization on its own was not interpreted as successful

development. Furthermore, this concept asks if industrialization went hand in hand with improve-

5

ment in standards of living for the citizens. Indicators like school enrollment or infant mortality

were considered as equally important as economic indicators. Other scholars focused on the impact

countries have on the global balance of power. This concept expanded the view beyond endogenous

economic development to geopolitical factors such as population size, availability of important re-

sources (oil), or the capacity of a country to act as a regional hegemon to specify a country as an

emerging economy. Finally, the process of integration into global economy caught the attention of

researchers. According to them, an emerging economy should be able to improve its position in the

world economy. Economic integration and expansion of trade were seen as necessary conditions for

development. (Messner 2003: 45)

A fourth approach discussed the implications that emerging economies pose for the existing theo-

ries on development. The occurrence of emerging economies had a significant impact on the validi-

ty of modernization- and dependence-theory, which were the dominating theories for decades. Ac-

cording to modernization theories, internal factors such as illiteracy, agrarian structure of the econ-

omy, and/or the lack of infrastructure are responsible for underdevelopment. Correspondingly, a

change of these endogenous factors is seen as the strategy for development. The industrialized

countries are considered a role model regarding their organization and design of economy and so-

ciety for Third World countries. Within this line, suitable actions for development are the moderni-

zation of the production, capital aid, and transfer of know-how, so that the developing countries can

reach the stage of industrialized countries (Nuschler 2005: 214/215). In the 1960s and 1970s, criti-

ques of Modernization-Theory emerged around the concepts of dependency and underdevelopment.

While the Modernization-Theory focused mainly on endogenous factors, the so-called Dependence-

Theories revolve around exogenous structures that determine the capacity to act of the Least Devel-

oped Countries (LDCs). LDCs are considered dependent countries. Dependence on industrialized

countries is seen as the main cause of underdevelopment, while internal factors of developing coun-

tries are considered irrelevant or symptoms and consequences of dependence. Regarding the causes

of dependence, the various theories differ, though economic factors dominate. Some concentrate on

colonialism, others stress the structure of capitalist world economy or world market integration.

Following these assumptions, Dependence theorist advocated a closed economic system and a poli-

cy of import substitution industrialization as strategy for development (Nuschler 2005: 215-217).

Both so-called grand theories failed to explain the process of differentiation within the Third World.

According to modernization theory, all countries should have experienced the same change. Con-

trary to their assumptions, years of endogenous modernization policy in Third World countries did

not lead to catch-up development in most of the countries. Instead, the global disparities and inequi-

ties increased even more. The success of emerging economies such as the “Asian tigers” (South

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Korea, Taiwan, Hong Kong, Singapore) is the most cited example that the theoretical assumptions

of the dependencia school have been wrong. According to dependencia, the integration of Asian

countries into the world market should have lead to a debacle - a continuing development of under-

development (Frank 1969). Additionally, the debt crisis in Latin America questioned their recom-

mendation of import substitution industrialization. As a result, more and more scholars announced

the End of the Third World (Harris 1986), the End of the Grand Theories (Menzel 1991), and a gen-

eral crisis of development theory (Boeckh 1885).

From mid 1980s to 1990s the debate about emerging economies was focused around one question:

why did emerging economies in Latin America struggle, while the countries in East Asia remained

strong? (Menzel 1987; Mármora / Messner 1991) The IMF and World Bank justified their liberal

structural adjustment programs with the development successes of the East Asian countries

(Aghevli / Ruarte 1986; World Bank 1993). This interpretation was criticised sharply by many

scholars. They argued that the development strategies in Eastern Asia were rather a concept of a

guided market economy, with an autonomous and strong “developmental state”, which seeks to "set

the prices wrong" in order to create competitive advantage (Amsden 1994).

After processing the discussion over the causes of the crisis in Latin America and the success in

East Asia scholars moved on to the explanation of the financial crises in Asia 1997/98. The Asian

financial crisis prompted scholars to discount the state centric development model. Critics claimed

that it would lead to "moral hazard" and other undesirable collusive practices which lead to finan-

cial sector weakness (Kaminsky / Reinhart 1998; Goldstein 1998).

The failure of both the liberal model and the state centric model as well as the results of the discus-

sion about the causes of the crises in Asia and Latin America led to the rise of a new research

framework, that emphasis the role of institutions for the process of development. Relying on the

assumption that “Institution Matter”, scholars analyzed different designs of social and legal norms

and rules regarding their effect on economic growth (Williamson 1975, 1985; North 1990). The

international finance institutions, namely IMF and World Bank, got influenced by this process and

considered the relevance of institutions for economic growth in their development policies and fi-

nancing strategy (Hall/Jones 1999; Acemoglu/Johnson/Robinson 2001; Rodrik/Subramanian/Trebbi

2002). The consequence was that international development policy tried more and more to foster

good governance, such as ensuring the rule of law, improving the efficiency and accountability of

the public sector, and tackling corruption. Since the 1990ties even the provision of aid got coupled

with claims of good governance.

Today, research on emerging economies tends to analyze certain regions or county-groups, rather

than trying to capture the whole phenomena. The former socialist economies in Eastern Europe are

7

solely analyzed with the theoretical paradigma of transition (Merkel 1995), although many of them

show the characteristics of emerging economies. Regarding Asia, scholars still refer to the term

“developmental state” to catch economic development (Aoki/Kim/Okuno-Fujiwara 1997; Liao

2001; Weiss 2003; Doner/Ritchie/Slater 2005). Successful economic development in such big coun-

tries like China or Russia lead to a debate about the economic potential of the so-called BRIC (Bra-

zil, Russia, India, and China) countries to surpass the G6 in the near future. Scenarios predict that in

less than 40 years the economies of Brazil, Russia, India and China will be bigger than those of the

G-6 (Wilson / Purushothaman, 2003). These countries encompass over twenty-five percent of the

world's land coverage and forty percent of the world's population. Economic emergence of these

countries has a much greater impact on world economy and world politics, than that of small coun-

tries like Singapore. Some scholars extended and converted the term BRIC to BRICK (K for South

Korea), BRIMC (M for Mexico), CISA (China, India, South Africa) and BRICET. (including East-

ern Europe and Turkey) when referring to emerging economies. The latest extension is the term

BRIC plus, which includes Brazil, China, Egypt, India, Indonesia, Iran, Malaysia, Mexico, Nigeria,

Philippines, Russia, South Africa, Thailand and Turkey (Shaw et al. 2007).

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Figure 1 BRIC plus growth rates, selected years (%)3

Figure 1 shows that the growth rates of the BRIC plus economies are, for the most part, significant-

ly higher than the OECD aggregate and match or surpass the world’s average. Global development

3 Source: Shaw et al. 2007

9

in the new century is affected by the changing economic stance of these emerging powers and their

growing influence in economic and geopolitical terms (Shaw et al. 2007: 1260).

Meanwhile, those countries espouse a wide variety of forms of capitalism beyond conventional An-

glo- American and European types (Goldstein 2007). Research within the field of development stu-

dies focused mainly on impact of property rights and good governance regarding the institutional

analysis of economic development (North 1990; Acemoglu / Johnson / Robinson 2001; Dollar /

Kraay 2002). Research within the field of comparative capitalism pointed out that capitalist econo-

mies differ in more ways (Hall / Soskice 2001).

2.2 Comparative Capitalism

Within the discipline of comparative capitalism there is a broad debate about the institutional varia-

tions of contemporary capitalist economies. This research on capitalist institutions is based on the

theory of institutionalism (Hall / Taylor 1996), institutional economics (Williamson 1975, 1985;

North 1990) and insights within the research on neocorporatism (Schmitter 1974; Schmitter/Streeck

1985), industrial sociology (Dore 1973), and new economic sociology (Granovetter 1985). Al-

though the discipline is an eclectic field with a wide range of analytical and theoretical frameworks,

there are some common assumptions that most of the scholars in this field share. The main idea is

that the institutions of capitalism differ across countries and that these differences are not coinciden-

tal. National economic systems are seen as being shaped by distinct institutional configurations that

cause a particular logic of economic action. Economic action is viewed as being embedded within

this institutional context. Furthermore, the literature suggests a theory of comparative institutional

advantage, assuming that different institutional arrangements have distinct strengths and weak-

nesses regarding different kinds of economic activity. This assumption arose out of the question if

the process of economic globalization causes a demand for uniformity or diversity of the economic

institutions of nation-states. Contrary to notions of convergence on a single model of best practice,

the literature emphasizes that common pressures may be refracted through different sets of institu-

tions, thus leading to different sorts of problems and calling forth different solutions. Assuming

institutional interdependence, national models will evolve in a path-dependent manner (Jackson /

Deeg 2006).

The comparative capitalism literature offers a large number of analytic frameworks. Some scholars

focus on mapping the diversity of coordination mechanisms used in the governance of economic

activity. This so-called governance approach distinguishes if governance is conducted via markets,

hierarchies, the state, networks, and associations. These mechanisms are analyzed along two dimen-

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sions: first, scholars examine the degree of self-interest or obligations for actors, and second, con-

cerning the degree to which power is distributed horizontally or vertically (Hollingsworth / Boyer

1997; Hollingsworth / Schmitter / Streeck 1994).

Richard Whitley (1999) developed another approach that compares business systems, which he de-

fines as patterns of economic organization. Those patterns vary in their degree and mode of authori-

tative coordination of economic activities as well as the organization of and interconnections be-

tween owners, managers, experts, and other employees (Whitley 1999: 33). Whitley identifies six

basic ideal-types of business systems: fragmented, coordinated industrial district, compartmenta-

lized, state-organized, collaborative, and highly coordinated.

One especially popular approach within comparative capitalism research is the so-called “varieties

of capitalism” (VoC) approach. Michel Albert first used the term “varieties of capitalism” in his

study in the early 1990s, where he identified two different versions of modern capitalism. He de-

fines a flexible, individualistic Anglo-Saxon model, which aims to achieve short-term revenues and

a so-called Rhenish model of capitalism that is characterized by long term commitments and highest

possible consensus among protagonist within the economic system (Albert 1991). Most favored

among scholars of social science, however, is the work by Peter Hall and David Soskice. Contrary

to other frameworks, the focus lies on micro-level agents such as firms, employees, or shareholders.

The approach tries to offer an institutional explanation for cross-national differences in business

firm behavior. Firms are seen as embedded into institutional subsystems (i.e. financial system and

industrial relations) that shape capitalist models and mutually reinforce each other. The core of the

VoC-Framework is the idea of institutional complementaries. Two institutions can be defined as

complementary if the presence of one increases the efficiency or returns from the other

(Hall/Soskice 2001: 17). For example, short-term finance requires fast entry and exit from business

activities and industrial relations systems have to allow quick and cheap hiring and firing of em-

ployees. Relying on these assumptions, Hall and Soskice suggest the already described theory of

comparative institutional advantage and the hypothesis of institutional path dependence.

Their key finding was the specification of two ideal types of capitalism distinguished by the degree

to coordination that exist within an economy. They identify the coordinated market economy

(CME) and the liberal market economy (LME), which are diametrically opposed along all institu-

tional subsystems. The LME is described by conflict susceptible management-labor relations, short-

term employment, the predominance of financial markets for corporate financing, an active market

for corporate control and much emphasis on short-term price movements on the stock markets.

Comparative advantages for the LME model are in sectors with radical and capital-intensive inno-

vation like biotechnology or high-end services. In contrast, the characteristics of the CME model

11

are a consensual relationship between capital and organized labor associations and provision of pa-

tient capital by major banks. Stable ownership grant firms considerable protection against hostile

takeovers. All of these factors support long-term investment in human resource development which

is crucial for the CME specialization in high skill and quality products based on incremental inno-

vation (Hall/Soskice 2001: 21-33).

At this point in time, the VoC-approach has been extrapolated to an in-depth research framework.

Numerous of studies exist that analyze specific institutional subsystems, i.e. industrial relations,

training systems, corporate governance, or inter-firm relations across countries. (z.B. Vitols 2001;

Höpner 2005, Thelen 2001; Pontusson 2005; Estevez-Abe et. al. 2001; Jackson/Vitols 2001).

Despite the growing popularity of the VoC-approach, it has also led to a growing number of critical

voices. First, the focus on national states as unit of analysis ignores regional as well as transnational

factors, and it is contradictory to the observable processes of globalization and Europeanization

(Phillips 2004: 12, Mykhnenko 2005: 8).

Second, the dichotomous view of two models of capitalism seems too narrow to analyze contempo-

rary capitalist economies. The reliance on two ideal types of capitalism becomes problematic when

analyzing countries where the state plays a central role in shaping the economy. Vivien Schmidt

elaborated a so-called state-enhanced market economy, drawing empirical evidence from France

and Italy. In these countries, the business relationship tends to be state-organized. Industry is more

dependent on the state than on banks or the markets for financing. Furthermore, the state influences

business development and wage bargaining (Schmidt 2002: 116). Schmidt proposes the distinction

of three models of capitalism, market, managed, and state capitalism (Schmidt 2001, 2002, 2003).

Scholars of regulation theory made other classifications with up to six models of capitalism (Hol-

lingsworth / Boyer 1997; Amable 2003).

One of the most important points of criticism, however, is the limitation of the VoC-approach to the

analysis of core OECD countries, whereas countries in Asia, Eastern Europe, Africa and Latin

America do not receive much attention (Phillips 2004: 14, Feldmann 2006: 830). Few studies exist

that try to identify a specific eastern European institutional configuration of capitalism and research

on this area is limited to theoretical work (Lane/Myant 2007), single case studies (Buchen 2004;

Mykhnenko 2007), or single institutional subsystems, i.e. industrial relations (Milutinov 2006;

Feldman 2006). The same is true regarding the diffusion of capitalism across Asian countries. The

few studies that deal with economic institutions in Asian countries are solely focused on Japan,

which serves as an ideal type for coordinated market economies (Yamamura/Streeck 2001; Gore

1997). However, some single case studies exist about China (Ahrens/Jünemann 2007) andVietnam

12

(Chand / Duncan / Quang 2001). Comparative studies were only conducted with few cases (Whitley

1999; Wong 2006; Andriesse 2006, 2008; Noble 2005; Orru / Biggart / Hamilton 1997).

Until today, research on development, economic growth, and comparative capitalism was not able

to capture and explain the success of emerging economies in full detail. While development studies

did not analyze the institutional configurations of economic systems, comparative capitalism re-

search focused mainly on developed countries within the OECD. An analysis about the institutional

configurations of emerging economies does not exist and seems to be a promising way to enhance

the scope of the VoC-approach, as well as contribute to research on economic development. Emerg-

ing economies may present novel varieties of capitalisms that have not been explored in full detail

yet. (Shaw et al. 2007).

3 Research Question

The research question must be divided into two parts because there are two main issues this study

aims to solve:

The first issue is the question if it is possible to identify distinct institutional configurations that lead

to economic success in emerging economies.

Which institutional configurations lead to successful economic performance in emerging econo-

mies?

The dependent variable is “economic success“ and this study wants to identify those institutional

configurations that determine the appearance of the dependent variable. The major research task is

to understand the impact of institutional differences on economic outcomes. On the basis of a com-

parative analysis, this study wants to detect institutional conditions for economic success.

The second issue is the existence of different types of capitalism in emerging economies.

Which varieties of capitalism exist in emerging economies?

To answer this question, a structured comparison is needed to identify similarities and dissimilari-

ties regarding the institutional configurations of economic systems in emerging economies. In other

words, this study will explore the possibilities to classify economies according to their different

institutional configurations. For example, are economic systems of emerging economies consistent

with the ideal types proposed by the VoC framework or do new varieties of capitalism exist outside

of the OECD world?

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4 Research Design

This study aims to conduct a comparative analysis of the economic systems of emerging economies

and to identify the common casual patterns in form of institutional configurations that are responsi-

ble for the economic success of these economies. For this purpose one needs a clear definition of

economic success, a specification and operationalization of relevant economic institutions, and an

appropriate method to determine multiple different institutional settings that lead to the occurrence

of the dependent variable.

4.1 Theoretical Framework

From a theoretical perspective, this study will use an institutionalist approach, presuming that insti-

tutional structures largely influence the social sphere of economy. This view contradicts neoclassic-

al economic theory, which claims that prices solely determine economic decisions. An institutional

approach assumes that economic decisions are also influenced by “non-price” factors, such as insti-

tutions. However, this leavesthe question open what institutions are from an economic point of

view. Diverse phenomena are coined as institutions. For example, the state, the church, or the

process of greeting someone with a handshake are all considered institutions. Although those things

seem different, they share some common features. They establish a status of social order by defin-

ing specific rules for social groups to interact. An important point about institutions is that they

have to be legitimate, which means that approval for that institution is general among those people

subject to its authority. Finally, institutions are enforced through sanctions for those not willing to

accept them (Mayntz/Scharpf 1995; North 1990; Hall/Taylor 1996). Other scholars use game theory

to define institutions. An institution, then, can be specified as a system of self-sustaining shared

beliefs of the players about the structure of the game that they are playing. It is the result of indivi-

dualistic and collective learning. Regarding economic systems as a whole, each system is unders-

tood as a coherent set of institutional arrangements formed on the basis of shared beliefs and indi-

vidual traits (Aoki 1996).

Relying on these basic assumptions, the VoC-approach appears like a reasonable analytic frame-

work because it allows a comparative analysis of economic systems and their classifications. More-

over, the VoC–approach offers a unique view on institutional relations and their complementari-

ness. Economic institutions are not examined in isolation, but rather according to their interrela-

tions.

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4.2 Case Selection

The subjects of this study are successful emerging economies. Regarding case selection, the strate-

gy is to select different cases with similar outcomes. The cases will be selected on the dependent

variable for various reasons. First, random selection only makes sense in large N studies. Since we

have to deal with the rather uncommon phenomena that a former poor country emerges to economic

success, a random selection would lead to a biased population (King / Keohane / Verba 1994:

145/199). Second, when a researcher seeks to identify similar patterns among emerging economies

worldwide, the selected cases have to be from different areas. Third, according to Barbara Geddes,

studies of cases selected on the dependent variable are “ideal for digging into the details of how

phenomena come about and for developing insights.” (Geddes 1990: 149) This means identifying

plausible causal variables, theory and hypothesis building, and selection on the dependent variable

is a reliable method of case selection. Fourth, selecting on the dependent variable is an appropriate

strategy to identify necessary (as opposed to sufficient) conditions (Dion 1998: 127).

If selection on the dependent variable is the current favorable strategy, the problem remains to spe-

cify the dependent variable, in this case, emerging economies and economic success respectively.

4.3 Concept Specification

The dependent variable: Economic Success

Economic success is a complex phenomenon because numerous factors can contribute to it. Theo-

ries which suggest that a single specific factor makes some countries richer than others are not able

to find empirical evidence for their assumption. To compare different nation states in terms of eco-

nomic success, a researcher needs a clear definition and a model that is able to picture economic

success and distinguish successful economies from non-successful economies. Social scientists use a

variety of measures to describe economic performance. Most studies include criteria like level of eco-

nomic performance, economic growth, poverty or inequality, and social indicators, such as health, infant

mortality, and education. Other common criteria that were used to picture economic success are em-

ployment, productivity, and even economic and political freedom, as well as freedom from violence.

One approach to specify the dependent variable would be to select some or all of these variables

and construct an index out of them. However, index construction contains many problematic deci-

sions. For example, there are great differences in the outcome, whether one uses nominal or real

variables to measure economic growth. The weighting of each criterion is also crucial for the out-

come. The researcher has to decide whether each indicator is weighted equally or if, for example,

15

economic growth is more important than social indicators regarding the attempt to map economic

success.

Another approach would be to rely on the work of others and simply select those countries that are

classified as emerging economies by international organizations. Since the term “emerging econo-

mies” implies economic success, one could select cases according to their classification.

The independent variables: Institutional Subsystems

Relying on the definition of institutions specified above, a study about institutional foundations of

emerging economies has to identify the formal or informal procedures, routines, norms, and con-

ventions that shape the economy. Looking at other studies within the VoC-framework, there seems

to be no consensus regarding the selection of institutional subsystems. Different approaches use

different institutions to analyze and classify economic systems.

Figure 2: Selected analytical frameworks4

4 Source: Jackson/Deeg, 2006.

16

As a first assortment, this study adopts the basic set of categories from the VoC-approach of Hall

und Soskice (Hall/Soskice 2001: 17-33) but enhances and modifies the institutional spheres regard-

ing state based actions and influence of the economic system. This modification seems necessary

because of the observable evidence that in many East-European and Asian emerging economies, the

state plays a crucial role shaping the economic system (Schmidt 2002; Amable 2003: 115-169). But

the boundary around this set is flexible. It is a starting point and will become more fixed as the re-

search proceeds through the interaction of theory and empirical evidence. Concept building and

empirical classification have to go hand-in-hand to ensure the highest possible accuracy in terms of

concept specification.

The following section pinpoints the different variables that appear to be most relevant.

Financial Systems: Financial systems channel household savings into investment in the productive

sector. Within this subsystem economies are usually distinguished in terms of “bank-based” and

“market-based” financing. In bank-based systems, which are typically associated with more “orga-

nized” forms of capitalism, the banks aggregate savings, match the maturities of savings and in-

vestment in order to minimize liquidity risks, and evaluate and monitor investment risks. Market-

based systems, which are usually associated with more liberal forms of capitalism, rely on a direct

transfer from savers to borrowers via securities markets (Berglöf 1991; Deeg 1999; Edwards /

Fischer 1994).

Industrial Relations: Industrial relations cover the regulation of the relations between employees

and employers, i.e. the degree of codetermination, forms of lobbying through interest groups, and

the organization of wage bargaining (Hall / Soskice 2001: 7). Usually, scholars refer to a general

distinction between centralized and decentralized systems. Centralized systems are typified by

higher levels of employment protection, higher wage replacement rates for unemployment, institu-

tions for labor participation in management (e.g. works councils), and collective bargaining institu-

tions that reduce wage inequality across sectors and skill levels. Decentralized systems on the other

hand have weak to no employment protection regulations, less generous unemployment benefits,

little or no institutions for workforce participation, and firm-level collective bargaining or individu-

alized labor contracts (Hall / Soskice 2001: 21-33)

Education and Training System: This institutional sphere describes the type of education system

provided by the government and efforts corporations put into the training of their employees. The

skill sets produced by a country’s system of training define the possible production strategies in

which companies can specialize (Hall / Soskice 2001: 7). The most common assumption is that lib-

eral market economies focus more on the production of general skills than coordinated market

17

economies. While the reliance on general skills grants access to labor with developed, portable

skills, it limits the amount of labor with highly specialized (and specific) skill sets that workers de-

velop in coordinated market economies (Hall / Soskice 2001: 17)

Inter-Firm Relations: The term inter-firm relation covers the relationship a company forms with

other enterprises (Hall / Soskice 2001: 7). Usually, scholars distinguish whetherthe inter-firm rela-

tions are obligatory or reserved/competitive. Obligatory relations are coined by cooperation through

corporate networks or strategic alliance in research and development. The degree of coordination

via marketing boards as well as the amount of mergers and acquisition are relevant indicators within

this institutional sphere (Hall / Soskice 2001: 21-33).

Corporate Governance: This institutional subsystem deals with varieties regarding the internal

structuring of firms, i.e. corporate management, ownership, or the relevance of certain shareholders

and stakeholders. One key element will be the question which actor sets the regulatory framework

in this area. A distinction could be made between systems with insider control by management, em-

ployees and suppliers, and those with outsider control by shareholders (Maher / Andersson 1999) or

if ownership is concentrated among large block holders, such as families, banks, and corporations,

or dispersed among small shareholders within capital markets (Becht / Roel 1999). Finally, the role

of labor and political actors could be important factors influencing diversity of corporate gover-

nance (Roe 2003; Blair / Roe 1999).

Welfare State: The concept of the “Welfare State” defines the relation between the state and the

market in terms of supply of social protection and distribution policy. Differences among the degree

of social protection were found to shape employment patterns like employment rates or the duration

of unemployment. Important variables to analyze the level of social protection are, for example, the

degree of dismissal protection or the amount of unemployment compensation. Esping-Anderson

distinguishes between three types of welfare state. The liberal welfare states provide only low bene-

fits on a universal basis. The conservative welfare states make extensive transfer payments for par-

ticular social groups on the basis of employment and contributions. The social democratic welfare

states provide generous universal support (Esping-Andersen 1990).

These are the main analytical categories to be used to compare and classify successful emerging

economies.

18

4.4 Method of Analysis

On its own no method of analysis is superior to another. The choice of the most appropriate method

rather depends on features of the specific research design. The number of cases, the form of the

data, and the outcome to be explained influences the selection of the method.

The units of analysis in this study are nation states and their economic systems lead to the problem

of a medium number of cases. Analyzing a medium number of cases is difficult because there are

too many cases to conduct in-depth case studies but too few cases for (probabilistic) statistical me-

thods. On the one hand, qualitative case studies rely on extensive case knowledge that cannot be

accomplished by a single researcher for double-digit case numbers. On the other hand, statistical

methods require at least a triple-digit number of cases to avoid biased results. (Goldstone 2003: 42;

Hall 2003: 382; Ragin 2003: 6).

Qualitative Comparative Analysis

Qualitative Comparative Analysis (QCA) is a method developed by Charles Ragin (1987, 2000) to

solve the problem stated above.

The method is based on the binary logic of Boolean algebra. Each case is represented as a combina-

tion of causal and outcome conditions. The basic idea is that cases can be represented by formal

logical statements in which the independent variables (conditions) for each case, in combination,

are seen as logically implying the score on the dependent variable (outcome) for that case. These

combinations can be compared with each other and then logically simplified through a bottom-up

process of paired comparison (Ragin 1987).

The first step in a QCA is to identify the relevant causal conditions for the outcome variable. In this

study the relevant causal conditions are the institutional subsystems implied by the VoC-approach.

The subsystems have to be aggregated with indicators that determine the presence or absence of a

certain institutional form. For example, the subsystem welfare state would be analyzed regarding

the question if a generous welfare state is present or not. A high dismissal protection for employees

and long term contracts maybe indicators for the presence, while low forms of dismissal protection

for employees and short term contracts may indicate the absence of a generous welfare state.

The next step is to construct a truth table with data for selected cases regarding the causal condi-

tions and the outcome variable. Truth tables list the logically possible combinations of conditions

and the outcome associated with each combination.

19

Figure 3: Truth table with four causal conditions (A, B, C, D) and one outcome (Y)5

A truth table elaborates and formalizes the process of examining cases. It enables the researcher to

identify explicit connections between combinations of conditions and an outcome. Table 2 shows

that QCA is based on binary coding, having only two values (0;1 or Yes;No). This basic version of

QCA is called Crisp-Set-QCA. Once cases, conditions, and outcomes are properly assigned, the

Boolean algebra-techniques are used to identify the logic of the conditions under which outcomes

occur by stringing together equations representing each outcome. The next step is to simplify the

equation. Paths that differ by only the presence or absence of one attribute are treated as equivalent,

with the differing attribute removed from the path. For example if ABCD = Y and AbCD =Y the

equation could be simplified to ACD=Y since the presence or absence of B does not influence the

outcome.6 The goal of the logical minimization is to represent the information in the truth table re-

garding the different combinations of conditions that lead to a specific outcome (Ragin 1987: 104-

113).

5 Source: Rihoux/Ragin 2004. 6 It is common practice in QCA to use capital letters for the presence of a condition and small letters for the absence of a condition.

20

With the results of the simplification process one can identify necessary and/or sufficient conditions

regarding the dependent variable. A condition is necessary if it must be present for a certain out-

come to occur. A cause is sufficient if by itself it can produce a certain outcome.

⋅ Y = AC + Bc (No cause is either necessary or sufficient)

⋅ Y = AC + BC (C is necessary but not sufficient)

⋅ Y = AC (Both A and C are necessary but not sufficient)

⋅ Y = A + Bc (A is sufficient but not necessary)

⋅ Y = B (B is both necessary and sufficient)

Thus, it will probably not be possible to identify single necessary or sufficient conditions for the

outcome economic success. It may be possible to identify multiple combinations of conditions that

lead to economic success. One key feature of QCA is its capacity to identify multiple causation,

where a given outcome may be caused by different combinations of conditions. This is the main

reason why QCA seems to be the appropriate method of analysis for this study. Economic success

may be caused by not only one best institutional configuration, rather there are different causal

paths. Furthermore, the validity of different hypotheses within the VoC-Framework could be tested

in reference to emerging economies. Finally, QCA can also be used to construct typologies. The

goal of analysis here is to produce aggregate cluster by sorting cases into different combination of

scores (Ragin 1987: 154ff).

One of the major problems of Crisp-Set QCA studies is the binary coding of the variables.

Crisp-Sets only capture if a certain variable is present or not. Because of this limitation, the original

QCA method was enhanced by so-called “Fuzzy-Sets”. Fuzzy-Sets extend Crisp-Sets by permitting

membership scores between 0 and 1 (Ragin 2000). For example, when analyzing a country’s organ-

ization of wage bargaining, it is possible that qualitative judgment leads to the opinion that wage

bargaining in this country is neither entirely centralized nor entirely decentralized, but something in

between. Fuzzy-Sets enable the researcher to scale the membership score to express this “in be-

tween” judgment. A country may receive a score of 0.7 to reflect that most of the bargaining is cen-

tralized, though some processes are not.

21

Figure 4: Crisp Set vs. Fuzzy Sets7

The use of Fuzzy-Sets increases the complexity of a research study, but it leads to higher content

validity and results that are closer to reality.

4.5 Data Collection and Coding The data will be collected through a meta-analysis of case studies in the relevant research field. A

meta-analysis is basically a reanalysis of existing single case studies along a coherent set of dimen-

sions. The case studies are coded along the specified dimensions and then analyzed and compared

again. To apply the generated data to QCA the data has to be scaled to dichotomous and/or fuzzy

variables. Via qualitative judgment each variable has to be specified regarding its presence or ab-

sence in each selected case. To be included into the meta-analysis a case study has to match the

following criteria. First, it hast to examine economic institutions of an emerging economy. Second,

it has to allow the coding of variables specified in the research design. Third, it has to fulfill formal

scientific criteria.

7 Source: Rihoux/Ragin 2007.

22

5 Time Schedule

Examination and structuring of literature: The first step will be to analyze and structure the

state of art literature on economic growth, comparative social science in general and comparative

capitalism in specific. The goal is to capture the state of art and derive a more specific theoretical

framework out of this work.

04/2008 –

08/2008

Case Analysis: Tying to the preliminary theoretical work detailed case analysis is necessary

in order to estimate the data basis regarding institutional variables for different countries.

09/2008 –

12/2008 Case Selection: Case Selection will be done on behalf of economic performance indicators, as

well as available data and preliminary work for eligible countries.

01/2009 –

02/2009 Selection and operationalization of the independent variables: The next step will be to derive

the relevant independent variables (institutional subsystems) out of the theoretical framework

and case analysis. Furthermore, the institutional subsystems have to be operationalized, which

means to find valid indicators that are able to represent the variables.

03/2009 –

05/2009

Collection and Preparation of Data: This phase includes collecting, as well as checking, the

data for accuracy, entering the data into the computer, transforming the data, and developing and

documenting a database structure. In case of a QCA, the data has to be scaled to dichotomous

and/or fuzzy variables. Via qualitative judgment each indicator has to be specified regarding its

presence or absence in each selected country.

06 2009 –

09/2009

Data Analysis: Data analysis is the process summarizing data with the intent to extract useful

information. It basically means the combination of theoretical assumptions and empirical obser-

vations regarding the phenomena one wishes to explain. The chosen method of analysis in this

study is QCA, which usually means that the process of data analysis is not the final step of re-

search. In QCA data analysis often leads to contradictions, which forces the researcher to modify

the research design or take a more detailed look at the contradictory cases to solve/explain the

problem. In the end this iterative process hopefully concludes in a final model, which is able to

explain the phenomena one chose to analyze.

10/2009 –

02/2010

Summary and interpretation of the results: 03/2010 –

06/2010 Revision 07/2010

– 10/2011

Print and publication of the study 10/2010 –

12/2010

23

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