Corporate Governance, Finance and the Technological Advantage of Nations (Routledge Studies in Global Competition)

Corporate Governance, Finance and the Technological Advantage of Nations

There is much debate regarding which countries’ economies have the best economic systems to encourage economic growth and technological change. This book is a major contribution to this discussion, connecting the fields of corporate governance and finance with the field of innovation and technology and analysing the ways in which countries’ systems of corporate governance affect firms’ ability to meet the technological challenges of different sectors. Tylecote and Visintin combine incisive analysis with empirical studies of systems of corporate governance in the US, Europe, East Asia and China, demonstrating how these systems vary and how the demands on those who control and finance industry are changing. The authors argue that while certain types of system have worked for particular sectors, the technological revolution through which we are passing demands innovation in corporate governance and finance. Indeed, this book goes some way to challenge accepted views of best practice in corporate governance and finance, showing how structures and rules intended to advance ‘shareholder value’ may undermine it by inhibiting technological change. This book will be required reading for students and researchers engaged with corporate governance and national business systems, as well as those interested in systems of innovation. Andrew Tylecote is Professor of the Economics and Management of Technological Change at the University of Sheffield. Francesca Visintin is Associate Professor in the Department of Economics at the University of Udine.

Routledge studies in global competition Edited by John Cantwell University of Reading, UK and

David Mowery University of California, Berkeley, USA

1 Japanese Firms in Europe Edited by Frédérique Sachwald 2 Technological Innovation, Multinational Corporations and New International Competitiveness The case of intermediate countries Edited by José Molero 3 Global Competition and the Labour Market Nigel Driffield 4 The Source of Capital Goods Innovation The role of user firms in Japan and Korea Kong-Rae Lee 5 Climates of Global Competition Maria Bengtsson 6 Multinational Enterprises and Technological Spillovers Tommaso Perez 7 Governance of International Strategic Alliances Technology and transaction costs Joanne E. Oxley

8 Strategy in Emerging Markets Telecommunications establishments in Europe Anders Pehrsson 9 Going Multinational The Korean experience of direct investment Edited by Frédérique Sachwald 10 Multinational Firms and Impacts on Employment, Trade and Technology New perspectives for a new century Edited by Robert E. Lipsey and Jean-Louis Mucchielli 11 Multinational Firms The global–local dilemma Edited by John H. Dunning and Jean-Louis Mucchielli 12 MIT and the Rise of Entrepreneurial Science Henry Etzkowitz 13 Technological Resources and the Logic of Corporate Diversification Brian Silverman

14 The Economics of Innovation, New Technologies and Structural Change Cristiano Antonelli 15 European Union Direct Investment in China Characteristics, challenges and perspectives Daniel Van Den Bulcke, Haiyan Zhang and Maria do Céu Esteves 16 Biotechnology in Comparative Perspective Edited by Gerhard Fuchs 17 Technological Change and Economic Performance Albert L. Link and Donald S. Siegel 18 Multinational Corporations and European Regional Systems of Innovation John Cantwell and Simona Iammarino 19 Knowledge and Innovation in Regional Industry An entrepreneurial coalition Roel Rutten 20 Local Industrial Clusters Existence, emergence and evolution Thomas Brenner 21 The Emerging Industrial Structure of the Wider Europe Edited by Francis McGowen, Slavo Radosevic and Nick Von Tunzelmann

22 Entrepreneurship A new perspective Thomas Grebel 23 Evaluating Public Research Institutions The U.S. Advanced Technology Program’s Intramural Research Initiative Albert N. Link and John T. Scott 24 Location and Competition Edited by Steven Brakman and Harry Garretsen 25 Entrepreneurship and Dynamics in the Knowledge Economy Edited by Charlie Karlsson, Börje Johansson and Roger R. Stough 26 Evolution and Design of Institutions Edited by Christian Schubert and Georg von Wangenheim 27 The Changing Economic Geography of Globalization Reinventing space Edited by Giovanna Vertova 28 Economics of the Firm Analysis, evolution and history Edited by Michael Dietrich 29 Innovation, Technology and Hypercompetition Hans Gottinger 30 Mergers and Acquisitions in Asia A global perspective Roger Y.W. Tang and Ali M. Metwalli

31 Competitiveness of New Industries Institutional framework and learning in information technology in Japan, the U.S. and Germany Edited by Cornelia Storz and Andreas Moerke

34 Risk Appraisal and Venture Capital in High Technology New Ventures Gavin C. Reid and Julia A. Smith

32 Entry and Post-Entry Performance of Newborn Firms Marco Vivarelli

36 Corporate Governance, Finance and the Technological Advantage of Nations Andrew Tylecote and Francesca Visintin

33 Changes in Regional Firm Founding Activities A theoretical explanation and empirical evidence Dirk Fornahl

35 Competing for Knowledge Creating, connecting and growing Robert Huggins and Hiro Izushi

Corporate Governance, Finance and the Technological Advantage of Nations Andrew Tylecote and Francesca Visintin

First published 2008 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2007. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an informa business © 2008 Andrew Tylecote and Francesca Visintin All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested ISBN 0-203-93388-5 Master e-book ISBN ISBN10: 0-415-11221-4 (hbk) ISBN10: 0-203-93388-5 (ebk) ISBN13: 978-0-415-11221-5 (hbk) ISBN13: 978-0-203-93388-6 (ebk)

For all my sons ABT For Matteo FV

Contents

List of figures List of tables Preface and acknowledgements 1

Introduction: the role of corporate governance and finance in innovation

xiii xiv xvii

1

1.1 How do nations get technological advantage? 1 1.2 How can one classify and assess national systems of finance and corporate governance? 5 1.3 Financing and controlling technological change: the challenges 8 1.4 The demands of technological change on the finance and corporate governance system (FCGS) 11 1.5 Who controls firms, what are their objectives, and why should it matter? 15 1.6 Autonomy, stewardship and stakeholders 21 1.7 Technological regimes and technological revolutions 25 1.8 What this book sets out to do 26

2

How sectors vary in their requirements from the system of corporate governance and finance 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8

Introduction 31 Opportunity and need for reconfiguration 33 Visibility and appropriability 34 Changes over time 35 How scale matters 36 The high-technology sectors 37 The medium-high-technology sectors 50 Conclusion 60

31

x

3

Contents

How national systems of corporate governance and finance vary

63

3.1 Introduction 63 3.2 The shareholder–manager relationship 64 3.3 The manager–manager relationship 67 3.4 The role of employees 68 3.5 Our four categories 71 3.6 Poles of control; or, where does stakeholder capitalism come from? 72 3.7 Directness of control and degree of managerial autonomy 73 3.8 Mainland China, Taiwan and Italy 74 3.9 Family capitalism and what remained of it near the end of the twentieth century 75 3.10 Financial systems and the match with corporate governance 81 3.11 Financial systems: the evidence 85 3.12 Conclusion 87 Appendix 90

4

Corporate governance, finance and innovation in the US, the UK, and Switzerland

92

4.1 Introduction 92 4.2 The United States: more direct control than meets the eye 92 4.3 The UK: families fade, and the City rules 96 4.4 Switzerland: an oligarchy of families? 102 4.5 Corporate governance and technological advantage: what would one expect? 105 4.6 The high-technology sectors 107 4.7 The medium-high-technology sectors 121 4.8 Conclusion 126

5

Corporate governance, finance and innovation in Japan, Germany, and Sweden 5.1 Introduction 127 5.2 Germany: how stakeholder structures developed 127 5.3 Japan: how stakeholder understandings developed 129 5.4 Sweden: stakeholder capitalism gained and largely thrown away 131

127

Contents

xi

5.5 Stakeholding capitalisms compared 133 5.6 Corporate governance and technological advantage: what would one expect? 134 5.7 The high-technology sectors 137 5.8 The medium-high technology sectors 145 5.9 Conclusion 151

6

Corporate governance, finance, and innovation in France and Korea

152

6.1 State-led capitalism – changing fast 152 6.2 France 152 6.3 Korea 157 6.4 Corporate governance and technological advantage – what would one expect? 161 6.5 The high-technology sectors 165 6.6 The medium-high-technology sectors 177 6.7 Conclusion 182

7

Corporate governance, finance, and innovation in Italy and Taiwan

184

7.1 Introduction 184 7.2 Italy 184 7.3 Taiwan 190 7.4 Corporate governance and technological advantage, what would one expect? 195 7.5 The high-technology sectors 196 7.6 The medium-high-technology sectors 202 7.7 Conclusion 207

8

Corporate governance, finance, and technological development in mainland China 8.1 The new China: state and family capitalism, separate and together 208 8.2 The financial handicaps of the private sector 209 8.3 How the governance flaws of state-owned firms affect managerial behaviour 211 8.4 How finance and corporate governance undermined Chinese technological development 215 8.5 The evidence 217

208

xii

Contents 8.6 The outsiders: why their corporate governance works and why there are not more of them 218 8.7 The outcomes: strengths and weaknesses of Chinese businesses 220

9

Looking forward: current trends, future prospects, and modest proposals

223

9.1 Introduction: shareholder capitalism triumphant? 223 9.2 The performance of the competing systems 226 9.3 Corporate governance and stakeholder inclusion in a time of technological revolution 228 9.4 Current trends in governance 234 9.5 A prescription for ‘hybrid’ corporate governance 238

Statistical appendix

244

Notes Bibliography Index

262 272 299

Figures

1.1 1.2 2.1 3.1 4.1 4.2 6.1 7.1 A1 A2 A3

Manufacturing trade balance (2001) Revealed technological advantage (1990–1999) Average size of firms (1999), by number of employees Employee protection and length of employment Relevance of biotech for discovery activity in pharmaceuticals Market share of the best selling new medicines, by country in which the main providing firm is based Production in sector X/total production. Year 2000 R&D spending as a percentage of GDP: Italy, Taiwan, EU Weight of each sector in each country’s value added (2000) Distribution of employees by sector among firms by nationality, 2001 Proportion of total R&D spending devoted to each sector

2 3 38 69 112 112 178 188 260 260 261

Tables

1.1 1.2

Types of corporate governance and financial system Dimensions of technological regimes and financial and corporate governance systems 2.1 High-technology and medium-high-technology industries 2.2 Determinants and indicators of challenges of technological change for finance and corporate governance 2.3 Characteristics of technological change in high-technology manufacturing sectors 2.4 Top ten world software producers, turnover in FFm. 1997 2.5 Characteristics of technological change in medium-hightechnology manufacturing sectors 2.6 Broad-brush synthesis of findings 3.1 Insider- and outsider-dominated financial systems: the stereotypes 3.2 Soskice’s measures of business coordination, 1970s–1980s 3.3 Enterprise-level codetermination: employee representation on company boards, c.2000 3.4 Systems categorised by labour market/labour relations character 3.5 Corporate governance types by ‘polarity’ of control 3.6 Trust, by country 3.7 Comparative stock market capitalisation (as a percentage of GDP, late 1996) 3.8 Ultimate control of publicly-traded firms, 1996–1999 3.9 Ownership concentration and identities in large listed firms, 1990s 3.10 Ownership of listed stocks by sector 3.11 Countries by flow of Venture Capital Investment, 1999 3.12a Structure of net financing of non-financial enterprises, 1980–1990 3.12b Debt to equity ratios, 1980–1991 3.12c Structure of net financing of non-financial enterprises, 1970–1989 3.13 Business enterprise expenditure on R&D (BERD) as a percentage of value added in industry

6 15 32 34 39 48 53–54 61 65 67 70 71 73 76 77 78 79–80 81 83 86 86 86 90

Tables xv 3.14 3.15 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 7.1 7.2

Distribution of employment in manufacturing by size class (1999) Selected data from European Innovation Scoreboard 2001 Characteristics of shareholder capitalisms, early 1990s Aerospace: US, UK, and Switzerland Pharmaceuticals: US, UK, and Switzerland Office, accounting and computing machinery: US, UK, and Switzerland Radio, television and communication equipment: US, UK, and Switzerland Top ten world software producers, turnover in FFm. 1997 Software and IT services: US, UK, and Switzerland Chemicals: US, UK, and Switzerland Machinery and equipment not elsewhere classified: US, UK, and Switzerland Automotive: US, UK, and Switzerland Ranking of ‘lack of appropriate sources of finance’ as a factor hampering innovation, 1990–1992 Characteristics of stakeholding capitalisms, late 1980s Aerospace: Japan, Germany, and Sweden Pharmaceuticals: Japan, Germany, and Sweden Office, accounting and computing machinery: Japan, Germany, and Sweden Radio, television and communication equipment: Japan, Germany, and Sweden Software and IT services: Japan, Germany, and Sweden Chemicals: Japan, Germany, and Sweden Machinery and equipment not elsewhere classified: Japan, Germany, and Sweden Automotive: Japan, Germany, and Sweden Characteristics of state-led capitalisms, mid-1980s Aerospace: France and Korea Pharmaceuticals: France and Korea Foreign share of electronic output and exports (US$ million) in South Korea Office, accounting and computing machinery: France and Korea Radio, television and communication equipment: France and Korea Software and IT services: France and Korea Chemicals: France and Korea Machinery and equipment not elsewhere classified: France and Korea Automotive: France and Korea Characteristics of family/state capitalisms Aerospace: Italy and Taiwan

91 91 105 109 111 117 118 120 120 121 123 125 129 134 137 138 142 142 144 145 147 150 161 166 169 170 171 171 176 178 179 181 195 197

xvi 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 8.1 A1 A2 A3 A4 A5 A6 A7 A8 A9 A10 A11

Tables Pharmaceuticals: Italy and Taiwan 198 Taiwan’s world market share in electronic products (2003) 200 Office, accounting and computing machinery: Italy and Taiwan 200 Radio, television and communications equipment: Italy and Taiwan 201 Software and IT services: Italy and Taiwan 202 Chemicals: Italy and Taiwan 203 Machinery and equipment not elsewhere classified: Italy and Taiwan 204 Automotive: Italy and Taiwan 206 Advantages and disadvantages of types of ownership in mainland China 214 Synthesis of data for Aerospace 246 Synthesis of data for Pharmaceuticals 247 Synthesis of data for Office, accounting and computing machinery 248–249 Synthesis of data for Radio, television and communication equipment 250–251 Synthesis of data for Software and IT services 252 Synthesis of data for Chemicals 253 Synthesis of data for Machinery and equipment not elsewhere classified 254 Synthesis of data for Electrical machinery and apparatus 255 Synthesis of data for Automotive 256 Pattern of specialization in the production of machine tools 257 Revealed technological advantage, various periods 258–259

Preface and acknowledgements

It is a very odd thing, in a capitalist system, that it should be necessary to argue that profit, capital, and the power of those who own it, are important. Our economies are driven by firms, which are set up with capital, and absorb more. Making a profit is probably their central purpose and certainly their central requirement. Accordingly, their chief financial officers play a crucial governance role in everything they do – including innovation and technological change. Often that role is negative. When we have gone into big firms and talked to the middle managers who really know how technological change takes place there, most had a story to tell of how the CFO had inhibited or distorted it by his requirements for return on capital or cash flow. Yet turn to almost any textbook on the economics of technological change, or technology management, and you will be in another world. The CFOs, and the shareholders they represent, have disappeared. Profit and cash flow as aim and constraint are scarcely mentioned. Corporate governance is not mentioned at all. In smaller firms it is most obviously external finance which constrains or directs their technological change. This is not ignored in the technology literature. But most of the scholars who have written on it have looked at the financing with venture capital of the new high-tech elite – a subset of a much more general issue. What holds for firms holds for nations. We show in this book how the technological advantage of nations – their overall performance and their pattern of specialisation – has been, and is being, profoundly affected by their finance and corporate governance systems, broadly defined. There is a community of scholars, to which we belong, which works on national systems of innovation. All of us accept that a country’s science base, labour markets, and government policy play important roles in its system of innovation. These roles are by now far better understood than those of finance and corporate governance, which remain neglected areas in the NSI literature. We are also members of the finance and corporate governance academic communities, who need no persuasion of the importance of money and power. Many there have written well on the effect of finance and corporate governance on firms’ and even countries’ performance. Some have even addressed themselves to their effects on technological change. But they look at technology

xviii Preface and acknowledgements from a distance, and rarely if at all do they get to grips with it. Financing and controlling technological change is really very different from ordinary investments. The special nature of technological change is not only a problem for academics. It is one that dogs those who try to make money out of it in the real world. That is in one way easier, in another a great deal more difficult, now than it was (say) 30 years ago, because since then a technological revolution has hit us, which is still raging. Information and communication technology has presented us with a new paradigm of technological advance. On the one hand, this means a wealth of new technological (and commercial) opportunities, compared to what there were 30 years ago. On the other hand, there is not really an established way of making money out of them. In fact, as everyone knows, a great deal of money was lost by those who hurried to exploit them in the boom years of the late 1990s. A central problem is that in order to make money out of those opportunities, we know that most of our investment has to be in intangible, intellectual capital. Henry Ford and those who followed him had it much easier, raising money mostly for equipment, assets that accountants could enter in a balance sheet and a suspicious investor or financier could see. It is not easy to finance and govern what needs to be invested in technological change now. The result is underinvestment. In the face of a cornucopia of opportunity, the rate of investment in developed countries is low by historical standards. This represents not only a missed opportunity, but a real macroeconomic danger. Demand in the developed world is being maintained largely by the consumers and government of the United States, and to a lesser extent the United Kingdom, spending more than they earn. Colour has been put back into the pallid cheeks of the German and Japanese economies by demand for equipment from China, which is spending to catch up. If and when either of these locomotives falters – let alone both – deep recession must follow, unless in the meantime we have hitched up the best locomotive of all. So a discussion of this subject needs to be both backward-looking and forward-looking. What worked in this or that sector even in the recent past will not necessarily work even in the near future. The book concludes by sketching the sort of changes needed to construct financial and corporate governance systems that can cope with the new challenges. We wish to acknowledge the help and advice of those who commented on draft chapters or on elements of the book presented at seminars and conferences too numerous to list, and that our colleagues on the EU COPI project. Notably we thank Sergio Albertini, Andrea Baruzzo, Robert Boyer, Cai Jing, Steve Casper, Cristiana Compagno, Gao Xudong, Marc Goergen, Louis Goldish, Anna Grandori, Gu Shulin, Liu Jiajia, Lu Feng, Bengt-Åke Lundvall, Stuart Macdonald, Ferdinando Maraschini, Jacques Mazier, Bart Nooteboom, Paolo Omero, Pascal Petit, Daniel Pittino, Paulina Ramirez, Felix Schmid, Urs Schöttli, Su Yuezhen, Tu Jun, Nick von Tunzelmann, Franz Waldenberger, Sean Wang, Richard Whitley, and Wu Guisheng. The usual disclaimer applies with more than usual force: we apologise for the limited extent to which we were able to

Preface and acknowledgements

xix

act on excellent advice. We hope friends and colleagues will not feel they cast pearls before swine. At this point it is customary to express appreciation and offer apologies to exploited spouses and neglected children. We shall not do so. On the contrary, we declare that the writing of this book has not involved or caused any suffering by defenceless family members. Unfortunately, somebody always has to pay a price for high ethical standards. In this case that has fallen to a succession of Routledge editors, over the years (we shall not disclose how many). To Alison Kirk, Alan Jarvis, Robert Langham, Terry Clague and Thomas Sutton, we now say, sorry, thanks for the tactful nagging, and we trust it was worth the wait. Parts of Chapter 1 draw on Andrew Tylecote, ‘The role of finance and corporate governance in national systems of innovation’, Organization Studies, September 2007. Parts of Chapter 3 draw on Andrew Tylecote and Francesca Visintin, ‘A new taxonomy of national systems of corporate governance’, in: Lars Mjøset and Tommy H. Clausen (eds) Capitalisms Compared, Comparative Social Research, vol. 24 (Amsterdam: Elsevier JAI, 2007), pp. 71–122. Parts of Chapter 9 draw on Andrew Tylecote, ‘Organisational structure and the diffusion of new forms of corporate governance in Europe’, in: E. Lorenz and B.Å. Lundvall (eds) How Europe’s Economies Learn – Co-ordinating Competing Models (Oxford: Oxford University Press, 2006), ch. 8 pp. 178–202. Acknowledgement is given to, respectively, Sage, Elsevier and OUP, for their permissions to reproduce the above material. We also acknowledge the financial support of the European Union through the Targeted Socio-Economic Research programme.

1

Introduction The role of corporate governance and finance in innovation

1.1 How do nations get technological advantage? The aim of this book is to show how far a set of institutions and relationships, which we call corporate governance, together with a closely related set, which we call finance, can go to explain the technological advantage of nations. Corporate governance we will define simply as who controls firms, and how – although that begs many questions, which will be answered later in this chapter and in Chapter 3. Finance is probably clear enough for the moment. The technological advantage of nations, we will dwell on now. The phrase recalls Michael Porter’s book on The Competitive Advantage of Nations, as it was intended to. Porter asked, as we ask, why does one country do better in industry A and another in industry B? And why do some do better overall? But we refer to technological advantage. Technological innovation is one of the driving forces of modern capitalism, and arguably the main one. We do not mean by this that those who develop or first introduce a new technology are necessarily those who dominate the economy. The race may go not to the technologically strongest, but to those with the sharpest commercial nose, or the best organised to exploit the new technology. Google did not invent or introduce the search engine but they thought of a refinement that would help it to serve the searcher better. Dell have done little to make computers better, but they were the first to introduce the techniques of e-business effectively for selling them and (starting from the sale) organising the supply chain. Both firms needed to master one or more novel areas of information and communication technology (ICT) in order to introduce their ‘commercial’ or ‘organisational’ innovations. For us, that is technological enough. So our measures of technological advantage will not be only the production of new technology, as measured (very imperfectly) by rates of patenting. We shall also look at countries’ levels of production, and their trade balances, in sectors which can be defined as technologically demanding. The pattern of specialisation as shown by trade balances (as percentage of sector output: Figure 1.1) is broadly the same as that shown by relative patenting rates (otherwise known as Revealed Technological Advantage – Figure 1.2); that is, if a country has a trade surplus in sector X, then (out of all the patents taken out from that

2

Introduction Italy

France

Sweden

Japan

Germany

Switzerland

UK

US 6

4

2

Motor vehicles Radio, television, and communication equipment

0

2

Electrical machinery Office, accounting, and computing machinery

4

6

8

10

Machinery and equipment

Chemicals

Pharmaceuticals

Aerospace

Figure 1.1 Manufacturing trade balance (2001) percentage of output (source: OECD (2003a)).

country) the proportion of them relating to sector X is likely to be relatively high compared to other countries. (For definitions of these measures see Statistical Appendix.) Thus, on both measures Japan and the United States are very strong in various areas of ICT hardware; Germany and Japan lead in motor vehicles; Germany, Japan and Italy lead in non-electrical machinery; Germany leads in chemicals. In a few rather ‘globalised’ industries this is not the case. In pharmaceuticals the US is strong on relative patenting but not on trade performance. This does not mean that patenting is a poor indicator of technological prowess in pharmaceuticals or that technological strength does not lead to commercial success there: it shows mainly that US firms often find it convenient to supply the huge US market with medicines they manufacture elsewhere.

Introduction

Italy

3

Motor vehicles Electrical machinery

France

Machinery and equipment Chemicals

Sweden Radio, television, and communication equipment Japan Office, accounting, and computing machinery Germany Pharmaceuticals Aerospace Switzerland

UK

US

0

1

2

3

Figure 1.2 Revealed technological advantage (1990–1999) (source: authors’ calculations on www.nber.org/patents (see Statistical Appendix)).

But are countries, or nations, the right level to consider technological advantage at? Do countries innovate? No, the main unit that can be said to innovate in a capitalist economy, is the firm. Still, firms are not isolated units: they compete and cooperate with others, and they have connections with other institutions of various kinds. Their interactions are particularly important in innovation, since innovation revolves around learning, and learning, as argued by Bengt-Åke Lundvall (1992: 1), ‘is predominantly an interactive and therefore socially embedded process which cannot be understood without taking into consideration its institutional and cultural context’. We have then to consider systems of innovation. The first problem is where to set the boundaries of those systems. The early writings on systems of innovation were on national systems of innovation. The first book on the subject was Christopher Freeman’s (1987) on Japan, although Freeman gracefully conceded first use of the term to Lundvall.1 There were two

4

Introduction

key early edited works on national systems: Lundvall’s (1992) National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning and Richard Nelson’s (1993) National Systems of Innovation: A Comparative Study. Even in a globalising world economy, there are factors that vary more among countries than within them – conditioning factors like consumer tastes; supportive factors like educational systems and research institutions. The interactions that are key to innovation – cooperation between firms and research institutions, collaborations among firms, rivalry and imitation among them – take place more frequently and intensely where geographical and cultural distances are short. And the national state even now can play an important role in the direction and rhythm of technological innovation (Niosi et al. 1993; Patel and Pavitt 1994; Freeman 1995; Edquist 1997). Other authors place a major emphasis on regional systems of innovation, where regions might cross national borders or be part of a wider national system. For example Braczyk et al. (1998) trace the history and the structural characteristics of 14 regional systems of innovation. Useful as this work is, most would accept it as something of a supplement to that on national systems. Both these approaches are geographical in the definition of space. The alternative is to divide the world economy by type of activity. That can be done in two different planes, vertical (following chains of production which connect producers to users), and horizontal (looking at a particular sector such as pharmaceuticals or steel). There are accordingly two competing approaches. The Technological Systems of Innovation approach (Carlsson and Stankiewicz 1991) emphasises cooperative relationships, many of which are in the vertical plane of interaction. Sectoral Innovation Systems, on the other hand ‘focuses on competitive relationships among firms by explicitly considering the role of selection environment’ (Breschi and Malerba 1997: 131). In other words, competition among the firms in a sector helps to determine which innovation emerges victorious. The other firms with which the firm relates – cooperatively as well as competitively – may well of course be foreign, and in a globalising world a sectoral innovation system will certainly extend across borders, as an ever-increasing number of firms do. We shall draw on the insights of both these approaches from time to time, particularly in Chapter 2. Yet there is still something rather national about firms, most of them at least, and some of the most national aspects of firms, we shall argue, are connected to their finance and corporate governance. Finance and corporate governance (as the reader will be expecting us to insist) are important, and they are closely connected. Firms are organisations set up with the primary purpose (normally), and requirement (universally), of making profit. Firms must raise, use and reproduce capital in order to come into being, survive and grow: so the question of finance is central to a firm’s being, not a mere necessary inconvenience as it might be for a university or a government. Accordingly, those whose capital is most at risk in it – the shareholders – have the first (although perhaps not the only) claim to power over it. One cannot expect to understand firms’ behaviour in any area without understanding their finance and corporate governance.

Introduction

5

In other words: in capitalism, capital and capitalists count. One might therefore expect the literature on technological innovation to give a central place to finance and corporate governance. It did so once. The founding father of the economics of technological innovation, Joseph Schumpeter, recognised the importance of finance and corporate governance. Innovation was usually expensive: ‘major innovations and also many minor ones entail construction of New Plant (and equipment) – or the rebuilding of old plant – requiring non-negligible time and outlay’ (Schumpeter 1939: 68). In his early work he saw these ‘new combinations’ as generally introduced by firms founded for the purpose – by entrepreneurs who were ‘new men’ not established in business (Schumpeter 1911/1996). Such innovators required external finance. Later, influenced by developments in US business, Schumpeter (1942) saw the main driver of innovation as the ‘perfectly bureaucratized giant industrial unit’, reinvesting profits into a routinised innovation process. Thus, for Schumpeter Mark I, financial institutions decided who should be given the resources to innovate: ‘[the banker] authorises people, in the name of society as it were, to form [“new combinations”]’ (Schumpeter 1911/1996: 74); for Schumpeter Mark II, the key decisions on resource allocation were part of the corporate governance of large firms. After Schumpeter, the literature on innovation seems mysteriously to have fallen almost silent on matters of finance and governance. By way of example, we conducted a brief survey of 400 articles on innovation, between May 1998 and October 2003, and found only seven which gave any prominence (i.e. a mention in the abstract) to questions of finance or corporate governance.2 There are distinguished exceptions to this neglect. Lundvall’s 1992 book on NSI contained a chapter (by Jesper Christensen) on the role of finance. There is the work of Lazonick and O’Sullivan which we shall discuss later. And Keith Pavitt in the decade before his untimely death in 2003 looked more than once at the role of finance and corporate governance in national systems of innovation (Pavitt 1999). He argued, as we shall, that alongside national systems of innovation, and interacting with them, there are national systems of finance and corporate governance, and that the manner and outcome of innovation has been decidedly different between the US and UK on one hand and Japan and Germany on the other, because of radical differences in their systems of finance and corporate governance (Tidd et al. 2001: 93).

1.2 How can one classify and assess national systems of finance and corporate governance? In parallel to, but quite separate from, the work done on national systems of innovation, there is now a large body of work on national systems of finance and/or corporate governance. It defines categories, assigns countries to them, and in a general way evaluates them. At one time the most popular distinction was between stock exchange-based and bank-based (or market-oriented and bank-oriented) financial systems (Zysman 1983; Levine 1997, 2002; Allen and Gale 2000). The attraction was

6

Introduction

that this classification appeared to combine categories of corporate financing, equity ownership, and corporate control: thus, bank-oriented systems were for long believed to exhibit high levels of bank finance and of equity holdings by banks, leading to close and long-term relations between banks and firms and active governance by the banks. Few countries however display all these features. In one ‘bank-oriented’ economy, Germany for example, bank financing has been rather low (Edwards and Fischer 1994). Another major economy, Italy, fits poorly into either category (Tylecote and Visintin 2002). Categorisation by ownership and control has been found more robust and useful. Franks and Mayer (1997) coined the terms ‘insider system’ and ‘outsider system’ to denote, respectively, •

•

economies with highly concentrated equity ownership, where larger blocks were generally held with control in mind (‘control-oriented systems’ in Berglöf 1997) economies with low equity concentration, where even the larger shareholders were generally uninterested in control (Berglöf’s ‘arms-length systems’).

See Table 1.1. The ‘outsider’ category corresponds well with the ‘stock exchange-based’ category above. The ‘insider’ systems comfortably include all the (allegedly) bank-oriented systems, but within them banks, where active, are merely one category of insider – family owners, government, and cross-holding firms are others. LaPorta et al. (1999) and Barca and Becht (2001) placed virtually all the non-English-speaking economies in the insider category, and the English-speaking economies in the outsider category. (We shall see later that the United States’ place is more arguable than most.) It is by now well established that each type of corporate governance system has its advantages. When a number of economies with insider systems (such as Table 1.1 Types of corporate governance and financial system Type of financial system

Share of control-oriented finance Financial markets Share of all firms listed on exchanges Ownership of debt and equity Investor orientation Dominant conflict of interest Role of hostile take-overs

Insider-dominated (Control-oriented)

Outsider-dominated (Arms-length)

High Small, less liquid Small Concentrated Control-oriented Controlling vs. minority shareholders Very limited

Low Large, highly liquid Large Dispersed Portfolio-oriented All shareholders vs. management Potentially important

Source: Adapted from Berglöf (1997) ‘Reforming corporate governance: redirecting the European agenda’, Economic Policy, April, pp. 93–123, Table 1.

Introduction

7

Germany and Japan) seemed highly successful, in the 1980s, economists naturally noticed their strong points. Stiglitz (1988), Shleifer and Vishny (1986), and Huddart (1983) pointed out that concentration of ownership, such as insider systems show, provides strong incentives for active corporate governance. In the 1990, as the flaws of insider systems became more apparent in practice, and the US economy made a come-back, the theorists became more conscious of the arguments against them. Shleifer and Vishny (1997) and LaPorta et al. (1999) argued that the exercise of power by dominant shareholders can be at the expense of minority investors and, in consequence, can limit the availability of external capital. Franks and Mayer (1997) were conscious of the advantages of both types of system. They argued that large ‘blockholders’ can commit to longterm cooperative relationships with other stakeholders (such as employees, suppliers and customers); which may be an advantage where such relationships are needed, but a disadvantage where changes like the adoption of new technologies are resisted by such stakeholders. Mayer (2002) added another point in favour of the outsider system: financial institutions that diversify their portfolios of assets, with only small stakes in any one firm, can take a relaxed approach to high-risk investment. ‘Insiders’ may have too many eggs in one basket to do so. If each type of system has its advantages, each will presumably tend to specialise in sectors in which its advantages are valuable and its disadvantages do little damage; and avoid sectors where the converse applies. A range of work has been done to explore this general proposition. Most of it gives more attention to the characterisation of the financial/corporate governance system than to that of the sectors examined. Thus, the one sectoral characteristic with which Rajan and Zingales (1998) and Cetorelli and Gambera (2001) are concerned is dependence on external finance. Carlin and Mayer (2003) go deeper: they look at industry measures of external equity financing, bank financing, and skill levels. The insider–outsider distinction fits well into still wider frameworks, developed mainly by political scientists and sociologists, distinguishing ‘national business systems’ (Whitley 1999, 2002, 2003) or ‘varieties of capitalism’ (Hall and Soskice 2001). We discuss this literature in some detail in Chapter 3; we shall only refer here to Hall and Soskice’s work. In brief, capitalism is seen as coming in two main varieties: • •

economies in which the market is allowed to structure economic relationships, economies which are to a large extent coordinated through non-market relationships.

The first are called Liberal Market Economies (LMEs), the second, Coordinated Market Economies (CMEs), of which the main category is Business-Coordinated. Neatly, the LMEs (led by the US and the UK) have ‘outsider’ corporate governance (CG) systems, and the CMEs (of which the leading business-coordinated ones are Germany and Japan) have ‘insider’ CG systems. Neatly again, the explanation and predictions of ‘varieties of capitalism’ are generally quite consistent with those of the financial and

8

Introduction

corporate governance economists. The LMEs, driven by the market, excel in industries that involve ‘radical’ technological change; the CMEs, in which market forces are restrained, excel where ‘incremental’ change predominates. (Rajan and Zingales et al. would agree, because the former seem likely to require more R&D, thus more risk capital, thus more equity financing, which the outsider systems are seen as better at providing.) Hall and Soskice (H&S) compare the US and Germany, using data on patenting, and duly find that the US is generally more specialised in sectors they classify as ‘radically-innovative’, Germany in ‘incrementally-innovative’ ones. The sceptic Mark Taylor (2004) reviewed their work. First, he cleared them of the natural suspicion that sectors had been classified to suit the argument. He used the extent to which patents in a sector had, on average, been cited in subsequent patent applications as the criterion of ‘radicalness’, and broadly agreed with H&S’s classification. Second, he repeated their tests, first for the US and Germany, and then for LMEs compared with (business-coordinated) CMEs. It was for the expanded data set that the predictions failed – or rather, they depended totally on the inclusion of the US as an LME. Whatever the other LMEs have in common with the US – besides speaking English – it does not seem to be anything that makes for radical innovation. Likewise, on the CME side, Japan stood out, inconveniently, as a radical innovator, next after the US. There is, in short, something about international specialisation – or, if you like, the technological advantage of nations – which remains to be explained, and it seems reasonable to look for a large part of the explanation in finance and corporate governance, broadly defined. None of the studies discussed started from a systematic analysis of the specific problems of financing and governing innovation and technological change. We shall now offer one.

1.3 Financing and controlling technological change: the challenges The problems of financing and controlling technological change are related to the difficulties of analysing it. These are severe. Technology is a factor of production which, from the point of view of conventional neoclassical economics, misbehaves utterly. With the other main factors, land, labour and capital (physical or financial), the more is used the less is left. The reverse applies with technology, since it is essentially knowledge, the fruit of learning, and one learns by doing and by using. Frameworks of thought which have been developed to cope with the allocation of scarce resources, do not, therefore, apply to technology (Arrow 1962b; Stiglitz 1988). The other factors, moreover, are in every sense of the word visible: the quantities at a firm’s disposal can be measured and valued fairly reliably and accurately. Technology cannot be. Even codified knowledge, such as one finds in a formula or a blueprint, is hard to value, and much knowledge may not be codifiable; or firms may choose not to codify it: they may keep it tacit. The technological capability of a firm in practice is based on a complex and changing amalgam of codified and tacit

Introduction

9

knowledge, of intellectual and human capital (Teece et al. 1998). Moreover the monetary value of this capability – the profit that can be derived from it – depends crucially on its scarcity, which given the nature of technology is essentially artificial. Other firms must be prevented from getting it, by means which will usually involve a degree of secrecy. This reduces visibility even more. The difficulties of valuing technological capability at a point in time – the valuation of technology as a stock – are great. Greater still may be the difficulties of valuing the resources invested in increased technological capability, during a period of time – technology investment as a flow. Clearly, research and development is part of it. So, in some degree, is new equipment. New equipment is visible in the firm’s accounts, and so in principle is research and development; but it is well known that much R&D, particularly in small firms, is informal, and not measured as such (Vossen 1999). Even more important, and even less visible, is the learning, or contribution to learning, of employees in sales and marketing, production, purchasing, whose main tasks are to do with current output but who have opportunities linked to their daily jobs to see how products or processes might be improved. They are, or should be, key actors in innovation. Their contributions to it may be cheap, but they are rarely free. The sales representative who (alongside selling the current range of products) finds time to talk to customers about what changes and new products they would like to see, and then finds more time to pass on what (s)he has learned to (say) someone in R&D, is by using that time spending the firm’s resources. It is highly unlikely that this expenditure will be separately monitored, let alone measured and recorded as an investment. These are problems of costing investments in improving technological capability. There are further problems of valuing the future output to be expected from that investment, many of them to do with technological uncertainty – ‘will it work?’ – and market uncertainty – ‘will it sell’? One of the worst of them relates to the effective ownership and control of that capability. Part of the ‘amalgam’ which we referred to above is human capital, which may, as it chooses, walk out of the door – lost to the firm and perhaps gained by a rival. Another part of the amalgam is that part of intellectual capital which is in some sense distinct from human capital: that is, it is not diminished by the departure of employees – within limits at least. But even then the firm depends on employees’ cooperation in keeping rivals from knowing too much about its intellectual capital, and about what is being done to increase it. The firm depends also in some degree on suppliers and customers with close and constructive relationships with the firm. The technological capability thus does not belong securely to the firm and its shareholders. The return the shareholders get from their investment in it may depend heavily on the firm’s relationship with these other stakeholders. So the tasks of finance and corporate governance in resourcing and controlling technological capability and innovation are extremely demanding. Financiers and shareholders will always need to understand the rate and the manner in which a firm is investing, and might invest, in improving its capability, and the likely

10

Introduction

outcomes in terms of value added and profit. It would be naïve to suppose that if they have such understanding, it will always lead them to encourage and support such investments. They may sometimes conclude that, however attractive to management – carrying forward one of their pet projects, satisfying their curiosity, realising their empire-building ambitions – a proposed investment in innovation and technological change would be unlikely to cover its cost of capital and should not be carried out. Under some circumstances such restraint might be for the best all round: the firm would make more profit and later be able to finance more successful and profitable innovation. But some firms might simply not have good opportunities for investing profitably in innovation, and in those firms, informed shareholder control might mean more profit, but less innovation than managers would have carried out if left to themselves – if autonomous. Another kind of disagreement between managers and well-informed shareholders might arise over the direction of technological change. Managers who have grown up with a certain technological paradigm – a way of thinking and a path or trajectory of improvement – are likely to be attached to it. They want to improve, but to do so in a familiar way. A move to a new paradigm will devalue their accumulated expertise – or be competence-destroying, in the words of Tushman and Anderson (1986) – and leave them dependent on the skills of a new generation who will then deserve to supplant them in power. Managers in such a situation need to be intellectually courageous and honest to admit even to themselves, let alone others, that the switch is for the best. Most will fail this test, at least until competitors have proved them wrong. Well-informed but detached shareholders and financiers – if there are any such available – then have the task of forcing radical change on the unwilling manager. Thus, as the Japanese camera industry was confronted by digitalisation in the late 1990s, the senior people in Canon’s photographic equipment division were reluctant: ‘The majority of technologists in the company thought that the quality of picture by digital camera must be much lower than with conventional cameras’ (Yada 2004: 27). In the end, the decision to introduce digital cameras – just in time for the company to win top position in the digital camera market – was driven through by the chief executive, an accountant by training. He himself was under pressure from American investors – themselves advised by industry analysts who typically take a sector-wide view of technological trends (Tylecote and Ramirez 2006). One area where the role of the well-informed shareholder will be supportive rather than intrusive, will be in management’s building of relationships with stakeholders. Close and constructive relationships with suppliers and customers, and employees, such as may be needed to protect and nurture innovation, take time to develop. They may require behaviour by management which is not profit-maximising over a short period of time or even with respect to a particular project. For example, a new product might be developed because it helped to maintain employment, although it was not expected to cover its cost of capital. The understanding among employees that the firm was doing its best to save their jobs might make them tolerant of process change that, in and of itself,

Introduction

11

tended to reduce employment. The outcome overall – of the new product plus the process change – would be more profit and more employment than doing neither. Shareholder pressure for profit, applied without understanding of such a trade-off, might spoil the deal. One can hardly expect that the various challenges that we have sketched here are faced in equal measure in every sector at all times. Nor, therefore, are the skills and relationships we have described of equal value, always and everywhere. There is therefore no point in trying to identify a national system of finance and corporate governance that is the best for technological change of all kinds. We need rather to explain why system A has come out on top in sector X, while system B has got the upper hand in sector Y; and perhaps why system C (generally deficient in all those skills and relationships) has performed badly across the board. For this we need an analytical framework that shows how sectors, and sub-sectors, may vary and change, in ways that affect the demands they make on the finance and corporate governance system. The next section sets out these dimensions of variation.

1.4 The demands of technological change on the finance and corporate governance system (FCGS) In 1982, Richard Nelson and Sidney Winter, in An Evolutionary Theory of Economic Change, introduced the idea of technological regimes, referring to the learning and knowledge environment faced at a given time by firms in a particular sector or sub-sector. We believe we have identified four dimensions of technological regimes that define the pattern and balance of the demands made upon the FCGS – the characteristics it needs to have in order to control and finance that sector properly. This determines the suitability of a particular FCGS to that sector – at that time. We shall state them and explain them one by one, showing what they demand from the FCGS (see Table 1.2 on p. 15). 1

We mentioned above that a move to a new technological paradigm would be competence-destroying. How far are the changes which a firm needs to introduce, competence-enhancing or competence-destroying? Competenceenhancing change is paradigmatic, path-dependent and cumulative (Malerba and Orsenigo 1997; Malerba 2004). Competence-destroying change involves radical shifts in direction, and to succeed in that, reconfiguration is needed: the firm has to reconfigure its organisation and change its methods, technologies and/or workforce. (As Teece 1998: 201 argues, ‘in rapidly changing environments, there is . . . value in the ability to reconfigure the firm’s asset structure and to accomplish the necessary internal and external transformation’.) There will inevitably be internal resistance, and an effective way to overcome that may be through pressure for higher value-added from owners or financiers who are well-informed – well-informed about the industry as a whole. (See the Canon example, above.) Sometimes, however, particularly where the most radical change is required, the leading firms do

12

2

3

Introduction not budge. Time and again, when top managers in large old firms blocked the development of a radically new product (Xerox with personal computers, Disney with computer animation), small new firms have taken up the running – Apple with the PC, Pixar with animation (Economist 2006c). If the most effective way to overcome such resistance is indeed to set up a new firm, then it will be very helpful to have strong and very well-informed venture capital, to establish and nurture such new firms. (This is not a new story. Venture capital is a term coined in the mid-twentieth century, but venture capital institutions, thinly disguised as banks, were operating in England in the 1770s, financing new high-technology mining firms using advanced steam engines, Brunt 2006.) Another of Malerba and Orsenigo’s dimensions is technological opportunity: the likelihood of innovating successfully – profitably – for any given amount of money invested in the attempt. Where there is high technological opportunity, there will be high spending on R&D and other innovative activities, and fast growth. What does high technological opportunity require from the FCGS? Clearly, a lot of money. Those who provide it should have a decent knowledge of the industry as a whole – industry-wide expertise again – although if no paradigm change is involved, and the money is going to established firms, much less expertise is required than for radical reconfiguration. They must also accept that even spending within an established paradigm is risky – some rival may get there first – so they are providing risk capital, which will normally be equity. It follows that equity or other risk capital must be available in generous quantities (most likely, on the face of it, in a ‘stock exchange-based’ financial system); and the firm must be prepared to take it on the terms on which it is available. Neither availability nor acceptability can be taken for granted, as we shall see in Chapter 3. If the firm is established, and profitable, it may be able to finance a high level of innovative expenditure out of its own cash flow – as managers would probably be glad to do; and so in that case management autonomy may be sufficient. The third of our ‘regime dimensions’ is visibility. This is very much our own, introduced in Tylecote and Conesa (1999) but prefigured in Tylecote and Demirag (1992). In fieldwork with British firms in the early 1990s, managers in large firms listed on the stock exchange persistently complained that their innovative activities were financially constrained; which seemed odd, given their easy access to risk capital on the stock exchange. In one sector alone, pharmaceuticals, the story was different. Gradually we came to understand what the main problem was: low visibility. The managers needed to satisfy the shareholders, who had only very limited information about the firm – mostly its financial accounts. Heavy spending on innovation would lead to lower profits for some years. Shareholders would only accept that if they had a clear understanding of the inputs and likely outputs of innovation. For the pharmaceuticals firms, they did: spending on innovation there, was mostly conducted in rather centralised laboratories, on R&D which could be easily measured, and its immediate

Introduction

4

13

outputs were ‘new chemical entities’ (medicines) which (being well protected by patent) could be safely discussed in public, at least in the last year or two before their introduction. In a word, their innovative activities had high visibility. No other sectors met all these conditions, and some met none. One example of low-visibility investment is the effort of the sales representative, mentioned in the last section. One British R&D director, of a cable-manufacturing firm, explained to us that one of the reasons why his firm was losing ground to its main Continental European competitor was that its competitor’s sales representatives talked regularly to customers about ideas for new products. His firm’s reps didn’t, because they, like everyone else, were being driven for immediate profit. If they took time to talk about future products it would reduce their division’s profit – the finance director whose financial controls were driving the business would not recognise this as an investment. When the visibility of innovation is low, owners and financiers need to engage closely with the firm, to develop firm-specific understanding – so as to be able to see below the surface to what is really being done for future innovative success. That seems to have been happening in the Continental cable firm. Failing that, a good second best is high management autonomy: managers being able to spend more or less as they choose on innovation, because they have access to a strong internal cash flow, and for some reason they can thumb their noses at the shareholders. (See Section 1.5 below.) In fact many managers who could not ignore shareholders’ wishes and interests indefinitely, can do so for a year or two, with a promise that patience will be rewarded. So an alternative to high visibility may be a fast pay-off. An example of extremely slow pay-off is given by the jet engine sector. Rolls-Royce’s development of the RB-211 engine, which began in the late 1960s, caused it massive losses during the 1970s, but was ultimately responsible for steady improvement in its market share for new engines during the 1990s (Lazonick and Prencipe 2005). The benefit to profitability came about a decade later still – because profits in this market come mostly from supplying spare parts and services. Pratt and Whitney, one of its two US competitors, effectively gave up the innovative battle during the 1980s and 1990s – the pay-off was too slow. (Why Rolls-Royce, a British firm, held on is explained in Chapter 4.) The last of our dimensions is stakeholder spill-overs: the extent to which employees and allied firms (notably customers and suppliers) benefit from and are able to contribute to the firm’s technological changes. (See for example the ‘quid pro quo’ mentioned in Section 1.3, where employees go along with process change in exchange for new product development.) In some sectors this is certainly of great importance. Here is Malerba summing up the situation in ‘specialized suppliers’ (mostly equipment producers), one of the four types of sector that Pavitt (1984) identified in his famous taxonomy: ‘innovation is focused on performance improvement, reliability

14

Introduction and customization, with the sources of innovation being both internal (tacit knowledge and experience of skilled technicians) and external (userproducer interaction)’ (Malerba 2004 p. 384; italics added). Clearly for such firms, close and constructive relationships with stakeholders – here, skilled employees and ‘lead’ industrial customers – are vital. We sum up such relationships, with employees and other firms, as ‘stakeholder inclusion’.

Stakeholder inclusion is relevant not only to the making of innovations, but also to the protecting of them, or appropriation: the challenge of ensuring that the firm, or more specifically its owners, pockets as much as possible of the returns from innovation. The standard work on this area is that of Teece (1986, 1998) who puts the emphasis very much on the danger of imitation by rivals, and sets out four main means of defending those returns: inherent difficulty in replicating the innovation (for example where much tacit knowledge is involved); intellectual property protection (patents, copyrights, etc.); investment in complementary assets and technologies such as manufacturing and marketing facilities; and dynamic capabilities that in effect make the firm a moving target by producing a stream of further innovations. We can insert stakeholder inclusion into Teece’s argument. Take the difficulty of replication, which depends largely on the degree of codification: this is to some extent for the firm to choose. The more the relevant employees can be trusted – not to talk, and not to walk – the better sense it makes to keep knowledge tacit. Even when it is necessarily codified – as for example with a chemical formula – if employees can be trusted to keep a secret, patenting can be delayed, thus increasing the life of the patent after launch. Dynamic capabilities, again, go very well with trustworthy employees and reliance on secrecy: if rivals only find out about products after launch, it may be too late, where the innovator already has another improvement in the pipeline. There may be limited scope for investment in complementary assets and technologies where the firm has industrial suppliers and customers who, so to say, box it in, in a vertically-disintegrated chain of production. In this situation a relationship of mutual loyalty with them may be to some extent an alternative to such an investment; and again, it may help in maintaining secrecy. The extent to which firms can take advantage of stakeholder inclusion – or need to – varies greatly by sector. For ‘specialised suppliers’, as Malerba (2004: 384) says, ‘appropriability comes mainly from the localized and interactive nature of knowledge’. The role of stakeholder inclusion in appropriation is much less in pharmaceuticals, where a product innovation, for example, is extremely easy to replicate but can be exceptionally well defended by patents. In defensibility by patents, pharmaceuticals lead, followed by chemicals, then electricals; mechanical sectors trail (Granstrand 2004). There are links and correlations among our four dimensions. Low visibility and high stakeholder spillovers tend to go together, because they both arise when lower-level employees, customers and suppliers are closely involved in

Introduction

15

Table 1.2 Dimensions of technological regimes and financial and corporate governance systems Dimension

Technological regime

Finance and corporate governance

1

Extent of competence destruction and consequent need for reconfiguration of firm structure.

2

Technological opportunity

3

Low visibility/slow pay-off of innovation Stakeholder spill-overs in innovation

Availability of expert finance for new firms in areas affected by radical innovation Pressure from expert owners for higher value-added in such areas Availability and acceptability of expert risk capital; management autonomy Shareholder/ financier engagement; management autonomy Stakeholder inclusion

4

innovation. One clear link between them is secrecy to protect an innovation: secrecy reduces visibility, and it requires the inclusion of whoever shares the secret. There is, on the other hand, a tension between stakeholder inclusion and competence destruction. Existing shop-floor employees, customers and suppliers may give vital help to an innovating firm in producing a competence-destroying change, but once it has happened in a sector, it is likely to reduce the value to all the firms in this sector of those who have the old competencies – what they know and can provide loses value, and commitments to them can indeed become a serious liability, not asset. Technological opportunity stands slightly apart from the other three: the sectors that show competence destruction, through radical innovation, naturally tend to show high opportunity, but they are a subset of the high opportunity sectors: as we shall argue in Chapter 2, there are sectors that show high opportunity without much competence destruction over considerable periods, (see Table 1.2).

1.5 Who controls firms, what are their objectives, and why should it matter? Having set out what demands innovation may make on the system of corporate governance and finance, we will consider now how far the insider/outsider distinction can help us predict whether a system can meet one or other demand. 1.5.1 Control in outsider systems The modern literature on corporate governance starts from Berle and Means’ (1932) claim that the top managers of most large US companies were no longer in any obvious sense under direct shareholder control, largely because shareholdings were fragmented. (B&M’s own data showed that this claim was

16

Introduction

highly exaggerated (Gadhoum et al. 2005).) Within another generation it was shown, much more convincingly, that this was true for Britain (Florence 1961). This stylised fact has since been the basis of a large literature written by mainstream economists familiar with America or Britain. (Even scholars living in very different corporate governance systems have frequently theorised about the stereotypical Anglo-American company or system.) Being mainstream economists, they naturally assumed that the parties involved were selfishly rational members of Homo economicus. They also assumed that the firm in every possible sense belonged to its owners, more particularly its ‘residual’ owners, the shareholders, and that the greatest social good could be expected to arise via the maximisation of shareholder wealth. The main current within this literature took shareholders to be principals, and managers to be agents, in a classic principal/agent relationship (Jensen and Meckling 1976; Fama and Jensen 1983; Shleifer and Vishny 1997). A principal, who is too busy or otherwise disinclined to run his or her own business, employs an agent to do it. The terms of employment are set by the principal – subject of course to there being a suitable person prepared to accept them. So the principal is in ultimate control; but the agent has the advantage of being on the spot. And the agent, like everyone else, is (to repeat) selfishly rational: looking after Number One. Given information asymmetry between principals and agents – that is, the agents are much better informed both about their own actions and about their outcomes – it is never likely to be optimal for the agents to act in a way that is optimal for the principals.3 How top managers’ behaviour will diverge from the ‘shareholders’ optimum’ depends on the way they are paid. Let us assume first that they are simply paid a fixed salary according to their position. Assume also (for the moment) that they will stay in the firm until they retire – or until they are fired, or the firm goes bust. They will only be fired for blatant underperformance because anything less than that can be explained away to the shareholders. Then chief executives, who have no higher to rise, will be •

•

lazy and/or luxury-loving, at the firm’s expense. Why not concentrate on having a good time, if you will be paid the same regardless of effort and economy? excessively risk-averse, normally, because if they take a risk and the worst happens, the result is dismissal, whereas if the outcome is good there is no gain compared to the cautious option. The exception arises where for some reason there is a very bad situation and they can expect even the cautious option to lead to dismissal. Then one may as well play for high stakes – ‘double or quits’: if the risk comes off the job is saved, if it does not, the outcome will be worse for the shareholders but not for the manager.

Next, let us be a little more realistic, and assume both that managers may be promoted, either inside or outside the firm, and that they will be paid not only a

Introduction

17

salary, but also a profit-based bonus. Now they have an incentive to ‘perform’, or rather to be seen to do so. Their firm, or their section of it, should be as profitable as possible – or appear to be. That will give them the largest possible bonus and, other things being equal, the best chance of promotion inside or outside. So in this situation there is some incentive for effort and economy, and even for taking risks. The main distortion now is towards too-short time horizons. There are many courses of action that can give high profits for a year or two at the expense of the further future. If the executive has moved on (or retired) by the time the ‘further future’ arrives, that is somebody else’s problem. An even better way of ‘aligning incentives’, in principle, is the stock option. Give Firm X’s chief executive at time t the right to buy (say) a million of X’s shares, five years on, at the price at which they stand at time t: say $10. If X’s share price in the market has risen by time t + 5 to $30, then for each share there is an instant capital gain of $20, and the chief executive can be $20 million richer overnight. He or she then has a strong incentive to do what it takes to push up the share price. The share price will depend on profits between t and t + 5 (the ‘exercise date’), and also on what are seen as the firm’s prospects. (Note that there is no ‘downside risk’ attached to stock options: if things go badly and the share price goes down, the shares do not have to be bought: the manager has only an option, not an obligation, to buy.) This should wipe out any remaining tendency to be risk-averse. What it does to short-termism depends on how far ahead is the exercise date for the options, and also how perceptive the ‘market’ is about the firm’s prospects. If the exercise date is close and the ‘market’ seems to the managers not to be perceptive, then there is a very strong incentive for short-termism, and sheer deceit. Further, giving enough stock options to motivate managers strongly is expensive. The notorious case of Enron shows how stock options can, in the worst case, transfer large amounts of money to managers in exchange not for high profits but for the appearance of high profits. The choice for principals in the face of severe information asymmetry thus seems to be between the plague and the cholera. The solution is then, if possible, to reduce the information asymmetry, by active monitoring. This is what auditors and non-executive directors are mainly for. The Enron scandal (and others about the same time) suggested that neither could be relied upon. But why not? In principle both should be very useful to shareholders. The main problem is that a key initial assumption in the principal–agent theory of corporate governance is flawed: ‘Shareholders are principals’. Principals choose their agents. In most large listed firms in the United States and Britain – the firms with dispersed ownership to which the corporate governance theorising relates – this is not the situation. Shareholders do not choose managers or decide how to pay and monitor them – managers choose managers, and decide how they themselves are to be paid and monitored. To be painfully precise, directors choose top managers, but top managers choose (and are) directors. They also choose their auditors. Even top managers who have not the slightest intention of misbehaving

18

Introduction

have a natural tendency to choose ‘monitors’ who will agree with what they are doing and want to do. This odd situation will make information asymmetry greater than it would be if shareholders really were principals. It will also increase the degree of managerial autonomy – managerial freedom to act openly against shareholders’ wishes – beyond what it would then be. How much autonomy there will be, is debatable, and has been much debated. In principle, shareholders, however dispersed, can come together and elect a new board of directors who will fire the top management. Alternatively they can sell to a hostile takeover bidder who will do the same. The latter requires no initiative by the shareholders, who may simply accept an offer made to them, although one can well imagine disgruntled shareholders seeking out and encouraging a potential bidder. This is what is referred to by ‘the market for corporate control’, which is assumed to be active in ‘outsider’ systems. But is it? In the United States, ‘shark repellents’ (takeover protection devices) have long been deployed by incumbent managements. They were briefly ruled illegal in the early 1980s, then restored to full efficacy by a number of court judgments and state laws (Weston et al. 2004). Management protection against takeovers (and against direct shareholder intervention) is far weaker in Britain, as we shall see in Chapter 4. So managerial autonomy (in the stereotypical large firm with dispersed shareholdings) is much greater in the US than Britain. Assume that there is at least some managerial autonomy, then. What will managers do with it? No one would really accept the economist’s crude assumption that all managers are interested in is money and leisure. There is general agreement that they are interested in power as well. (In the next section we see that some noneconomists ascribe higher motives to them too.) So ‘empire-building’ is included among managerial objectives. There are two ways of building empires: by organic, internal growth, and by acquisition. It is well understood that growth by acquisition will often be pursued beyond the point of profit maximisation – which is why when a takeover bid is announced the usual stock market reaction is to lower the price of the bidding company. Organic growth may also be pursued beyond this point. Marris (1964) constructed a persuasive theory of ‘managerial capitalism’ based on the idea of growth maximisation subject to a profit constraint: that is, profit would be sacrificed to growth but only down to a certain level. The ‘floor’ of minimum profit might be set at what the shareholders would tolerate or it might be determined by what was required to finance the growth strategy. Strong shareholder dissatisfaction will at the very least lead to a low share price which will make it impossibly expensive to raise new capital in the stock market or to pay for an acquisition with the firm’s own shares. As far as the top management of one firm is concerned, organic growth and growth by acquisition are alternative means to the same end – a larger ‘empire’. Organic growth will benefit lower management and other employees, which an acquisition probably will not; but acquisition is quicker. However, if hostile bids are blocked, firms must be found whose managers are willing to surrender their own power. Owner-managers who want to get rich are obvious candidates – if the price is right.

Introduction

19

Even managers who are well protected from shareholder interference or hostile takeover may then have every incentive to present themselves as loyal servants of shareholder interest – as maximisers of shareholder value, to use the current buzzword. As such they will find equity capital, for acquisitions or other investments, cheaper to come by. For such managers the stock option has been manna from heaven. As we showed above, if used by intelligent controlling shareholders it should align managers’ incentives more closely to shareholder interests. If used by controlling managers, it gives them a further incentive to do what it takes to raise the share price, and reassures shareholders that this is what they will try to do; although they should not be much reassured, since the record shows that options will be manipulated to enrich managers regardless of the firm’s performance. (In the next section we look at the effects of the vogue for ‘maximising shareholder value’, since the 1980s.) How will the extent of managerial autonomy in a firm affect the amount spent on investment generally and innovation in particular? It depends on the opportunities it has for profitable growth, and on how severe is the information asymmetry problem. If a firm has good opportunities for profitable growth and information asymmetry is mild, there is nothing to gain by autonomy, since shareholders will be in favour of a fast-growth strategy and with them in tight control there will be less waste and less conservatism. However, if the opportunities for profitable growth are poor, autonomous managers are likely to invest more heavily and innovate more rapidly than managers with shareholders in control. Likewise, if information asymmetry is severe (because shareholders lack industrial expertise, or being disengaged cannot appreciate low-visibility investments) then whatever the opportunities, shareholder power will be a drag on innovation and growth. We shall see in Chapter 4 that this last point applies with force to Britain. We can conclude that it would be dangerous to expect uniformity from ‘outsider’ systems in their technological performance. Management autonomy can vary and we have already seen – comparing the US and UK – that it does. The industrial expertise and engagement of shareholders and financiers may also, in principle, vary (and with this the availability of venture capital). In Chapters 3 and 4 we shall see that it does. We have not so far discussed stakeholder inclusion: in Section 1.6 we shall see that it can and does vary too. Finally, this may be a good point to enter a warning about stereotypes. Just as Berle and Means (1932) understated the extent of direct shareholder control in the US in the 1930s – a time at which, for example, Henry Ford controlled Ford and the Du Pont family controlled both DuPont and General Motors – so recent writers understate it too. Gadhoum et al. (2005) have shown that a larger proportion of the largest firms in the United States are controlled by families and founding entrepreneurs than in Germany, the UK or Japan – and who should be surprised, when we know that the Waltons control Walmart, the Fords Ford, Bill Gates and his fellow founders Microsoft? The ‘shark repellents’ (deterrents to hostile takeover) that in some large US firms protect management autonomy, in others make it possible to maintain secure family control with a modest minority shareholding. (In Britain, more

20

Introduction

friendly to takeover, this is rarely possible.) So the largest ‘outsider’ economy is in large measure an insider economy. We discuss the stereotypes and realities of the US and UK further in Chapters 3 and 4. 1.5.2 Control in insider systems Insider systems might seem designed to minimise the two variables we have just been discussing: management autonomy and information asymmetry. The meaning of ‘insider shareholder’, of which the two classic types are founders and their families, and banks, is that the shares are bought and held with a view to some degree of direct control. It certainly makes sense for an insider to ‘engage’ with the firm and to invest the time required to develop ‘firm-specific understanding’. The insider, or one or more representatives, can sit on the firm’s board of directors and as such be privy to its secrets. So insiders should be able to cope well with low visibility. Whether they have the sort of industrial expertise required when the need for reconfiguration or the level of opportunity is high, is another matter. For the nurturing and exploitation of industry-wide expertise one needs industry-wide interests: stakes in a number of firms in the same industry. A big bank might well have the resources needed for that, but if it builds such stakes questions will be asked about monopoly power, as they were in Germany in the 1970s. In fact the insider may not exercise control effectively: family or bank oversight may be slack, and allow management a great deal of autonomy. The main limits to such autonomy will be in the raising of capital. An issue of new share capital, or a share swap as part of an acquisition, may ‘dilute’ the insider’s holding(s) and jeopardise their control. Heavy borrowing will increase their risks. So when either possibility is on the table one would, so to say, expect the sleeping ‘insider’ to wake up. Whether newly awoken or awake all along, the need to raise capital is a serious challenge for the insider and the insiderdominated firm. The most engaged insider is likely to be one that has a large proportion of its assets tied up in the firm – typically, the founding family. In that case it may have difficulty in providing extra share capital, while (as pointed out above) having misgivings about external capital; and the difficulty will be greatest for the riskier ventures. A bank shareholder, which will have less difficulty in finding finance, is on the other hand less likely to be fully engaged. A third important category of insider shareholder is another firm. Here we have to distinguish between two types of ‘cross-holding’: one way and two-way. Where Firm X has a large shareholding in Firm Y (but not vice versa) this is essentially the projection of whoever has power over (or in) X. Where the crossholdings are reciprocal – X and Y have shareholdings in each other – they may provide a buttress for management autonomy in both. This will be strong autonomy, which does not end when external capital is required, if the partner increases its shareholding in proportion to the shares being bought by outsiders. Government, at whatever level (central, regional etc.) also counts as an insider, in the sense that if it holds shares, it will be for control, or at least influence.

Introduction

21

Of course many firms are, or have been, wholly state-owned. It will be an odd sort of insider, however – at the opposite end of the insider spectrum from a founding family, since no individual will be involved whose own wealth is at stake. The incentive for any individual official, or group of officials, to develop understanding of the firm, or industrial expertise, is likely to be low – unless the firm is seen as important to government policy. If it does not seem important, its management will probably be allowed to go its own way, although perhaps starved of capital and inhibited from firing employees. We conclude that in insider systems as in outsider systems, there is nothing like uniformity where it counts. Only in industry-wide expertise, and thus in coping with high need for reconfiguration, is the picture fairly uniform (and bleak). In engagement, in the availability and acceptability of risk capital, and in management autonomy, anything is possible. The same is true, as we shall see in Chapter 3, for stakeholder inclusion.

1.6 Autonomy, stewardship and stakeholders There is a theory of, or approach to, corporate governance that is very much in favour of managerial autonomy, because it is rather optimistic about what managers will do with it. So far we have been working with some rather harsh assumptions about managerial aims and motives. To selfish love of wealth, luxury and leisure we added lust for power. The ‘stewardship’ approach rejects such assumptions. Drawing on the model of man put forward by Argyris (1973), and generally on psychology and sociology, proponents see managers as naturally inclined to cooperative, pro-organisational behaviour rather than to self-serving individualism. They gain satisfaction from the success of the firm they run and, as a consequence, their actions are most effective when the corporate governance structures give them authority and discretion: ‘. . . stewardship theorists focus on structures that facilitate and empower rather than those that monitor and control’ (Davis et al. 1997: 26). But how will top managers define ‘success’? Their motives are assumed to be ‘aligned with the objectives of their principals’ (Davis et al. 1997: 26) – who are taken by Davis and subsequent writers, always and everywhere, to be the shareholders. This last assumption is highly questionable. Is it psychologically and sociologically natural for managers to devote themselves to shareholders’ interests, when shareholders are not people with whom they deal and work? It is interesting that the model is the medieval steward, who looked after his lord’s lands while the great man was away at court or at war. The ideal steward of course looked after those lands as though they were his own. But who knows what the real steward might have done if he had thought he could get away with it – if he had been ‘facilitated and empowered’: dipped his own hand once or twice in the treasure chest? Or perhaps cut the rents, and increased wages? Lubatkin et al. (2005) argue for what amounts to a conditional or contingent stewardship approach: managerial opportunism as assumed by principal/agent

22

Introduction

theories appears plausible to them in the US, because of US culture and institutions, but not to anywhere near the same extent in Sweden or France. But who are the Swedish and French managers acting as (more or less) loyal stewards for? In both Sweden and France, it is explained, there are dominant shareholders that are much better able than the stereotypical US or UK shareholder to get their interests respected. Nonetheless, the managers’ sense of obligation is not simply to the shareholder, but to a wider set of stakeholders. (In Chapter 3 we shall see who these variously are, in Sweden and France and elsewhere.) Although this difference is put down by Lubatkin et al. to culture and institutions, it can be partly explained by law. In law, it is almost only in the Englishspeaking world that the enterprise belongs in the full sense of the word to the shareholders: elsewhere, managers have a legal obligation to act in the interests of a number of stakeholders (Kay and Silberston 1995). That, we submit, goes with the sociological and psychological grain. Serving a multitude of unseen and unknown shareholders, doesn’t. There is in fact an excellent economic justification for this wider approach to ‘belonging’. Margaret Blair (1995, 1996) points out that employees invest in ‘firm-specific human capital’ – capital that will be largely lost if they are dismissed or the firm closes. Thus ‘The value of the rents that employees have at risk in the typical large corporation is, in the aggregate, roughly the same order of magnitude as the stake that shareholders have’ (Blair 1996: 11). It follows that ‘management and directors should focus on maximising the total wealthcreating potential of the firm, not just on maximising the value of the stake held by shareholders’ (Blair 1996: 13). Blair’s conclusion is that corporate governance rules should be adjusted to give employees a share of control that corresponds to their investment in the firm. Blasi et al. (2003a) argue strongly in the same general direction. They point out that US industry, with the encouragement of legislators, has gone a long way towards making employees shareholders. However the problem of employee shareholdings, as the Enron debacle shows, is that they double the employees’ downside risk: if it fails they lose not only their jobs but part of their savings. Blasi et al. show that the neatest way of matching the inevitable downside risk that employees share with the firm, with a share of the upside (if it becomes highly profitable they should benefit accordingly) is to give all or most of them stock options – rights to buy shares in the future at a price fixed in the past, so that if its share price rises, they make an instant capital gain once the exercise date arrives. As we pointed out above, with stock options there is no downside risk because one is not obliged to exercise them. Justified as Blasi’s criticisms are, employee shareholding is another striking ‘insider’ element in the United States corporate governance system. Employee shareholdings can in some circumstances be voted, although almost always in favour of incumbent management (Weston et al. 2004). Whether they can or not, they make for a more cooperative relationship between management and employees; they notably help to dissuade employees from using what power they may have against the interests of shareholders. For example they may not

Introduction

23

resist the closure of a loss-making division, so that more funds may be put into a growth area. Blair and Blasi’s arguments for employee ‘inclusion’ are not specifically based on its benefits for innovation. William Lazonick’s and Mary O’Sullivan’s are, and what is more they are put in the context of an analysis of how finance and corporate governance systems affect innovation.4 Its starting point is a proposition with which we strongly agree: that the learning process required for innovation is uncertain, cumulative, and collective. It is uncertain because ‘what needs to be learned about transforming technologies and accessing markets can only become known through the process itself’. It is cumulative because ‘learning cannot be done all at once; what is learned today provides a foundation for what can be learned tomorrow’. Since for both these reasons the investment in learning takes time, it requires ‘sustained, committed finance’: financial commitment. Learning is also collective: it ‘requires the collaboration of different people with different capabilities [and thus] the integration of the work of these people into an organization’: organisational integration (all quotations from Lazonick 2004: 30). ‘The essence of the innovative firm is the organizational integration of a skill base that can engage in collective and cumulative learning’ (Lazonick 2004: 34). (Organisational integration is clearly closely related to our ‘stakeholder inclusion’.) In some degree, Lazonick and O’Sullivan seem thus to be doing what we are not trying to do: set out a one best way of financing and governing innovation. In fact within their second requirement there is room for variation: ‘The types of organizational integration that result in innovation vary across industries and institutional environments as well as over time . . .’ (italics added; Lazonick 2004: 50). ‘In industries such as electronics and automobiles, Japanese companies such as Sony and Toyota . . . remain leading innovators in those types of products in which . . . their integrated skill bases gave them international competitive advantage’ (Lazonick 2004: 45). American firms, at least recently, have tended to focus on ‘those types of activities in which innovation can be generated by investing in ‘narrow and concentrated’ skill bases of highly educated personnel’ (Lazonick and O’Sullivan 2000). It is organisational integration which thus bears the main load of explaining the sectoral specialisation of nations (Lazonick 2002a). It is the first requirement, financial commitment, which seems to offer a uniform prescription – put very plainly in Lazonick and O’Sullivan (2000) as ‘retain and reinvest’. There is some justification for this. Lazonick and O’Sullivan have shown how US industry enjoyed and gained from financial commitment during its global dominance in the early and mid twentieth century, and how that financial commitment helped provide conditions in which organisational integration could be developed and maintained. They have shown how Japan and Germany benefited from their own styles of financial commitment and organisational integration – the latter extending further than the US style, to encompass a large part of the non-managerial workforce (Lazonick 2002b; O’Sullivan 2002). The great contrast is with the decline of

24

Introduction

financial commitment in the late twentieth century United States, under attack from the ideology of ‘maximising shareholder value’, which they argue is responsible for a far-reaching erosion of organisational integration. In our terms, what serves to raise profits in the short term – sharp cuts in the labour force, buying from the cheapest supplier, for example – is adverse to stakeholder inclusion. Lazonick and O’Sullivan and their collaborators have shown how this undermined the US position in industries such as machine tools and jet engines (Forrant 2002; Almeida 2002). However, machine tools are a specialised-supplier sector which requires engagement and inclusion (Section 4); jet engines, as we pointed out above, have a very slow pay-off which requires engagement or real management autonomy. ‘Retain and reinvest’ suits them very well. But what of those areas where, because of their need for reconfiguration combined with high opportunity, we would expect to need new firms, supported by venture capital? Today’s best-known venture capitalist, John Doerr, calculates that between 1981 and 1990 the value of the new personal computer industry grew from virtually nothing to $100 billion, the largest legal accumulation of wealth in history. More than 70 per cent of these firms were venture-backed; nearly a third were backed by Mr. Doerr’s own firm. . . . the total of venture-capital investments [in all industries, in the US, defined as investments in start-ups and young companies] reached a record $10 billion last year [1996] . . . in 1995 70 per cent of American venture investments went to technology companies; two-thirds of those were in information technology, mostly computer hardware, software, and networking equipment [and 24 per cent went into biotechnology]. . . . (The Economist, 1997a: 9–20) This was the highest of the high ground of the new technologies, which was being occupied by the shock troops of the US economy, in the face of relatively feeble European and Asian opposition: Nearly half of Europe’s $9 billion in venture financing in 1995 went to management buyouts, an altogether stodgier business . .. . They funnelled just 2 per cent of their investment into biotechnology firms; communications, computers and other electronics received 16 per cent. Asian venture capital is often recorded as being nearly as big as America’s but it mostly takes the form of corporate investment by giant conglomerates and family-run businesses. ... (The Economist, 1997a: 20) Whatever damage was being done to other areas of the US economy by the abandonment of ‘retain and reinvest’, something valuable was being done here by capital that was presumably available because it was not being retained and reinvested. In the next section we consider whether there has been more of a need for such mobile capital recently than in the heyday of financial commitment in the US.

Introduction

25

1.7 Technological regimes and technological revolutions No doubt there is always some sector or sub-sector where competencies are being destroyed, and many where they are being enhanced. But it would be unwise to suppose that the rate of competence destruction, across developed economies in general, is always much the same. There is strong evidence by now that it fluctuates in long cycles or waves. There are times when there is an established set of technological paradigms, and enhancement dominates. There are other times when a new set becomes more-or-less accepted, and starts to destroy competencies across a wide range of industries – these are times of technological revolution. A technological revolution is in progress now, consisting of the wide diffusion and application of the new information and communication technologies. It is the fifth such revolution since the 1780s (Perez 1983; Tylecote 1991; Freeman and Louçã 2001). This allows us, learning from history, to make some generalisations about their economic and organisational effects. Perez (2002) focuses on the relationship of finance with management – or as she puts it, on the relationship of financial capital with production capital. This relationship develops and changes according to the degree of maturity of the ruling technological paradigm. In the period when the established paradigm has become mature (most recently, the 1960s and 1970s) there is a resulting reduction in profit opportunities and growing strain between financial and production capital. ‘Financial capital is footloose by nature’ (Perez 2002: 73). Incumbent production capital is tied down to the current paradigm by its investment in physical capital, the knowledge and experience of its management and personnel, its networks of suppliers, distributors and customers. ‘As the low risk investment opportunities in the established paradigm begin to diminish, either in innovation or in market expansion, there is a growing mass of idle capital looking for profitable uses and willing to venture in new directions . . .’ (Perez 2002: 33). When the new paradigm appears and some innovators want to try to commercialise it, It is here that the separation between financial and production capital has its most fruitful consequences . . . Financial capital will back the new entrepreneurs and it will be more likely to do so, in spite of the high risk, the more exhausted the possibilities are for investing in the accustomed direction. (Perez 2002: 33) However, in order to exploit the new paradigm fully, there has to be a new understanding between financial and production capital: they have to come much more closely together again. This in due course takes place – although not until there has been a period of frenzy (in this revolution, the late 1990s boom and internet bubble) followed by disillusion. Perez’s framework is attractive as a schematic, stylised account of a long cycle in the relationship of finance and industry, at least with regard to the outsider systems she seems to be describing. It reminds us that there is something to

26

Introduction

be said for ‘footloose capital’, and the more so at times like the present. However, like Lazonick, she does not differentiate systematically among sectors. The financial capital that backs the new entrepreneurs is, in the present period, venture capital, and one can see the importance of its role in the new sectors which are the spearhead of the revolution, such as software and microelectronics. But of equal interest to the sectors that are created by the new paradigm are those, much more numerous, which are transformed by it. Some transformations (as with machine tools) have happened already; others are in progress; others are still to come. We discuss some of these changes in Chapter 2, and in Chapter 9 we look ahead to how finance and corporate governance may respond to them.

1.8 What this book sets out to do As we said earlier: in capitalism, capital and capitalists count. Finance and corporate governance is surely important. And the nature of finance and corporate governance (FCG) is all the more important in innovation and technological change because financing and governing it is so difficult. The quality of a country’s finance and corporate governance system must greatly affect its success in innovation and technological change, and the type of its FCG system must affect which sectors it tends to specialise in. The aim of this book is to show how this works. We do not wish to claim too much. Even with the broad definition we give to ‘finance and corporate governance’, we have to concede that other factors are important too. Looking across the world economy there are some factors, such as labour market institutions, which are to some extent complementary to FCG because they affect mostly where the dominant firms in an industry choose to invest, while FCG affects mostly where those dominant firms are from. But those factors, and others, are also to some degree competitive with FCG. Where new young firms are trying to establish themselves, both the local FCG and the local labour market arrangements will affect their chances of success. It is quite obvious, likewise, that firms in high-technology industries (at least) need good access to the latest scientific and technological advances. A country without a strong science base in the appropriate disciplines is unlikely to be really successful in any high-technology sector. Another obvious limitation comes from path-dependence. Knowledge and the other factors which bring success in business are always to some (varying) extent cumulative: in any industry it helps a great deal in being successful today, if one was successful in that industry (or at the very least a related one) last year and last decade. History matters: and in sectors such as aerospace where, as we shall see, progress is highly cumulative, it matters a great deal. Aerospace is also of course a largely military industry. So the most important factor in determining technological advantage – any advantage – in aerospace now is what side a country was on in the Second World War. The losers lost their seats at the table, and they have had, and are still having, great difficulty in getting them back.

Introduction

27

Another more subtle case of path-dependence is electronics. Electronics took off, one may say, in the 1960s and 1970s, and changed very fast during this early period. This meant that there was relatively little cumulated knowledge during that period, and a newcomer could rather easily get a seat at the table if certain criteria were met. However, those countries that failed to get established in the sector then or shortly after, would find it much more difficult to do so later. Path dependence applies to most of the factors affecting technological advantage, and competitive advantage generally. It certainly applies to Michael Porter’s famous diamond, of four key determinants of national competitive advantage: factor conditions, demand conditions, related and supporting industries, and firm strategy, structure and rivalry. It must be rather disheartening (for example) for a policy-maker trying to use the diamond to guide policy, to be told (quite rightly) by Porter that it is very helpful in sector X to have strong ‘lead customers’5 for X within the country, and to have well-developed research and higher educational institutions serving the sector. If a country is not already strong in sector X it is unlikely to have these advantages and it will find it hard (although not impossible) to get them. But if some important factors in competitive advantage show a degree of path-dependence, it is all the more interesting to ask, what other factors may help, over a period of time, to move them to a higher path? It is a fascinating exercise to read Porter’s Competitive Advantage of Nations from this point of view, and in particular to consider how far finance and corporate governance can play such a role, of an unseen prime mover. Not that finance and corporate governance is always unseen by Porter. In the book and elsewhere he shows a good understanding of its direct role. His Chapter 3 has a great deal about finance and corporate governance systems. His central emphasis, however, is on interactions among firms. He stresses the value of interaction with homebased suppliers and customers, but as he points out, it does not occur automatically. We have already argued that finance and corporate governance may have a lot to do with it. In fact, where there is cross-holding of shares among suppliers and customers, the relationship with them is part of corporate governance – as we shall see most particularly in the case of Japan. Likewise, Porter strongly emphasises the importance of domestic rivalry. He therefore deplores the merger of competitors into one ‘national champion’. Now, sure, this may take place because of mistaken state policies, and it may be prevented by the good sense of regulators. But above all the key is the wishes of managers and shareholders in the firms that may merge – which takes us back to finance and corporate governance. Likewise, rivalry can be generated or regenerated by the setting up of new businesses, which draws on another part of the finance and corporate governance system. Another approach to inter-firm interaction which is deservedly fashionable is via ‘clusters’ or ‘industrial districts’. In Dynamics of National Advantage (Chapter 4 of this book) Porter has an important section on Interchange within Clusters, and he looks at its causes as well as its benefits. He gives two lists:

28

Introduction

1 Facilitators of information flow • • • • •

Personal relationships due to schooling, military service. Ties through the scientific community or professional association. Community ties due to geographic proximity. Trade associations encompassing clusters. Norms of behavior such as a belief in continuity and long-term relationships.

2 Sources of goal congruence or compatibility within clusters • • • • •

Family or quasi-family ties between firms. Common ownership within an industrial group. Ownership of partial equity stakes. Interlocking directors. National patriotism.

The first list includes some factors shaping finance and corporate governance and others affected by it. Most of the second list is directly finance and corporate governance. There are, clearly, some considerable lags in the system. Finance and corporate governance affect some other determinants of technological advantage, and these in their turn take time to work. So how far back in time does one go? Tylecote and Vertova (2007) showed how FCG, among other factors, could explain the changing technological advantage of the US, Germany and Britain in some key industries from the beginning of the twentieth century. In this book we shall not go so far. We aim to explain only current performance, and recent changes over up to about 30 years – depending on the availability of data, and whether there is an interesting story to tell. Clearly we need to trace the explaining factor, finance and corporate governance, back further than the explained one, technological performance, because of the lags in the mechanism. Happily, in most of the countries we shall be looking at there was a period of considerable stability in the FCG system as in others, between the 1950s and the 1980s. So it is not a great simplification to assign most of our countries to a particular distinct FCG category at least until the 1980s, and treat that as our main driving force in determining technological advantage. The nearer one comes to the present, the more mobile the FCG scene becomes, particularly in the ‘insider’ systems. Some of them changed far enough soon enough for the effects of those changes to be traceable in technological performance. Even where FCG systems were not changing rapidly, some sectors were doing so in ways that meant a country whose FCG was suited to success in sector X in (say) 1985 was no longer in that position by 2000. How did we choose our economies? Most of them chose themselves. The United States, Japan, Germany, Britain, France and Italy seem just too important to ignore. We rather arbitrarily added Sweden and Switzerland because, although small, they are interestingly different and there is enough data. Moreover, in spite of their small size, they have powerful multinationals. By the same

Introduction

29

token, Canada and Australia were excluded partly because of the strength of foreign multinationals there. The Netherlands is excluded partly because two of the three firms that dominate its economy – Royal Dutch/Shell and Unilever, the third being Philips – are Anglo-Dutch. In Asia, South Korea and Taiwan are the two largest of the four strikingly successful ‘East Asian tigers’. Then there is (mainland) China. Unlike all the others it is a developing not a developed country (many would not class South Korea as developed either, but at present rates of progress they soon will do) and it does not fit comfortably into any of our categories. On the other hand, one could (and we would) argue that its technological performance over the next decade and more, matters as much as that of all the rest put together. Happily, one of us knows China quite well. Our apologies to readers in, or from, the other obvious candidates, excluded more because of our ignorance than their unimportance. We hope that when you see how we analyse our 11 you will be in a position to do a do-it-yourself job on the country of your choice. If and when there is a second edition of this book we doubt whether we shall leave out India again. How did we choose our sectors? The OECD list of high-technology and medium-high technology manufacturing sectors seemed a good place to start, covering most of the key battlegrounds of technological competition among developed countries (see Figure 1.2). We look at all these sectors except for the smallest in each group, ‘medical, precision and optical equipment’, and ‘railway and other transport equipment’; although as we explain in Chapter 2, another ‘medium-high technology’ sector, electrical machinery, turns out to be impossible to discuss usefully for our purposes. Another battleground that is too important to ignore is software and IT services. We cover that too. We would like to have looked in depth at a wider range of services. We are always being told that it is hopelessly out of date to focus mostly on manufacturing when services make up most of any developed economy and a rapidly expanding part of international trade and investment. If we had also been told where to get the necessary data we would have been glad to oblige. As it was we added a rather half-hearted look at telecommunications services, and a glance at business services in general. We think they yield one or two interesting insights, but our treatment is superficial. In fact, the depth and thoroughness of our treatment varies a great deal among sectors. In some cases we were restricted by the availability of data. In others, such as aerospace, we see little point in discussion at great length when manifestly the main factors determining technological advantage now, are not finance and corporate governance now, recently or ever. Of course that lays us open to the charge of selecting what (metaphorically and literally) suits our book. We deny that, but certainly if one aims to go anywhere in the direction of systematic testing of any proposition such as ours, this is not the way to go about it. One would rather have to make unimpeachable lists of sectors and countries, find dependent variables to be explained for which reasonable data were available, do likewise with the independent variables, and conduct multivariate regressions of one sort or another. We have done some of this sort of exercise in the past (e.g. Tylecote and Conesa 1999) and mean to do more in the future, but

30

Introduction

it is dry stuff. It makes dull reading and still proves nothing. We prefer to be interesting, and aim to be, by taking the reader on a sort of aerial tour of the landscape, showing what features of it finance and corporate governance factors can explain, and how. Sometimes it will seem to make sense to look at them alone, sometimes to do so in conjunction with other factors which are obviously important. The sequence is as follows. In Chapter 2 we look, sector by sector, at the characteristics that determine the demands technological change makes on the finance and corporate governance system – what they are and how they have been changing. In Chapter 3, we look at finance and corporate governance systems, in the very broadest sense, show how they can be categorised, and assign our countries to categories. In most cases, as we said above, there was a degree of stability for some decades after the Second World War, and so it is convenient to do the ‘assigning’ as of the 1980s – but not for (mainland) China, for which it must be much more recent. We then look at our economies in turn, first in trios: the US, UK and Switzerland; Japan, Germany and Sweden; then in pairs: France and Korea; Italy and Taiwan; finally mainland China. The aim is to group together economies with strong similarities in finance and corporate governance. In each case we give a more detailed discussion of the development of FCG than there was scope for in Chapter 3, and show how it accounts for at least some aspects of the general pattern of specialisation and change. In each chapter, except that on China, we focus for some time on one or two major sectors in which the countries discussed are or have been strong. In the final chapter, we bring together the discussions in the country chapters of recent developments in FCG, and consider the general trends and tendencies of change, and how they are affecting, and are likely to affect, technological change and advantage. We then turn prescriptive. We argue that the current near-consensus on corporate governance is in some respects too narrow and in other respects plain wrong. The stereotype of ‘good’ corporate governance does not describe what has worked best in any industry, still less does it measure up to the needs of firms and economies in the midst of the current technological revolution. There will have to be real institutional creativity if the most is to be made of the extraordinary opportunities for technological progress that now exist.

2

How sectors vary in their requirements from the system of corporate governance and finance

2.1 Introduction We argued in Chapter 1 that innovation poses four challenges for corporate governance and financial systems, each of which they can meet, given the appropriate capabilities or characteristics: •

•

•

•

The opportunity for innovation: to take advantage of high opportunity requires heavy spending on innovation, which in turn demands high availability (and acceptability) of risk capital. The need for reconfiguration: how far does a product or process of innovation involve, or need, radically new ways of organising its development or production, radically new technologies, and/or radically new markets or selling methods? To what extent (therefore) does the organisation of the firm need to be reconfigured in order to succeed in innovation? Radical reconfiguration can most readily be pushed through where there is strong pressure for higher value-added. If the need for reconfiguration goes to the point of requiring new start-up firms – firms configured from nothing – then strong venture capital is required to establish and nurture them. The visibility of innovation: how easy is it for controllers or financiers not closely involved in managing the development of a new product or process, to judge what resources are being devoted to it, and how efficiently? Alternatively, how long will it be until there is a visible pay-off in market share and profit? The lower the visibility (and/or slower the pay-off), the more the monitors need firm-specific understanding, which can be developed through engagement with the firm. Stakeholder spill-overs in innovation: can the firm ensure straightforwardly (for example by patents) that the bulk of the returns on it are appropriated by the shareholders; or does innovation in the industry naturally tend to involve large spill-overs to, or from, other stakeholders? The latter case, which could also be called low appropriability, can be met by some form of stakeholder inclusion: formal or informal arrangements which ensure some proportionality between the inputs from and benefits to each party while (at best) giving stakeholders influence over the firm.

32

How sectors vary

We shall be considering in this chapter how these requirements vary by sector. We shall be concerned, as throughout the book, only with sectors that can be regarded as technologically demanding; a slightly arbitrary judgement in which we shall follow the OECD when it set out a list of manufacturing industries in order of R&D intensity, that is, the proportion of sales revenue spent on research and development. The OECD arranged them into groups of similar R&D intensity and called them, accordingly, ‘high technology’, ‘medium-high technology’, ‘medium-low technology’ and ‘low technology’. That seems to make reasonable sense: a high-technology sector is surely highly-innovative, and although R&D is not the only kind of spending on innovation, it is the most prominent. The five manufacturing sectors categorised by the OECD as ‘high Table 2.1 High-technology and medium-high-technology industries ISIC Rev.3 number

High-technology industries Office, accounting and computing machinery (‘IT hardware’ for DTI) Aircraft and spacecraft Pharmaceuticals (and biotech) Radio, TV and communications equipment Software and IT services

R&D/ production, 1999* (2003)**, %

R&D/ value added, 1997***, %

Production/ value added 1997

30

7.2 (8.6)

39.7

3.78

353

10.3 (4.9)

36.5

2.87

2423 32

10.5 (15.0) 7.4

25.4 19.9

2.25 2.43

72

(10.7)

Medium-high-technology industries Motor vehicles, trailers 34 and semi-trailers (automobiles) Electrical machinery 31 and apparatus, not elsewhere classified Chemicals excluding 24–2423 pharmaceuticals Machinery and 29 equipment, n.e.c.

–

–

3.5 (4.3)

13.4

3.82

3.6

10.3

2.71

2.9 (3.7)

7.9

3.04

2.2 (2.5)

5.0

2.63

Sources: * OECD (2003a): STI Scoreboard, Annexe 1.1. ** DTI, The 2005 R&D Scoreboard (relates to the average R&D intensity in 2004 of the largest world companies in the sector). *** OECD (2001b) STI Scoreboard, Annexe 1.1. The production/value added figure is the result of own calculations.

How sectors vary

33

technology’, on this basis, are plausible enough: aerospace; pharmaceuticals; office, accounting and computing machinery; radio, television & communications equipment; and medical, precision and optical instruments. The next five sectors in the OECD ranking order (by R&D intensity) are defined as ‘medium-high technology’: electrical machinery and apparatus, not elsewhere classified (n.e.c.); motor vehicles; chemicals excluding pharmaceuticals; railroad equipment and transport equipment n.e.c.; and machinery and equipment n.e.c. (see Table 2.1). These two categories cover the main manufacturing sectors in which the advanced countries compete – and in which the stronger developing countries are trying to establish themselves. The ‘lowertechnology’ sectors below them are less important, and performance in them depends less on innovation and technological change, so we feel justified in ignoring them. Even in our chosen categories we shall leave out one sector in each category as too small and heterogeneous for our purposes: medical etc. in high-tech, railways etc. in medium-high-tech. We shall also leave out electrical machinery from detailed consideration in our ‘country chapters’, for reasons we shall explain below. Sadly, we were obliged to leave out all service sectors except software and IT services: important some of them may now be, but the data is simply not good enough. There are reasonable data for software and IT services: this is fortunate, for if ever there was a sector that was at the cutting edge of technological (and organisational) change, it has been that one, at least for the last 20 years. It seems to meet the OECD requirement of high R&D intensity, comparable to the ‘top five’ of manufacturing, although perhaps a little below them. (Software development is not really a service in the true sense: its production is analogous to the production of a capital good, with the difference that once it is made it can be multiplied n times without having to be produced again.) The task is now to give a rating, approximate as it may have to be, to each of the sectors we have chosen to look at, in terms of our four challenges, our four faces of innovation, opportunity, reconfiguration, visibility and stakeholder spillovers (see Table 2.2).

2.2 Opportunity and need for reconfiguration Technological opportunity is to do with how much can profitably be spent on innovation. R&D intensity shows how much is being spent on one important element of innovation, so it is a reasonable indicator of the level of opportunity. But there are different kinds of technological change. There may be high R&D spending propelling an industry along an established trajectory of change; or a complete paradigm shift in which all the rules of the game are rewritten and only new firms, or firms prepared to make radical organisational and technical changes, will prosper. It is in the latter case that one sees not only high opportunity, but also high need for reconfiguration. As we have already pointed out, the most pervasive ‘shifter of paradigms’ of the last 30 years has been the complex of changes in information and communication technology, which has

34

How sectors vary

Table 2.2 Determinants and indicators of challenges of technological change for finance and corporate governance Opportunity Need for reconfiguration Visibility and spillovers/ appropriability

• • • • • • • • • •

R&D intensity frequency and scope of paradigm shifts turnover of companies proportion of research/basic research in innovation spend proportion of fixed capital in innovation spend codifiability of knowledge vs. cumulativeness on the shop floor importance of patents protecting products and processes vs. importance of secrecy importance of relationships with employees, customers and suppliers scale at which innovation takes place speed of pay-off

left no industry unaffected but has naturally had most effect on those which make ICT’s tools. Another has perhaps cut as deep but has not spread so wide – biotechnology. We shall argue that, in general, the high-technology sectors have been more affected by ICT and/or biotechnology than the rest, but that the degree of paradigm shift has varied a good deal among them too. A good indicator of its extent is the turnover of firms: how many among the dominant firms in an industry are completely new – at one extreme – or (at the other extreme) were already dominant in that sector (say) 50 years ago?

2.3 Visibility and appropriability There is a picture that can be painted of high visibility and of high appropriability/low stakeholder spill-overs. Imagine a firm where innovation revolves around research, as opposed to development – and assume that this research, as is often the case, is carried on in central labs. The results of the research, whether new products or processes, are codified – expressed in words, symbols, blueprints – and in that form protected by patents and perhaps copyrights, which in this industry we shall assume are both very effective protective devices for intellectual property. Some of the new knowledge is then embodied in new equipment. The patents and the equipment belong, unarguably, to the firm and thus to its shareholders, who in due course will profit from them. Meanwhile, the process of innovation, as described, is as visible as it can be. The top management are well able to monitor it, and (because their intellectual property rights are secure) to tell the shareholders as much about it as they want to hear. Now imagine a second, very different, firm. There are no central labs here. What R&D is done is all D, and the development is split into a thousand piecemeal mini-projects scattered around the firm – much of it not even registered as R&D, but simply the informal part-time activity of those whose main responsibilities are for one or other of its daily operations – production, say, or

How sectors vary

35

sales. Each of those projects draws on the suggestions and ideas of customers and suppliers, and low-level employees in whatever department or division. What emerges from each of the projects, feeds back into the operations of the customers and suppliers, and into those of the firm’s own employees, and the changes are mostly not codified or embodied. The shareholders may well benefit greatly from all this innovative activity, but if they do, it will be partly because the employees, customers, suppliers involved did not give the fruits of it away to rivals, and because they were prepared to make the effort in the first place. From the point of view of outside shareholders who wish to monitor what is being done for their future enrichment, and to keep the gains from it for themselves, firm no. 2 is a hopeless case: the visibility of innovation is abysmal, and its appropriation is a mess. Reality of course is spread out along the line between these two poles. We can judge visibility and appropriability roughly from some factors that can be measured, and others that must be roughly gauged or guessed. ‘Proportion of research and fixed capital in innovation spend’ come in the first category, ‘codifiability of knowledge versus cumulativeness on the shop floor’ and ‘importance of relationships with employees, customers and suppliers’ come in the second. It turns out that there are fairly good data on the effectiveness of patents protecting products and processes; in particular, two US surveys relating to 1983 (Levin et al. 1987, hereinafter ‘1983’) and 1994 (Cohen et al. 2000; hereinafter ‘1994’) respectively. The later of these two seminal studies gives sectoral data on the effectiveness of a range of appropriability mechanisms, including secrecy. It seems to be the high-technology sectors which are, on the whole, the more visible and the more appropriable via patents and other legal measures – but there is a lot of variation in both the high-tech and medium-high-tech categories, as we shall see.

2.4 Changes over time There is some evidence that reliance on patents for appropriation has been increasing, at least for large firms (Cohen et al. 2000). There was a clear-cut upward change in trend from about 1984 in applications for patents in the United States. This can partly be explained by a flurry of legal changes in the US in favour of patenting, in 1980–1982.1 But it is interesting that the ‘structural break’ change in trend did not affect chemicals and pharmaceuticals, but did clearly affect the ‘electrical, computers and communication’ category, and also ‘mechanical and other’ (Cohen et al. 2000). ICT and the accompanying digitalisation of measurement has led to a great increase in codification. To take an example from production technology, a computer-numerically-controlled machine tool can conduct a range of different operations, each of which must be digitally specified: it cannot operate without codified knowledge. This affects chemicals and pharmaceuticals least, because chemical formulae are a quite different and longestablished form of codification. The codification of knowledge makes it easier to formulate a patent application, and it makes patent protection, if effective, more

36

How sectors vary

attractive since imitation of codified knowledge is easier. But patent protection may not be effective. Apart from the difficulty of enforcing a patent right against infringement (a nightmare for a small firm facing a larger one), a patent may simply provide a conveniently visible target for a competitor to ‘invent around’. Patents have become increasingly visible, in this dangerous sense, with the development of programmes for scanning large numbers of patents in an automated manner. What is certain is that patents have become more important as a tool of business strategy. As we shall see in the final chapter, they have come to play a role in finance and corporate governance, since analysis of a patent portfolio can be used as part of an exercise of valuation of a firm. They have also become an important issue for United States foreign policy. A great success for the United States was the TRIPS agreement of 1994, a powerful move to extend the protection of intellectual property internationally. Whether they have become more effective as a means of safeguarding the profits from innovation is more debatable. Between the 1983 and 1994 surveys the most conspicuous change in this area was a rise in the importance of secrecy (at the expense of sales and service for product innovations, and of lead time and sales and service for processes). Secrecy is an alternative to patenting, at least at a point in time (one may use secrecy first and patent later). What continues to be true for patents, as we shall see, is that they work a great deal better for some sectors than others.

2.5 How scale matters The visibility of innovation is affected by scale of production – and scale of innovation project. Other things being equal, a large-scale firm counts as more visible because it is, so to speak, more worth looking hard at. Every unit of time and effort an investor spends engaging with it, getting understanding of it, will yield a better return. If an activity is an inevitably small-scale one – let us say the development, manufacture and sales of a highly specialised machine – it can still be carried on by a large firm, but if it is, it will be a small part of that firm’s activities, and as such its visibility will be relatively low – even to top management. If it is – more appropriately – carried on by a small firm, in the extreme case one which does nothing else, then anyone who has a good understanding of that firm will understand that activity. The problem is then the low visibility of the whole firm, from the lofty height of a large institutional investor. Of course (the reader may object) a small firm does not even think of getting funding from a large institutional investor – it will seek it from its local bank. Unfortunately the same principle usually applies: for a small loan, it is not worth the bank taking the trouble to look carefully at the firm’s plans, technologies and prospects. It will not bother to engage – unless it has a policy of doing so, perhaps because it is a public-sector bank with a mission that goes beyond profit. (The only other way the small firm may find a lender with a good understanding of what it is trying to do, is in an ‘industrial district’ where half the town is making much the same thing. A bank manager who has made a dozen loans to

How sectors vary

37

similar firms for similar purposes already that month, may be able to size up the proposition, and the proposer, in ten minutes.) So small-scale activities need investors with, if you like, a high propensity to engage; and the obvious candidates are family owners. As we shall see in the next chapter, national systems vary greatly in the availability of engaged family owners, as they vary in the availability of banks willing to engage. Scale also affects stakeholder spill-overs and appropriability. If we hold the size of firm constant, the scale of an investment will, or should, determine what level of management has discretion over it. A decision to double the capacity of its largest plant is one for the very top; the decision whether to replace or repair a small machine should be taken a long way down. The same applies to investments in innovation, of every kind. An ‘included’ employee can probably be trusted to use his or her discretion in the interests of the firm. It is relatively easy to ‘include’ the top management – they will naturally identify with the firm, ‘their’ firm, and they will get shares or stock options if anyone does. (There remain of course the reservations we set out in Chapter 1 about their aims, and who the ‘firm’ is anyway.) Much rarer is the firm in which the average production operative, lab technician or sales rep feels ‘included’. So the stakeholder inclusion problem in innovation depends partly on what level or levels of the firm really need to drive it. Difference in firm size also will have an effect on appropriability. As mentioned in the last section, a small firm will find it hard to defend any patent it may have against infringement by a large one,2 and it is increasingly easy for large firms to find patents with a view to infringing or inventing around them; which may explain why, between the 1983 and 1994 surveys, concern over information disclosure became more important as a reason not to patent (Cohen et al. 2000). The 1994 survey found that the smaller the firm (and/or the business unit), the less the patent effectiveness. The stakeholder inclusion (above all employee inclusion) needed to protect its secrecy is then all the more valuable. Scale matters, then. As Figure 2.1 shows, it also varies considerably among our sectors.

2.6 The high-technology sectors 2.6.1 Aerospace We have to make a sharp distinction in aerospace between level of opportunity and need for reconfiguration. The very high R&D intensity (whether by turnover or by value-added) shows that opportunity is high. But this is the high-technology sector that displays easily the most continuity. So little has changed in 30 or 40 years: aircraft still consist of fuselages, wings and tails of much the same shape, and they are powered in much the same way. Of course the industry has not been unaffected by the ICT revolution – but so far as aerospace is concerned, it has been a long, slow revolution. This was one of the first industries to be deeply affected by electronics – during the 1940s.

38

How sectors vary

300 250 200 150 100 50

Motor vehicles, trailers, and semitrailers

Electrical machinery

Machinery and equipment

Chemicals

Radio, TV, and communication equipment

Office, accounting, and computing machinery

Aircraft and spacecraft

0

Figure 2.1 Average size of firms (1999), by number of employees (source: author’s calculations on OECD (2006)). Note Chemicals include pharmaceuticals

Computer-numerically controlled machine tools are (literally) the cutting edge of the ICT revolution in terms of production processes; well, aerospace was the first industry to introduce CNC tools, in the 1960s. The essential continuity of change is reflected in the very slow turnover of firms. Most large civilian aircraft flying today were made by the same company, Boeing, that made most aircraft, 30 or 40 years ago – and many of them indeed are of models that were developed 30 years ago. The Airbus consortium (now part of a firm, EADS), which is Boeing’s main rival, was founded in 1970, and the various European manufacturers that came together in it, at that time and afterwards, were then making most European aircraft. The world’s three main aero-engine makers today, GE, Pratt & Whitney and Rolls-Royce, were its three main aero-engine makers 30 years ago. The temporary catching up of Boeing by Airbus, and the overtaking of Pratt & Whitney by RollsRoyce, are interesting developments, which we shall discuss in Chapters 4 and 5 – but they are not earth-shattering. So the need for reconfiguration is decidedly low. There are some features of the industry that do not make for high visibility or appropriability. Pity the poor top executives who wish to explain to outside shareholders the beauties of the new model they are preparing for launch. Patents are relatively ineffective in protecting product innovations in aerospace – secrecy is exceptionally important (see Table 2.3). Outside shareholders cannot be trusted to keep secrets. Employees at all levels may be – if they are loyal enough. This is then an industry that needs employee inclusion – helpful too when one considers

251.78

Average size of firms (employees) (1999) (7)**

C: Low S: 2.2 25.4 2 since 1970s; Not high until 1990s NA

99.08

C: Medium S: 3.0* 39.7 Full effect of ICT shifts; Quite high

44/43

87.64

Semiconductors and related equipment: 4.5/3.2 Communications equipment: 3.6/3.1 PATENTS Semic.: 27/23 Electronic components: 21/15 Comm. 26/15 TV/Radio:39/19 SECRECY Semic.: 60/58 El.comp: 34/47 Comm.: 47/35 TVRadio: 50/48 C: Mixed S: NA 19.9 Varying effect of ICT shifts; Moderate

NA/66.1

Radio, television and communication equipment

Notes * IT Hardware. ** The data refer only to the countries included in the book.

Sources: (1) Istat (1995); (2) Doudeyns and Hayman (1993); (3) Levin et al. (1987); (4) Cohen et al. (2001); (5) C: selling only to few industrial customers: very high; selling only to mass market: very low. S: Sales over value-added, for top 600 European companies, DTI Value-Added Scoreboard 2004/5; (6) OECD (2003a); (7) Own calculations on Hwwa worldwide matrix (www.hwwa.de).

C: High S: 2.4 36.5 None; Very low

53/68

55/49

41/30

3.4/3.3

6.5/4.9

50/36

0.8/64.8

Office, accounting and computing machinery

NA/66.7

Pharma.

33/21

Importance of relationships with customers (C) and suppliers (S) (5) R&D intensity (R&D spend/value-added) (6) Frequency of paradigm shifts; Turnover of companies

Effectiveness of appropriation mechanisms for products/processes (1994) (4): Patents on products/processes (mean of full sample: 35/23) Secrecy on products/processes (mean of full sample: 51/51) (4)

Percentage of basic research in innovation spend (1) 36.6/NA and/or % of research in innovation spend (2) Relative importance of patents protecting products/ 3.8/3.1 processes (1983) (Mean of full sample 3.5/4.3) (3)

Aircraft and spacecraft

Table 2.3 Characteristics of technological change in high-technology manufacturing sectors

40

How sectors vary

the cumulation of employee skills which follows from the continuity of products and processes. Some other features favour visibility and appropriability. This is a ‘scaleintensive’ industry: it is dominated by very large firms that spend very large amounts of money on individual projects for new aircraft or new engines. There are, accordingly, a small number of big decisions that have to be taken by very senior people. Those big decisions could be explained to, or discussed with, outsiders with an adequate technical and scientific background – as long as they could be trusted to keep secrets. Such people exist, or may exist, in government ministries. For them, and for top executives, the visibility of innovation will be relatively high. Likewise, there is no need to blur the boundaries of self-interest between aircraft manufacturers and their customers. Of course the major airlines are important customers to be cultivated individually with great care – but there is no long-term commitment. What makes airlines reluctant to switch from Airbus to Boeing or from Boeing to Airbus is the cost of doing so, not any kind of long-term trusting relationship – or cross-shareholding. Suppliers, on the other hand, are of great importance in such an ‘assembled’ industry – although the relationship with the engine manufacturers is made less dependent by the fact that most large civil aircraft are designed to be able to fly with more than one manufacturer’s engines. 2.6.2 Pharmaceuticals The production of medicines is of course a very old industry. Until very recently it was, from a scientific point of view, an alliance between medicine and botany, since most medicines were of herbal origin. During the nineteenth century, as Henderson et al. (1999) explain, all that changed, with the discovery of the medical effects of dyestuffs and other organic chemicals. Henceforth, chemists were able to synthesise an ever-increasing number of New Chemical Entities (NCEs) which might (with luck) turn out to have therapeutic effects, and (with much more luck) not have too severe side effects. Their understanding of the NCEs’ structure and direct chemical activity steadily increased. Understanding of how they worked in the body lagged behind. As long as that was so, the industry could be, and was, treated as a branch of the chemical industry; and many pharmaceutical companies, particularly in Europe, were divisions of large chemical firms. The dominant research technique in pharmaceuticals, in the 1950s and 1960s, was the so-called random screening approach. With this method, many synthetic chemicals (produced by chemical synthesis or fermentation) or natural products are indiscriminately tested for biological activity. As at the time there was not a precise understanding of what caused a specific medical problem, the compounds were tested in vivo, on animals that presented the ‘target pathology’. This kind of technology in experimentation depended heavily on tacit knowledge and, in particular, on ‘chemists’ intuition’ (Nightingale 2000). Random screening was a very costly and time-consuming technique but it worked very effectively during the 1950s and 1960s to develop many important drugs such as diuretics and vasodilators (Henderson et al. 1999).

How sectors vary

41

Since then, the industry has undergone two paradigm shifts. The first, which occurred during the 1970s, was the transition from random screening to the ‘guided discovery’ approach. A ‘pathway of disease’ was identified by collaboration between clinical (medical) and biomedical scientists: chemists then had to find, or synthesise, a chemical entity that had the properties required to break that pathway. Their tacit knowledge remained important, but they were thenceforth playing second fiddle to that clinical–biomedical collaboration. Strong connections with scientific centres of clinical and biomedical excellence became of great importance for pharmaceutical firms. The second paradigm shift, which took place during the late 1980s and 1990s, had several elements that drew variously on informatics and biotechnology. ‘Combinatorial chemistry’, based on fundamental advances in miniaturisation, robotics and receptor development, allows scientists to create large populations of molecules, or libraries. Genetic engineering allowed the development of cloned reactors as assays for automated testing: this ‘high-throughput screening’ allows those libraries to be efficiently tested for therapeutic effect (Gordon et al. 1994). The high degree of automation involved in Combinatorial Chemistry drastically reduced the centrality of chemists’ tacit knowledge or intuition (Nightingale 1998). The impact that biotechnology or genetic engineering has long been expected to have on the industry, goes much further, but has only been partly realised. On the production side, genetic engineering has been employed in the production of natural proteins like insulin whose therapeutic effects were already known and exploited, and were too complex to be produced with the traditional chemical methods. A stream of new biotechnology-derived drugs has been developed since the early 1980s but, as complex proteins, they have repeatedly come up against the difficulty of administering them, since they are destroyed by stomach acid. Diabetics may be resigned to injecting insulin, but any patient who has the alternative of swallowing a pill will take it. There are other strong stabilising factors in the industry. Any new drug has to be subjected to a long, rigorous and expensive series of pre-clinical tests (on animals) and clinical tests (on humans), whose results must then be presented to regulatory authorities like the Food and Drug Administration in the USA. For all the scientific and technical advances that have been made, only a small percentage of the drugs that begin this marathon will survive to the end. The competencies that are required to navigate the testing and regulatory procedures have changed only gradually over the decades, and the large pharma firms have them. They also have the large sales and marketing departments required to make sure that new drugs get the commercial success they deserve. New ‘dedicated biotechnology firms’ (DBFs), which sought not only to discover but to develop, even to sell new drugs, have found that these were all expensive barriers to surmount; and those investors who provided the funds to allow them to do it learned the hard way what Big Pharma already knew – that the odds against success for any one drug were high. (Introducing a new drug on the market takes on average 12 years, and costs over $800 million, according to the US Office of Technology Assessment in 2000. Only one of 5000 screened compounds is

42

How sectors vary

approved as a new medicine and only three of ten marketed drugs produce revenues that match or exceed R&D costs (Nightingale 2000).) On the other hand Big Pharma’s own mechanisms for drug discovery (and evaluation of drugs discovered) are in crisis. The big pharma firms are struggling to stop their drug pipelines running dry.3 The DBFs now exist in an uneasy symbiosis with Big Pharma: they do much of the discovery of promising new drugs, particularly those requiring innovative approaches (whether or not they involve genetic engineering) and, having patented the drug and done some of the early (and cheaper) testing, then find a big firm willing to pay them for a license on it. How can we rate pharmaceuticals, then, on our four dimensions? Opportunity is clearly high, to judge by R&D intensity – although measuring that over valueadded, as opposed to turnover, it is not as high as aerospace or computing. The need for reconfiguration likewise is high but not top. Since the 1970s, change has been rapid, and with some deep organisational consequences; but (except for the ‘upstream’, discovery end) the gains have gone not to new firms, but to old firms that made the necessary changes earlier and more skilfully than the rest. Those that were part of chemicals groups, had to be de-merged; and if they were dominated by chemists, the chemists had to be dethroned. Those that were inward-looking, had to forge close links with the science base; those that were scattered across a large number of therapeutic areas had to specialise in a few in which they concentrated their biomedical and marketing competencies. In the areas selected they had to be as favourable to those NCEs discovered by startups as to those discovered in-house. And firms that spread their development resources thinly over a large number of NCEs regardless of their prospects of approval or the volume of sales they could hope for, had to learn that big profits went mainly to those firms that focused early and brutally on a few likely ‘blockbuster’ drugs, selected by cross-functional teams. Where pharma leads, in most respects, is in visibility and appropriability. All authorities agree that product patents are an unusually effective method of appropriation in this industry.4 Secrecy, interestingly, is also rated somewhat above average for product protection. The need for this is nonetheless limited to the discovery phase. Not all knowledge here is codified, or codifiable: ‘While high-throughput processes are used at the start of research tasks, the final stages of biological analysis and chemical synthesis are still very craft-based’ (Nightingale 2000: 350). Knowledge accumulated on the shop floor is important in this sector as in others, but the shop floor is, in this case, the high-tech lab. Once the clinical testing starts, it would be hard to keep much secret about a new drug, and it would matter relatively little if a rival found out, since it would first have to ‘invent around’ the patent, then start down the same long road, a long way behind – without knowing whether the first firm has a winner anyway. The people who really need to keep secrets are the few people, mostly scientists and technicians, involved at the discovery end. So employee inclusion is valuable, but not outside a rather small core. Near the end of the long development process, when success is at least likely, the shareholders can be told about the progress of specific drugs. They can be given quite good general information as

How sectors vary

43

well. As shown in Table 2.3, the proportion of R&D in innovation spend is very high, and it is rather common for a firm in this sector to display its R&D expenditure (and that on capital and marketing) and to communicate to the market detailed information about the employment of new technologies or research alliances with other companies and universities (Ramirez and Tylecote 2004). There are certainly few obstacles to visibility within the firm. The top management have a good view of the innovation process, because of its formalised, regulated, codified nature, and because a new drug has a rather fixed character, defined by its chemical composition. A mechanical or electrical product will be modified in all kinds of significant and insignificant ways during its development process, to make it easier to produce and to sell – this is mainly what the development process is for, and that is why authority over that process needs to be decentralised to relatively low levels of the firm, who can be responsive to those who will have to produce and sell the product. With a new drug, on the other hand, one will learn something about dosage and perhaps about the type of patients who will benefit from the drug, and not much more; not enough to justify decentralisation of authority. The only important factor demanding shareholder engagement (or management autonomy) is slow pay-off. From the beginning of research in an area, to the launch of a product resulting from it, could well be 15 years, given the long series of pre-clinical, then clinical tests required. Not until after launch can shareholders have any confidence that a drug will succeed. Indeed they cannot even be sure then, given the possibility of disasters such as Merck’s withdrawal in 2004 of its successful pain-killer Vioxx, launched in 1999; a withdrawal that cut $27 billion from Merck’s market value (The Economist 2005c).5 We have seen that inclusion of a small core of employees is valuable. No other stakeholders count for much. Sales are to a mass market, not to a few cherished customers. The sales/value-added ratio is unusually low, and the tendency to outsource discovery to the biotech firms, and parts of testing to contract research organisations, does not require the big pharma firm to develop hightrust long-term relationships with either of them.6 2.6.3 Office, accounting and computer equipment For all intents and purposes, the computer industry is a creation of the second half of the twentieth century. It is, of course, one of the spearheads of the ICT revolution, and it has itself been revolutionised several times in its short history – in each case led very much by the United States. Each revolution, or paradigm shift, in hardware was naturally accompanied by a shift in software, and although our primary concern in this section is with hardware, we shall make some references also to software. The first paradigm shift in the industry that we need mention arose from the development of integrated circuits, which led to the launch, in 1965, of the PDP8, the first general purpose minicomputer – far cheaper than any mainframe. This opened up a totally new and rapidly-growing market segment, and new start-ups of minicomputer producers entered the market. Some

44

How sectors vary

of them were spin-offs from universities, others from incumbent firms. There was also entry by instrument firms such as Hewlett-Packard. Another, related shift took place in the same period: computer vendors began to ‘unbundle’ the hardware from the software (hardware and software started to be considered as different products and invoiced separately), which offered new entry opportunities for software developers – and indeed made entry easier on the hardware side too (Bresnahan and Malerba 1999). The next shift again followed a leap forward in the key component: the development of the microprocessor led to the introduction of Personal Computers or microcomputers in 1981. PCs were less powerful than mainframes and minicomputers but much cheaper and easier to use. The introduction of PCs revolutionised the market for computers. It led to the transformation of computers into consumer durables (opening up huge opportunities for new companies); and to a parallel spread of software houses that specialised in the development of various applications. As with minicomputers, the entrance of new firms occurred mainly in the US, whereas in Europe and Japan new entries were not numerous, the only exception being the UK (Torrisi 1996). The introduction and spreading of PCs had an enormous impact on the software market and on the competitive strategy of software developers. In fact, operating systems and software applications were now sold on the mass market and not customised to the needs of the users as with mainframes and even minicomputers. Long-term relationships with customers, which were previously crucial for innovation, became irrelevant and formal intellectual property rights (mainly copyright and patents) acquired more importance. The most recent shift was that which culminated in the Internet: the appearance during the 1990s of new devices (and the related software) that support networks of computers, within the same firm (LAN, Local Area Network) or on a much wider scale (WAN, Wide Area Network). Operating systems and applications can now be stored on a central server (inside or outside the organisation) and utilised by PCs through the net. This has developed new market segments. For example, application service providers have increased, who deliver and manage applications from remote computer centres to numerous users via the Internet or private networks. This is clearly an industry that for at least the last 40 years, has displayed very high opportunity (confirmed by the R&D intensity figures), and very high need for reconfiguration, as radical changes in technology have led to equally far-reaching changes in the market.7 Ten years or so after the introduction of the PC, it was possible to think that computers themselves – as opposed to the connections between them that we have just mentioned – were settling down. The appearance of still smaller categories – lap-tops, notebooks, palm-tops – alongside PCs was not a comparable transformation to the development of the PC; and PCs were becoming a ‘commodity’ item. There then followed a much less visible but still important shift – in the nature of production. Many of the US producers of hardware sold most or all of their manufacturing facilities to companies that did nothing but manufacturing, and henceforth restricted themselves to development and design,

How sectors vary

45

and sales and marketing (Sturgeon 2002). By doing so they not only sharpened their focus, they made the whole chain of production more efficient. While they could not forecast accurately what their market share would be in the next round of product development, and had therefore been condemned, when manufacturing, to regular periods of excess capacity and capacity shortage, the specialist manufacturers could expect a smoother ride. If customer A won market share from customer B, what did they care? They would make more for one and less for the other. Opportunity may have been declining, then, in much of the sector; less so, the need for reconfiguration. The big change has been in visibility and appropriability. In the 1983 survey, the effectiveness of product patents on computers was well below average (3.4 against 4.3) and that of process patents a little below. By the time of the 1994 survey, that of product patents was clearly above average (41 against 35) as was that of process patents (30 against 23).8 The 1983 survey gives no sectoral figures for secrecy, but we can assume that as patents became more effective, its effectiveness declined – to the point where the 1994 computer figure was clearly below average for both products and processes. All this we might have guessed from Sturgeon’s findings on the separation of manufacturing from the rest: as he pointed out, this only took place because of a high degree of codification of knowledge about products and processes. Without that it would not have been feasible – how could designers and manufacturers have communicated at long range? Nor, without the patenting of the codified knowledge, would it have been safe. (Neatly enough, the change was made possible by advances in computing itself – the development of CAD-CAM, computer-aided design linked to computer-aided manufacturing.) The trend to rising visibility and appropriability must have been reinforced by the evolution of relationships with customers and suppliers. Since the rise of the PC there have been far too many individual customers – whether business or consumer – for there to be anything but a distant relationship with them. On the supplier side, this is clearly an industry with a high degree of vertical disintegration; yet with the codification of computer design, and the commodification of components, together with the globalisation of their production, there is little scope for long-term trusting relationships with suppliers. Only among the employees in the technological core of the firm – the design and development function – is there any obvious need for inclusion. 2.6.4 Radio, television and communication equipment This sector is misleadingly titled, for it includes semiconductors and related equipment, and electronic components – very important categories, which accounted for the majority of the US firms in the sector in the 1994 survey, even though the main producers of electronic components were and are in East Asia.9 The sector is, for the most part, a spearhead of the ICT revolution, much like computers, and as such high in opportunity (confirmed by its R&D intensity) but it seems to have been rather less subject to paradigm shift. For example, as we

46

How sectors vary

have seen, the successive developments of integrated circuits and microprocessors convulsed the sectors that used them – computer hardware and software. The integrated circuit brought a paradigm shift in the sector that produced it, too; but microprocessors were not much more than an important milestone along an established trajectory, which followed Moore’s Law (that the density of data on integrated circuits doubles approximately every 18 months). Likewise the essential design of the TV or monitor remained the same for more than 50 years, until the advent of digital transmission. Each of its components has of course been progressively improved and made more sophisticated, especially with the introduction of the micro-chip; but none of the innovations involved, not even the introduction of colour, or of remote control, was a competence-destroying radical innovation. The invention of videocassette recorders modified the use of the television but it did not bring about important transformations in the television itself. The same applies to TV transmission, and to radio. The replacement of the cathode ray tube by liquid crystal displays is a competence-destroying innovation so far as it goes – and many of the firms that make LCDs did not make CRTs; but it was a strikingly slow and predictable innovation. When LCD finally started to displace the cathode ray tube, it had been known for decades – with a number of firms patiently chipping away the obstacles to cheap manufacture of large high-quality screens.10 The Walkman, VCRs and CDs were striking innovations so far as the consumer was concerned, but developing and making them drew on little beyond a familiar set of electronic and mechanical competencies, and they could be sold to much the same people in much the same way. The picture of a sector in which change is generally evolutionary is confirmed by the slow turnover of dominant firms. A flurry of US start-ups in the 1950s produced Intel, which proceeded to establish dominance of the high end of the silicon chip market – and keep it into the next century. Major Japanese firms, followed by Korean chaebol groups, established and kept dominance of other electronic components and equipment, and the machinery to make them, in a similar way (Berggren and Nomura 1997: ch.7). The need for reconfiguration has thus been, by high-tech standards, low in most of the sector. This has some implications for visibility and appropriability; for in such circumstances, competencies cumulate. Shop floor manufacturing skills count, certainly for components (assembly, rather as with computers, is less high-tech and can be outsourced or (more likely) located where the labour is cheap11). So do good relationships with suppliers (of materials, components and machinery). Customers for components are large firms, and again, the opportunity will exist to build and make the most of a high-trust long-term relationship; in many cases, the relationship is between divisions of one large firm. It is notable that while computing moved from somewhat below average to somewhat above it for patent protection of products, this sector moved the other way, and was, as of 1994, firmly established as low on patent protection (except, marginally, for TV/Radio). For semiconductors, secrecy was correspondingly high, but not for the other parts. Electronic components – much like the typical commodity

How sectors vary

47

sectors, metals and glass – depended instead heavily on complementary manufacturing, sales and service to protect their new products (and processes). Telecommunications equipment is rather different. Until recently it was dominated by the telephone exchange segment, equipment notable for being sold overwhelmingly to very large, mostly state-owned telecommunications service providers, and for being itself large in scale. One segment of the sector stands out as an exception: mobile telecommunications. A number of radical innovations have made the sector more diverse: optical fibre cables, satellite earth stations, and above all the development of mobile telecommunications. It is the creation of a recent paradigm shift and is still changing very fast, and one striking piece of evidence for that is the transformation of Nokia from anonymity as a small Finnish conglomerate in the late 1980s to the (precarious) leadership of the industry some 15 years later. To be precise, Nokia’s leadership was in mobile hand-set manufacturing: and it was in that sub-segment most of all that the rules of the game were rewritten, with extremely rapid development of new products, to be sold to a mass, mainly young consumer market – in an industry accustomed to selling slowly-changing products to middle-aged industrial buyers. The advent of digital technology across the ICT sectors, heralds a real and general paradigm shift.12 In TV and radio transmission, the improvement in quality that it allows, and the multiplication of channels, are typical incremental changes, but the paradigm-changing fact is that the digital technology is the same as employed by computers, CDs, the internet and mobile phones. Suddenly separate products, technologies, and markets, are on a convergence course. The effect on the converging industries is, however, so far only in its early stages. The Apple iPod is an example of effective response.13 2.6.5 Software and IT services The service sectors are horribly neglected by statisticians, who are attached to the familiar manufacturing categories that they have tended for decades, and are slow to recognise the need for new ones. All business services suffer, moreover, from an obstinate demarcation problem: they can all be provided ‘in-house’ by employees of firms whose main business is something else (manufacturing, for example), and this is how they commonly are provided (although less so than in the past). With the best will in the world, the statistician could not recognise such activity as part of any service sector. Software is afflicted by both problems in full measure. A large proportion of software engineers, worldwide, are employed by manufacturing (mostly electronics) firms. Worse, for most statistical purposes software firms – that develop, create, software – are lumped in with IT service firms – which help other organisations to buy and use software and ICT in general. These are of course very different activities: to repeat a point made above, software development is akin to the manufacturing of a capital good, except that once created this capital good will never wear out (although it will become obsolete) and can be manufactured in unlimited quantities for next to nothing. IT services are much more typical services.

48

How sectors vary

Not surprisingly, it is software that is the more R&D-intensive, and the more obviously high-technology. Partly for that reason, it has had more academic attention – although not enough to get it included in either the 1983 or the 1994 survey on appropriation mechanisms. We have been saved from the inadequacies of the official data by Casper and Whitley’s (2004) pioneering work. They divided the industry into standard (or application-based) software, middleware, and enterprise software. Standard software includes graphic application software (e.g. CAD/CAM), multimedia and computer entertainment software, and a variety of application software used to run computer networks, such as email and groupware. Middleware includes secure payments systems used in e-commerce, and search engines used for navigation on the Web. Enterprise software is extensively customised for individual clients. It includes enterprise resource planning and customer relationship management products as well as sector-specific enterprise tools such as logistics and supply chain management tools. (These three sub-sectors are not exhaustive: there is, as pointed out by Berggren and Nomura 1997, also the customised software that forms part of complex industrial and technical equipment, and that is embedded in consumer products, such as camcorders; but both are largely produced in-house by the hardware producers, and so largely invisible in much of the available data. They are included however in Table 2.4.) Before we retell Casper and Whitley’s account of the current scene, we had better give some historical background. At the core of software development, of course, is programming. Programming has undergone several major transformations. While the first two generations of languages, the machine language and the assembly language, were in use, programming was something like a craft activity, an art more than a science, and based on skills that could be accumulated only over several years of learning. Accordingly, the programmers themselves played a key role in product and process innovation. With the advent of the third generation languages (FORTRAN, COBOL, PASCAL) and even more with the fourth (APL, Nomad 2) programming became much simpler and more routine. An equally important, and separate, change was the spread at the beginning of the Table 2.4 Top ten world software producers, turnover in FFm.1997 IBM (US) Microsoft (US) Fujitsu (J) Computer Associates (US) Oracle (US) NEC (J) SAP (G) Hitachi (J) Novell (US) Digital (US) Source: Nohara and Verdier (2001).

69.3 51.5 24.4 15.8 12.5 11.9 9.2 6.9 6.3 6.3

How sectors vary

49

1990s of component-based development (Pree 1997), in which components from existing systems are used for the development of new ones, without changes in the codes. This system is defined as ‘black-box re-use’ as there is no need to know the code of the components re-used. Component-based development is better able to handle complexity and to reduce development time and costs: it will however almost certainly create a program that has more code and needs more power than one written from scratch.14 As hardware became more powerful this disadvantage became less important; larger and larger blocks could be put together with more redundancy in each. The competencies needed to (so to say) tie the blocks together are rather standard and quickly learnt. As programming has become routinised, other professional figures have gained more importance in the software development process – those that operate at higher levels of abstraction and take care of the software concept (identify the high-level requirements of the system and the basic functions that the system must perform) and of the architectural design (define the high-level software architecture that outlines the functions, relationships, and interfaces for major components).15 Team-working has become a central feature of software development processes, as the increased complexity of projects now requires a variety of knowledge and skills. All the members of the team, to be able to cooperate and communicate effectively, need to have multi-disciplinary competencies (De Marco and Lister 1999). In general, as a fast-expanding and fast-changing industry, software development must have high opportunity and high need for reconfiguration – the latter particularly with the advent of component-based development. The entry rate in the sector is very high, thanks to the strong support of venture capitalists both in the US and in Europe, where financing of software start-ups accounts, respectively, for 20 per cent and 30 per cent of total technology venture capital (OECD 2002). In 1999, 40 per cent of the top 500 vendors were established after 1990 (OECD 2002). That figure would have been considerably higher, but for the fact that large incumbent firms have frequently acquired new successful start-ups to enter new market segments or gain access to new technologies. On the other hand we cannot treat it as a high-visibility, high-appropriability industry, so long as employees (whether the programmers of old, or the multidisciplinary teams of today) have important tacit knowledge. One highly controversial development has certainly done much to increase appropriability over the last 20 years: the extension of legal protection for intellectual property. As we have already seen, this has been a general phenomenon, but in software it has moved further because it has started from a very low base. The US Computer Software Act of 1980 marked a major extension of copyright protection in the industry, and subsequent legislation and court decisions made a wider range of innovations in software patentable in the US – a wider range than in Europe. We can now, with Casper and Whitley’s help, make some crucial distinctions within the industry. They find that standard software, which is created for large homogeneous markets, has high ‘competence destruction’ through radical innovation, but limited ‘appropriability risks’ – it is relatively easy to protect

50

How sectors vary

through some combination of patent/copyright protection, secrecy over its ‘source code’, and lock-in effects once successful. (Take Microsoft for example!) This clearly is a sub-sector requiring radical reconfiguration and little ‘nurturing of cumulative shop-floor knowledge and long-term customer-supplier relationships’. At the other extreme is enterprise software, which Casper and Whitley classify as having limited competence destruction but high appropriability risk, due to relatively weak intellectual property regimes. ‘While patents for particular technologies exist, work-arounds are relatively common once initial innovators establish proof of principle’ (Casper and Whitley 2004: 94). The extensive customisation of products for individual clients in this sub-sector means that long-term trusting relationships with customers will be beneficial; together with similar relationships with the workforce, these can (among other benefits) help to protect the firm’s IP. Middleware is in the middle: it is described by Casper and Whitley as ‘radically innovative’, with low technological cumulativeness, and with limited appropriability risk. But unlike standard software it has an inter-firm co-ordination problem because it must integrate interdependent kinds of knowledge provided by different firms. Trusting relationships are therefore very valuable, particularly with large firms that dominate a technology cluster. Casper and Whitley do not deal with IT services, but they would appear to have at least as much need as enterprise software for long-term trusting relationships with customers and the workforce: their IP regime is presumably even weaker, the intellectual property residing almost entirely in their employees’ heads. Nor is competence destruction likely to be stronger, since while of course the (fast-changing) IT available must be understood, a crucial part of the competence resides in understanding customer needs and the organisational difficulties of getting IT to suit them.

2.7 The medium-high-technology sectors 2.7.1 Chemicals The chemicals industry was the world’s first science-based industry, in the nineteenth century, and a pioneer both of the R&D department and of systematic industry–university links, in the latter part of the century (Murmann 2003). As such, it has had a long time to mature, and it has done so. Organic chemicals became dominant in the late nineteenth century, and have remained so. Petroleum took over from coal as the main hydrocarbon raw material for organic chemicals in the early twentieth century, and so it has remained. At much the same stage, highly mechanised continuous flow technologies were introduced, and with them came the rise of the chemical engineer as distinct from the chemist: the chemist learning how to synthesise a new chemical in the laboratory, while the chemical engineer, with the chemist’s help, would then tackle the quite different problems of volume production. All that was settled before 1950. Scale economies and cost reductions soon became so central to competitive advantage that by the 1960s

How sectors vary

51

specialised engineering firms (SEFs) had taken a central role in the industry. With a few exceptions, these engineering firms never invented radical new processes, but strongly contributed to shortening the learning curve. With all that settled, the industry seems to have enjoyed a golden age of some 20 years after which it ran into diminishing returns: as shown by Achilladelis et al. (1990), the rate of innovation (judged by patenting of chemical compounds) was much higher between 1950 and 1970, than from then to the late 1980s. By then, as we have seen, chemicals had in effect lost its most innovative part, pharmaceuticals – although confusingly much of the available data on the industry includes pharmaceuticals. In the past 20 years, new product and process development (in particular, testing and control processes) have been deeply affected by the development of new technologies (mainly ICTs), and by the increasing stringency of regulations on pollution both from the production, and from the use and disposal, of chemicals. Nonetheless, these are not major shifts.16 The impression of stability is confirmed by the very low rate of turnover. Of the 25 largest chemical firms in the world in 1994, 17 were engaged in chemicals production before 1914 (the others are mainly oil companies that entered the market during the 1940s) (Harris 1996). Since then, several mergers and acquisitions have occurred and the splitting and swapping of assets have generated ‘new’ firms and the reconfiguration of old ones; but much of that was the long-overdue shedding of pharmaceutical operations. There has been virtually no new entry: scale economies are a deterrent to start-ups, and there are probably no areas of chemicals where (due to some kind of convergence of technology) a non-chemical outsider could compete on equal terms with the incumbents. So we can put the industry in general down as only modest on opportunity (although that will vary by sub-sector, as we shall see) and even low on need for reconfiguration. The judgement on visibility and appropriation must depend very much on the sub-sector, but there are certain factors inherent in the technology of chemicals. A chemical compound can be precisely defined in scientific terms, which makes patenting relatively straightforward (although it does not preclude ‘inventing around’ with a very similar compound). So product knowledge is codifiable and likely to be codified. Likewise, although some aspects of scaling up may not be precisely predictable in advance, process innovation is not a matter for trial and error on the shop floor, or piecemeal improvement by skilled production workers: it must be firmly under the control of experts in R&D and engineering departments, and will also be largely codifiable. It may not, for secrecy’s sake, be codified, since here as elsewhere patents are less effective for processes than for products. There is then a certain minimum degree of visibility and appropriability. There are of course major variations in the pace and direction of innovation within the industry. With pharmaceuticals excluded, the main categories are base chemicals, specialty and fine chemicals, and consumer chemicals, accounting (within the EU) for respectively 50 per cent, 37 per cent and 13 per cent of total sales (European Chemicals Industry 200517).

52

How sectors vary

Base chemicals include petrochemicals and derivatives (plastics and synthetic rubber) and basic inorganics. These products are produced in large volumes and are sold to the chemical industry itself or to other industries. Process innovation predominates, since new product development is slow and markets highly pricecompetitive. According to the 1994 survey, process patents in ‘basic chemicals’ are slightly more effective than average (30), but that is not saying much – secrecy is almost twice as effective (58) (see Table 2.5). In price-competitive ‘commodity’ markets, relationships with customers are not likely to be close. If there is any outside ‘stakeholder’ involved in process innovation, it is likely to be one of the specialist engineering firms mentioned above. New process technologies are often developed in conjunction with the chemical companies on the basis of exclusive relationships (Moretti 1999). The main reason for not expecting a major problem of low visibility or appropriability in innovation, is that there is not likely to be much innovation going on. This is not the case in the second sub-sector. Specialty (dyes and pigments, oleochemicals, crop protection, paints and inks) and fine chemicals (pharmaintermediates, agro-intermediates, chemical intermediates) have a very high added value per unit weight, and are the main area of spending on new product development, and on innovation generally. Their opportunity must be higher than the rest. It is extremely likely that a product will be sold to a small number of very demanding industrial customers, and there is clearly a good deal of scope to gain from close and trusting inter-firm relationships. In the past ten to 15 years, such relationships have become the accepted norm: producers have become progressively closer to their customers. They have generally shifted from the production of a single product to the production of systems of products, often engineered to satisfy the specific needs of a customer. The chemical companies and the users co-define the features of the product and work jointly to identify the specific chemical component that the user needs, the most appropriate ways to produce and sell it and the ways in which products have to be used, reused and recycled. This usually occurs through long-term inter-firm agreements, namely long-term contracts or joint-ventures (Moretti 1999). These relationships provide probably the best protection for innovation – patents are not what they once were. While the 1983 survey found product patents for organic chemicals nearly as effective as for drugs – 6.1 against a sample mean of 4.3 – the 1994 survey put Chemicals n.e.c. and Miscellaneous Chemicals barely above average; presumably combinatorial chemistry is helping in the ‘inventing around’. On the other hand Miscellaneous Chemicals had top score for Secrecy for product innovations – relatively easily protected within an exclusive relationship with the customer. Finally, consumer chemicals – soaps and detergents, perfumes and cosmetics – have a modest rate of new product development, much exaggerated of course by their marketing departments. They are produced for a mass market, so relationships with customers are not an option, and it seems unlikely that relationships with suppliers will be of great importance either. This sub-sector seems to have high visibility and limited spill-overs to outside stakeholders. We have very little

Percentage of basic research in innovation spend (1)/per cent of research in innovation spend (2) Relative importance of patents protecting products/processes (1983) (Mean of full sample 3.5/4.3) (3) Effectiveness of appropriation mechanisms for products/ processes (1994) (4) Patents (mean 35/23) Secrecy (mean 51/51) NA PATENTS 2910 General purpose machinery n.e.c.: 39/24 2920 Special purpose machinery n.e.c.: 49/29 2922 Machine Tools: 36/18 SECRECY: 2910 General purpose machinery, n.e.c.: 49/38 2920 Special purpose machinery n.e.c.: 45/42

Inorganic 4.6/5.2 Organic 4.1/6.1 PATENTS 2400 Chemicals n.e.c.; 38/20 2411 Basic chemicals: 39/30 2413 Plastic resins: 33/21 2429 Misc. Chemicals: 40/27 SECRECY 2400 Chemicals n.e.c: 53/54 2411 Basic chemicals: 48/58 2413 Plastic resins: 56/67

35.4/ 47.6

Machinery and equipment n.e.c.

NA/47.3*

Chemicals excluding pharmaceuticals

PATENTS 3100 Electrical equipment: 35/19 3110 Motor/ Generator: 25/22 SECRECY 3100 Electrical equipment: 39/32 3110 Motor/ Generator: 51/43

Motor/generators/ controls 2.7/3.5

29.3/NA

Electrical machinery and apparatus n.e.c.

Table 2.5 Characteristics of technological change in medium-high-technology manufacturing sectors

(continued)

PATENTS 3410 Car/Truck: 39/22 3430 Autoparts: 44/24 SECRECY 3410 Car/Truck: 42/34 3430 Autoparts: 51/56

4.5

29.2/ 37.8

Motor vehicles, trailers and semi-trailers

C: Medium S: 2.89** 5.0 Low/Medium low 38.49

93.67

2922 Machine Tools: 62/48

2429 Misc. Chemicals: 71/76 C: High S: 2.84 7.9 Low/Low

Machinery and equipment n.e.c.

Chemicals excluding pharmaceuticals

60.59

C: Medium S: NA 10.3 Low/NA

Electrical machinery and apparatus n.e.c.

178.72

C: High S: 3.5*** 13.4 Low/Low

Motor vehicles, trailers and semi-trailers

Notes * Basic industrial chemicals; ** Engineering and machinery; *** Automobiles; **** Data relate only to the countries included in the book.

Sources: (1) Istat (1995); (2) Doudeyns and Hayman (1993); (3) Levin et al. (1987); (4) Cohen et al. (2001); (5) C: selling only to few industrial customers: very high; selling only to mass market: very low. S: Sales over value-added, for top 600 European companies, DTI Value-Added Scoreboard 2004/5 (6) OECD (2003a); (7) Own calculations on Hwwa Worldwide matrix (www.hwwa.de).

R&D intensity (6) Frequency of paradigm shifts/ Turnover of companies Average size of firms (employees) (1999) (7)****

Importance of relationships with customers (C) and suppliers (S) (5)

Table 2.5 continued

How sectors vary

55

information about appropriation mechanisms, since the 1994 survey is silent on this sub-sector; the 1983 survey looks only at cosmetics and finds the effectiveness of patents below average both for products and patents. This suggests that there may be heavy dependence on employees to keep secrets, at least as regards processes. The best defence against imitative competition on products probably lies in the capable hands of the marketing department. 2.7.2 The machinery industries: machinery and equipment n.e.c. and electrical machinery and apparatus n.e.c. The machinery sectors include two large groups of machinery: ‘machinery and equipment not elsewhere classified’ (both general purpose machinery and special purpose machinery18 plus domestic appliances) and ‘electrical machinery and equipment, not elsewhere classified’. Machinery n.e.c. The majority of machines (or to be more general, capital goods) have two things in common: first, they are made in much smaller quantities than the intermediate or consumer goods (or services) which are made with them; second, their manufacturers need to be in close contact with their users. These two features are linked: the machine is made in small quantities because it is made for the specialised needs of a certain segment of a certain industry – so those needs have to be carefully considered and addressed. This is the ‘specialised supplier’ situation described by Pavitt and mentioned in Section 1.4. Clearly there are certain types of machine that are made in large quantities and for a much wider spectrum of business use, and then the relationship with user firms has little or no importance. Other machines are indeed made for a mass consumer market. Most office equipment comes into one or other of these two categories, as do those very important capital goods called motor vehicles. Helpfully, machinery n.e.c. is mostly of the specialised supplier type, with the clear-cut exception of domestic appliances (which in our countries varies between 58 per cent of the sector in the US and 7 per cent in Germany (see Statistical Appendix, Table A7). This is why machinery firms are typically rather small (see Figure 2.1). For a capital goods producer, its product innovations count as process innovations for its customers. This makes its rate of progress highly dependent on having the right sort of ‘lead customers’: technically progressive firms able and willing to spend today on the sort of machines that the rest will be willing to buy tomorrow if someone else serves as guinea-pig. To a perhaps lesser extent, the ‘lead customer’ gains from having a capital goods producer close to it (geographically and otherwise). (In a very new industry with highly specific needs, the user firm is very likely to make its own machinery.) The specialisation has implications also for investors: they cannot expect to get a good understanding of what the firm is doing from familiarity with a wider industry, what is crucial

56 How sectors vary is engagement with the firm itself. Of course, if the firm is small, that means it needs an engaged family (or entrepreneur). One area in which one will not expect specialisation is in the equipment that the firm itself uses: for such small volumes, dedicated equipment would normally be too expensive to develop or make. Until the late 1970s, the only alternative was general-purpose equipment used by highly-skilled workers with much tacit knowledge. From the 1980s the advent of CNC tools and FMS (flexible manufacturing systems) has partially eased that requirement, but does not change the consequent need for skilled employees with specialised knowledge of the firm’s products and processes. It is unlikely, except perhaps in an industrial district, that there will be any alternative employers requiring similar skills available to these employees: their skills are then effectively firm-specific and this implies or demands a mutual commitment of employees and firm. If the firm does not do enough product improvement or new product development to maintain employment, the employees must fear unemployment. The sector, in general, clearly has a need for stakeholder inclusion, but we should note some variations within it. In the 1994 survey (Table 2.5) special purpose machinery is the only one of the group with higher scores (on product protection) for patents (49) than for secrecy (45) (also its score for lead time (60) is high). This suggests a relatively high degree of appropriability, supported by its respectable score on patent protection of processes. At the other extreme, machine tools stands out as having high scores on secrecy (62) and lead time (61) for the protection of products, while this category comes bottom for patent protection of processes. That should make them particularly dependent on customer and employee inclusion. General purpose machinery is broadly located between the first two. Typically, innovations in these sectors are incremental and the level of opportunity and need for reconfiguration are rather low. This is confirmed by the very low R&D intensity (see Table 2.5). With very few exceptions, most of the machine builders do not maintain formal R&D activities (see Sciberras and Payne 1985 for machine tools). For machinery and equipment n.e.c., the only major paradigm shift occurred in the 1970s, with the diffusion of numerical controls first and then of computer controls, which brought about a radical transformation in the system of production of the sector. This new technology was first developed within the machine tools sub-sector in the US in the early 1950s by the John C. Parsons Corporation, the US Air Force and the Servomechanisms Laboratory at MIT to produce highly complex metallic parts for the US Air Force. When first invented, numerical controls consisted of punched tapes, cards or operator push buttons that allowed programming and directing the operations of the machine (Wieandt 1994). With numerical controls, machine tools made possible much more flexibility than the previous specialised machines. However, their diffusion remained quite limited, as they were very expensive and unreliable. Further, shifting from one type of production to the other required the substitution of hardware components (Carlsson 1989). The significant diffusion of numerical controls occurred only with the

How sectors vary

57

use of microprocessors as control devices. A Japanese firm, FANUC, the current leader in controls production, was the first to apply the new computer technology to machines, starting a new era in the history of the sector. Electrical machinery, n.e.c. This sector includes machinery for the production, distribution and storage of electrical power (about half of the value of output); insulated cables and wires (about 15 per cent); electric lamps and lighting equipment (less than 10 per cent) and a large ‘not elsewhere classified’ remainder of about a quarter (Table A8). In the 1994 survey of appropriability mechanisms, ‘electrical equipment’ has an almost uniquely miserable position, with below-average scores on five out of six of the survey’s measures, the only exception being patents, on which it is just on the mean. (What is more, it scores six out of six below the mean on process protection.) It is not clear whether this category includes lighting. It certainly includes switchgear. The difficulties of appropriation in this sub-sector were vividly brought out by the revelation in 2006 that an international cartel had been operating in it since 1988, involving ten major European and Japanese firms (Echikson 2007). Cartels typically operate where firms are trying to avoid price competition in the market for a standardised commodity – which many of the products in the sector appear to be, sold to a large number of industrial customers. Another response to such difficulties is protection of domestic producers, either by formal means like tariffs or (now that tariffs are low and other obstacles to trade forbidden) by ‘preferential public purchasing’. It seems that protection of one sort or another has indeed been strong, from the exceptionally low variance of the patenting, trade and production figures for this sector, indicating little specialisation among countries (see Statistical Appendix, Table A8). Electric motors/generators are shown separately in the 1994 survey (see Table 2.5). Their appropriability conditions are fairly similar to those of machinery in general. The understanding of technological competition in this sub-sector is complicated by the gas turbine. The major technological breakthrough of the last century in electric power generation was the introduction in the 1970s of the Combined Cycle Gas Turbine, which has almost 50 per cent higher thermal efficiency than other fossil fuel power stations, with much lower capital cost and shorter construction times – and is much smaller and less polluting, so it can be sited close to cities (Watson 2001). Before this paradigm shift, and for more than half a century, steam turbines were completely dominant in electricity generation, whatever the source of heat to make the steam. However, the technology of gas turbines had been developed in the 1940s with the jet engine, which is essentially a gas turbine, and in the US (not elsewhere) was assigned by the Department of Defence to steam turbine manufacturers (GE and Westinghouse) to make. It became apparent that the gas turbine used by itself offered electricity generation with low capital cost per unit but lower thermal efficiency than the steam turbine. Gas turbines were accordingly used first as back-up generators in the late 1960s, in the US and UK. It was not hard to see

58

How sectors vary

that the very hot exhaust from the turbine (which was responsible for the low efficiency) could be used to generate steam, in a combined cycle. The first to act on this, not surprisingly, were the US manufacturers who were already making both types of turbine. They introduced CCGT in the early 1970s; it gradually came in after that, reaching its dominant position over a period of some 20 years. It thus gave an advantage to those manufacturers who were able, like GE and Rolls-Royce, to use their understanding of gas turbines as jet engines, to develop gas turbines for electricity generation. What we have described, then, is a highly heterogeneous sector, in which one major part is much influenced by developments in the completely separate sector of aerospace. Much of the rest appears to be dogged by appropriability problems: this means that neither patenting and other intellectual property protection, nor stakeholder inclusion, are obvious solutions, and in such circumstances our approach has little to say. Electric lamps and lighting are for the most part a mass consumer commodity, quite distinct from the rest. We would therefore find it difficult to discuss national advantage in this sector usefully without splitting it into sub-sectors – for which there is not much disaggregated data available. Happily there is, as we have just pointed out, very little national advantage to discuss. So we shall say little more about this sector. 2.7.3 Automotive We argued a few pages back that the essential stability of the shape and power source of an aircraft did much to give the industry that made it, continuity. That is even truer for cars, trucks and buses. One could take to the road today in an automobile made in the 1920s, and some people do. One would find little essential difference in shape or power source – or materials – from most made today; and if it were a 1920s Ford, even the means of manufacture (body pressing, for example) would be quite similar. As in aerospace, the industry has moved (though not completely) to CNC machine tools and the other elements of flexible manufacturing systems. The main difference is that it started the move later (in Japan in the 1970s) and that the switch was from the dedicated high-volume equipment introduced by Henry Ford, whereas aerospace moved from generalpurpose tools. In fact the change of best-practice methods could be said to have come in two stages. The first was in the 1950s and 1960s, when the German producers showed that their more participative, higher-skill adaptation of ‘Fordism’ was more productive than the American original (particularly in the segments in which Germany came increasingly to specialise: more expensive cars, and trucks);19 the second in the 1970s when the Japanese producers showed that theirs (including CNC etc.) was better still (particularly for cheaper cars).20 It is clear that the nature of automobile technology is decidedly cumulative, with long trajectories of incremental change: it is not given to radical innovation, even in processes, let alone in products. The need for reconfiguration thus must be very low. Opportunity however (to judge by R&D intensity) is moderate. That is where the easy judgments stop. Ten or 15 years ago this could have been

How sectors vary

59

judged a classic ‘stakeholder capitalist’ industry. Since its product is assembled from a multitude of components, the motor vehicle industry benefits greatly from close relationships between assembling firms and their component suppliers (Womack et al. 1990); as ‘Toyotism’ has demonstrated. Since the successive stages of manufacture and assembly remain incompletely mechanised, and are large-scale, each plant needs rather large numbers of shop-floor workers – a challenge to employee inclusion. How unsurprising, then, that the countries that came to dominate the industry are the two great exponents of stakeholder capitalism, Germany and Japan. Equally unsurprising should be the less well-known fact that the motor vehicle industry has (for a large-scale industry) an unusual presence of family-controlled firms: Ford, Toyota, Peugeot, Fiat, BMW;21 for an engaged controlling family can support continuity of policy, and commitment to trusting relationships with other firms and with employees. Now, the advantages of stakeholder inclusion in the industry are less apparent. It is now a globalised industry, in which all the main producers have production operations in all three of the main regions: North America, Europe, and East Asia, although low US fuel prices ensure that the models made and sold there are mostly different from the other regions. In each of those regions there has been a steady move of employment away from the highest-cost locations; first to the American South, to poorer regions in Western Europe, and to South Korea; more recently to Mexico, the new EU entrants, and China. The structures and understandings (and even, in Germany, laws) that underpin stakeholder inclusion at home, are very difficult to apply abroad. It is easier to base longdistance relationships – within and between firms – on codified knowledge; that is, if the knowledge can be codified. Increasingly it can, because of CAD-CAM. Can it, if codified, be protected? For motor vehicle parts, effectiveness of protection by product patents was rated just above the sample mean by the 1983 survey (4.5 to 4.3); process patents likewise (3.7 to 3.5), although as usual the absolute effectiveness was less. Eleven years later, with reliance on patents apparently rising generally, the 1994 survey found motor vehicle parts clearly above average in effectiveness of product patents (44 to 35) although secrecy was still more effective (51; just on the mean).22 Cars and trucks themselves (not covered in the 1983 survey) were rather less well protected (39). Both parts and vehicles showed high scores for lead time (64, 65, against a mean of 53) in protecting products; parts also in protecting processes (50, against 38). In other words, if the early stages of innovation can be protected by secrecy, patents and lead time together can be quite effective later on. There may be an innovative core within motor vehicle firms and their suppliers which stays close to home – R&D departments, designers, etc. – and could operate on a stakeholder basis; but it is not clear that it needs to include manufacturing. There is another important feature of the industry that jars with the picture of a perfect marriage with stakeholder capitalism: its customers. The ideal stakeholder firm buys from and sells to firms, a few firms, who can then be part of its stakeholder group. That is true for the parts makers, but not for the assemblers: most of their customers are not firms, and those that are (fleet buyers of cars,

60

How sectors vary

trucking firms) are numerous. A perhaps significant detail is that most of the individual customers are now female.23 The car industry seems for long to have been protected from rule by marketing by the fact that its product was difficult to make well, and the consumer was forced to prefer the models that were well made. Now, reliability and durability are generally acceptable, and the consumer can indulge his, or more likely her, inclinations as to style. Murat Gunak,VW’s chief designer, says that emotions are playing an ever larger role for carmakers as technology has reached such high standards across the industry. ‘The customer is no longer as strongly focused on technological innovations but on the brand and its identity and how the product fills the demands’. Such remarks reflect one of the key changes in the automobile industry: the growing importance of brand image against technology . . . . Ralf Kalmbach, a consultant . . . says . . . ‘In the view of the customer, the brand must be created, positioned and established. Automotive makers must redefine themselves from the technology end to the customer base’ . . . . Mr Gunat says that the growing importance of brand image in cars has given designers a much larger role. (Uta Harnischfeger 2003: 5) We now have a situation, then, where product differentiation is more a matter of intelligent designer choice from a portfolio of possible features, than a complex struggle to overcome technical obstacles to product innovation and to raise quality of production. Likewise cost reduction depends less on overcoming the difficulties of process change, than on the freedom to make a shrewd lowcost choice of plant location. Given the large scale of the industry, these are not low-visibility decisions, nor do they favour firms with stakeholder inclusion.

2.8 Conclusion The reality of sectoral requirements turned out to be quite complex. It was reasonable to treat technological opportunity, and thus requirement for expert risk capital, as relatively high in the ‘high-technology’ sectors – aerospace, pharmaceuticals, the ICT hardware areas, and software. They varied greatly, however, in competence destruction and thus need for reconfiguration – low in aerospace, quite low then rising in pharmaceuticals, generally high in computing, variable in communications, generally high in software. The ‘medium-high technology’ sectors – chemicals, motor vehicles, machinery and electrical machinery n.e.c. – were generally lower in technological opportunity, and with no more than episodes of serious competence destruction – none as yet in chemicals, two in motor vehicles (the advent of lean production, and then digitalisation), the arrival of computer numerical control in machinery. (See Table 2.6 for an overview of findings.) On visibility/speed of pay-off and stakeholder spill-overs, the sectors divided up on different lines. Appropriability through patents used to be very much the

How sectors vary

61

Table 2.6 Broad-brush synthesis of findings Opportunity

Need for reconfiguration

Visibility

Stakeholders’ spill-overs

Aircraft and spacecraft

High

Low

Pharmaceuticals

High

Office, accounting, and computing machinery

High

Moderate (rising – biotech) High

Low (High for ‘insiders’); slow pay-off High; rather slow pay-off High

Generally high (except customers) Low (except for research employees) Moderate

Radio, TV and communications equipment: Semiconductors High Moderate

Low

Electronic components

Moderate

Low

Low

TV/Radio

Low

Low

Moderate

Telecommunications: Consumer equipment

High

High

Moderate

Producer equipment

High

Moderate

Moderate

High (suppliers) High

Software and IT services: Standard Middleware Enterprise IT services

High High Moderate Moderate

High Moderate Moderate Moderate

Low Low Low Low

Low Moderate High High

Medium-high technology industries Chemicals: Base Low Specialty and fine Med. –high Consumer Low

Low Low Low

High Moderate High

Low High Low

Machinery and equipment, n.e.c. Special purpose Low

Low

Moderate

General purpose Machine tools

Low Low

Low Low

Low Low

High (customers) High High

Low

Low

Low

High

Low Low/ moderate

Low Low

Moderate Low but rising

Moderate High but falling

High-technology industries

Electrical machinery, n.e.c. Electric motors/ generators Electrical equipment Motor vehicles etc. (automobiles and trucks)

High (employees) High (customers) High (suppliers)

62

How sectors vary

preserve of pharmaceuticals and chemicals; the onset of digitalisation and the extension of intellectual property rights seem to have brought much of the ICT industries – hardware and software – up nearly to the same level, and affected others, such as motor vehicles. This tended to reduce the need for employee inclusion, and to increase visibility. Another dividing line was between sectors (or rather sub-sectors) where producers dealt with important individual industrial customers with whom cooperative relationships could be developed, and those where they sold either to a mass consumer market or to a large number of firms. Most machinery came into the first category; so did specialty chemicals, and enterprise software. These sub-sectors demanded stakeholder (customer/supplier) inclusion. The speed of pay-off clearly varied, too, although it was difficult to get reliable and comparable data. In pharma the time to market was long; in aerospace the products were long-lived and it would take a long time until they paid off their (heavy) development costs. The speed of development and product turnover was clearly much higher in the ICT industries, but in many cases this disguised the need for a sustained effort to build up technological capability and brand acceptance through a series of products and models. Finally, size mattered, and varied. Where success depended on large centrally-coordinated projects, visibility and appropriability were likely, other things equal, to be high, and there would be relatively little need for engagement or inclusion. This applied generally to aerospace and motor vehicles; more arguably to pharma. Where the scale of development and production was small, as in the case of most ‘machinery n.e.c.’, innovation needed to be driven either by the top management of small firms or the lower management of big firms. Either way, there would be a challenge of low visibility – for the financiers of small firms, for the shareholders and top managers of large firms. For the big firms there would also be a challenge of employee inclusion. We now have a reasonably firm basis on which to predict and explain the technological advantage and performance of nations – once we have categorised their systems of corporate governance and finance in the appropriate way. That is the task for the next chapter.

3

How national systems of corporate governance and finance vary

3.1 Introduction This chapter’s central purpose is to examine how our 11 economies vary in terms of corporate governance and finance. To repeat: we understand corporate governance in a very broad sense, as who controls and influences firms, and how. This means that various aspects of firms’ relationships with the state and their employees will be treated as relevant. We are thus dealing very much with what some authors have called ‘varieties of capitalism’. In a sense we shall be seeking to characterise national systems of corporate governance and finance, but we must stress that our concern is always with the situation of the individual firm. We shall find it convenient at certain points to give one label to a country’s whole economy, but this will always be an approximation that conceals variations among that country’s firms. At other points we shall distinguish types of firm and indicate the rough proportions of each type in a particular economy. Another consequence of our focus on the individual firm, as we have already pointed out in Chapter 1, is that the nationality of ownership and control1 is more interesting to us than the national location of activity. Thus, for example, we would treat the corporate governance of IBM’s British subsidiary as essentially American, because it is an extension of American structures of power, albeit operating mainly on the British labour and product markets. This helps, as we said, to account for our choice of countries: thus Switzerland as a place to produce may not be important enough to be worth discussing, but Swiss firms, including a number of very powerful multinationals, certainly are. We concentrate in this chapter on giving something of a comparative snapshot, or a set of snapshots, at a period of time (the 1980s and early 1990s) which was, generally speaking, the end of several decades of relative institutional stability. There are three practical reasons for this. First, much of the available literature relates to this period, more or less. Second, there are some clear and striking differences among countries at this time which are convenient for the taxonomist. The picture can be properly painted in primary colours. Since then there has been a good deal of convergence. Third, as we have argued, there are quite long lags in the effects of finance and corporate governance. The FCG

64

How national systems vary

picture up to 1990 or so can explain, as far as FCG can, the main features of technological advantage now and recently. There is, however, one major exception: China. Mainland China was in flux in the 1980s and early 1990s, en route to capitalism, and it is much more convenient to take the snapshot roughly as of 2000, when although change was still fast, a recognisable Chinese capitalism had taken shape. There are four minor exceptions, too: France, Sweden, Taiwan and South Korea changed very considerably between the early 1980s and late 1990s – enough, and soon enough, to have affected technological advantage already. We shall take account of this in the country chapters; here we shall focus mainly on their characteristics before the major changes. This will not be enough. Capitalist economies are dynamic, and where they are is no more important than where they are headed, which in turn can only be understood by examining where they have come from. Giving only a little historical background in this chapter, we shall give more in subsequent chapters. There, we shall also show how financial and corporate governance systems have been changing over the last decade and how that helps to understand current changes – and predict future changes – in technological advantage. But we need the big picture first.

3.2 The shareholder–manager relationship There are those who prefer to narrow the definition of corporate governance. ‘Corporate governance . . . is defined as the organisation of the relationship between the owners and the managers in the control of a corporation’ (Lannoo 1999:272); and the ‘owners’ are taken to be the shareholders. If this narrowed approach is accepted (we shall do so for the moment), it suggests three questions: 1 2 3

Who are the shareholders? What are their broad objectives as corporate owners? What is the nature of their relationship with the managers?

All three of these questions appear to be answered at once by the broad distinction discussed in Chapter 1, between ‘outsider-dominated’ and ‘insiderdominated’ financial and corporate governance systems. In outsider systems, the predominant shareholders (in weight and influence) are assumed to be financial institutions that have traditionally sought to manage a diversified portfolio of financial assets with the sole aim of maximising their return on them. (The main categories are investment funds, pension funds and insurance companies.) In order to do so they put liquidity above power, and their relationship with management is ‘arms-length’. Accordingly they do not put their representatives as non-executive directors on company boards. Individuals (‘households’) may also have a large number of shares (as in the USA), but their holdings in each firm are (it is supposed) generally small. The ‘insiders’, by contrast, have in common that they seek control, more or less direct control, over management.

How national systems vary

65

They accordingly generally do have their ‘own’ non-executive directors on the board. They may be families, banks, insurance companies, government, or other firms (see Table 3.1, modified from Table 1.1). The outsider/insider distinction provides an elegant simplification into two categories when one might have had many more. Where it is least satisfactory is in the answer to the last of our questions, on the nature of the relationship with management. The problem is more obvious in the outsider system. What does the arms-length relationship lead to? Management control, or autonomy? As we saw in Chapter 1, that does not automatically follow: there is in principle the possibility of indirect shareholder control, which operates essentially through the stock market: if the ‘market’ generally approves of Firm X’s performance, its stock price goes up, making new share capital cheaper to raise for investment or acquisition of other firms; if it disapproves, X’s share price goes down, with the opposite effect – and making it cheaper for another firm to buy. The spread of stock options as part of management’s remuneration certainly seems to strengthen indirect shareholder control, by giving management a very strong personal interest in raising the share price. We should not overestimate the effect of these mechanisms. Stock options can be managed by management rather as a way of helping themselves to a chunk of shareholders’ wealth. If the stock market goes up generally, as in the late 1990s, they can cash in even if their firm underperforms. If the stock market falls, as after 2000, they can reasonably complain that that is not their fault – and hand themselves out more options at generous prices. Likewise, as we pointed out in Chapter 1, the threat of the hostile takeover bid, which is the key ‘stick’ in indirect control, can be blocked by various kinds of ‘shark repellents’ – so long Table 3.1 Insider- and outsider-dominated financial systems: the stereotypes Type of system Insider-dominated

Outsider-dominated

Main shareholders

Families, banks, other firms, government

Ownership of debt and equity Investor priorities How do shareholders express dissatisfaction? Who do non-executive directors represent? How does control change?

Concentrated

Pension funds, mutual funds, insurance companies, households Dispersed

Control By ‘voice’

Liquidity By ‘exit’

Each represents specific major shareholder By agreement of main shareholders All non-English speaking countries, until at least 1990s

All shareholders equally

Countries usually assigned to category

Through takeover – agreed or hostile USA, UK, other Englishspeaking

66

How national systems vary

as these are permitted by the law of the country (or state) in which the firm is incorporated. The ‘carrots’ remain: but for either carrot or stick to work, shareholders (present and prospective) need information and the expertise with which to understand it. We cannot take the quality of either their information or their expertise for granted. One reason for scepticism about the indirect control mechanism in the ‘outsider’ system arises from the institutions on which it depends. The main financial institutions – pension funds, mutual funds, insurance companies – are run by people who are investing other people’s money. There is a double divorce of ownership from control – not just shareholder from manager, but investor from fund manager from industrial manager. In fact those who run pension funds frequently hand over the management of their assets to ‘asset management houses’: that makes a treble divorce – beneficiary/fund trustee/asset manager/industrial manager. All kinds of conflict of interest are then possible – if for example the ‘house’ that manages pension fund or mutual fund assets including shares in Firm X, is part of a financial institution that has another relationship with Firm X. They might then not sell X’s shares when they should sell. Even more likely, they might stick rigidly to the arms-length ‘outsider’ posture when it would make much better sense for once to join with other shareholders and intervene directly – if only to prevent abuse of the stock option system, or to stop management deploying ‘shark repellents’, and thus help indirect control to work. The insiders’ relationships with management are also far from clear. Where the dominant insiders are a family it is at least clear where their interest lies: in exercising control with a view to long-term profit, so as to protect and increase the family’s wealth (and perhaps influence and prestige). (Arrogance or foolishness may of course lead to quite different results, and some families may not take the trouble to exercise their power.) But all the other insiders are institutions – what about their corporate governance? Who guards these guardians? With what objectives will the managers of these institutions control the managers of firms? They may act purposefully in the interests of their own ultimate beneficiaries – the banks’ own shareholders or depositors; the cross-holding firms’ own shareholders; the government’s voters and citizens, and so on. But they may not. It is equally likely that these ‘guardians’ will in some degree collude with the top management of the firm they appear to control. Where Firm X and Firm Y (or Firm X and Bank Y) have shares in each other, the motive for mutual back-scratching is obvious; perhaps also when shareholding by Y in X is balanced by buying by X from Y. The most likely danger of all is simply personal friendship. Insider systems are generally rather stable: shareholdings are held for a long time. Y’s director on X’s board has probably known X’s CEO for years. They are probably both directors on Z’s board. Perhaps they play golf together. Y’s man (we can assume it is a man) is at the very least unlikely to try very hard to get the information and expertise he would need in order to exercise real control over X. Management control is thus a possibility also in insider systems.

How national systems vary

67

3.3 The manager–manager relationship We now revert to our broad definition of corporate governance as who controls firms, and how. Perhaps part of the who, or at least part of the how, is: other managers. Some at least of the insider systems appear to have a high degree of cohesion among firms. This may arise because of networks of cross-shareholding (as in Japan); because banks or governments control or influence a number of firms that can then be persuaded to cooperate with one another; or simply because in a small country or region everyone who matters knows everyone else. We believe the degree of cohesion is an important variable. So does David Soskice (1999). He makes a key distinction between Liberal Market Economies (LMEs) where such cohesion is low, and ‘business-coordinated market economies’ (CMEs), in which there is ‘considerable non-market coordination directly and indirectly between companies, with the state playing a framework-setting role’ (Soskice 1999: 103). He excludes from this category a country (like France) in which the coordination is largely by government. His two main measures of business coordination are interlocking directorates and employers’ wage coordination (Table 3.2, drawing on his Table 4.1). Italy, Soskice describes as ‘a complex case’ but chooses on balance to put it with the CMEs. We agree, although most of Soskice’s own data disagrees. On his measures of business coordination shown in Table 3.2, its similarities are more with the UK and the US (LMEs). We shall see that the same is true in a number of other areas.2 He is right essentially because Italians are masters of informal coordination, between firms as otherwise; see Chapter 7. Japan does not appear in Table 3.2 on the grounds that Japanese company boards do not have external directors (a mild exaggeration; see Allen and Gale 2000). Clearly, however, there are analogous links within kigyo shudan or ‘horizontal industrial groups’, which also provide a high degree of coordination. It is therefore entirely reasonable to classify Japan too as a CME, as Soskice does – one where the coordination is largely within cross-sectoral groups rather than industry by industry. Korea, Soskice puts with Japan in a ‘group-coordinated’ sub-category Table 3.2 Soskice’s measures of business coordination, 1970s–1980s

Belgium Germany Netherlands Austria Finland Switzerland Italy United Kingdom United States

H-index (index of concentration) of directorates

Employers’ wage coordination

Soskice’s Categorisation of Economy

0.30 0.21 0.21 0.20 0.19 0.16 0.11 0.07 0.05

2 3 2 3 3 3 1 1 1

CME CME CME CME CME CME CME LME LME

68

How national systems vary

of CME. We disagree. Korea does indeed have the chaebol, which being conglomerates with an interest in more than one sector could be described, at a stretch, as providing coordination. But this coordination excludes small firms (unlike Japan) and overall the main coordinator in Korea has been very much the central government, whose interventionist approach, as we shall see in Chapter 6, is most closely comparable with that of the French government.3 Taiwan and mainland China, Soskice does not discuss. The role of Taiwan’s state in its development can be described as ‘governing the market’, in the phrase of Wade (1990), but certainly in a much less intrusive manner than South. Korea’s. Taiwan’s industrialisation was driven by ‘guerrilla capitalism’ – by the highly entrepreneurial strategies of small and medium enterprises, which during the 1980s produced about two thirds of its total exports (Clark and Roy 1997; Hobday 1995a). These SMEs were hard for the government to coordinate and were disinclined to coordinate themselves in any formal way. It seems likely that, on Soskice’s criteria, Taiwan would resemble Italy in being informally coordinated – highly successfully. Mainland China has been far less effectively coordinated than its economic successes would suggest: Nolan (2001) shows that its industrial and technology policy largely failed, due to incoherence and bureaucratic rivalries: one might argue that the country is simply too large to be effectively coordinated. One could, however, scarcely call it a Liberal Market Economy. We have thus not two categories plus France, but three categories plus mainland China: 1 2 3

Liberal Market Economies: US, UK, other English-speaking countries. (Government-) Coordinated Market Economies: France, Korea. (Business-) Coordinated Market Economies: Germanic/Nordic countries, Japan, Italy, Taiwan.

We shall see in the next section, however, that Italy and Taiwan need to be separated from the third category.

3.4 The role of employees We have already strayed a long way from owner–manager relationships, the narrow definition of corporate governance, but we have not yet considered one of the strongest candidates for power or at least influence over management – employees. Employee power/influence can be measured in a number of ways. The most popular in the literature is employment protection (OECD 1999; Bassanini and Ernst 2002; Pagano and Volpin 2001). This measure matches the insider/outsider distinction closely: all the English-speaking countries have very low employment protection, and all the other countries have more (see Figure 3.1). However, it is notable that Denmark and Switzerland have not much more, and are closer to the English-speaking group than they are to the rest, which are themselves as different one from another as some of them are from the Englishspeaking group (Pagano and Volpin 2001; Figure 2). Three of ‘our’ economies

How national systems vary

69

14 12 10

Employee protection

8

Length of employment

6 4

0

USA GBR CAN NZL IRL AUS CHE DMK FIN NDL JPN AUT BEL SWE DEU NOR FRA ESP ITA GRC PRT

2

Figure 3.1 Employee protection and length of employment (sources: Waldenberger (2003: Table 1); Pagano and Volpin (2001: Figure 2)). Notes Employee protection (weighted average of indicators on regular contracts – procedural inconveniences, notice and severance pay for no-fault individual dismissals, difficulty of dismissal, short term contract – fixed-term and temporary, and collective dismissals. Values increase with the strictness of protection). Those of our countries less obvious from the acronyms are: CHE: Switzerland; SWE: Sweden; DEU: Germany.

are not included in Pagano and Volpin’s figure: S. Korea has strong employment protection (Lee and Lee 1994). Taiwan has very little (Buchanan and Nicholls 2003). Mainland China had, as of 1978 (the beginning of the reform programme), a rigid job-for-life system. Since that time employment protection has been steadily eroded, first by the growth of forms of employment (‘township and village enterprises’, and private firms) in which it never existed – by 2002, state-owned enterprises employed less than a third of the urban labour force; second by the change of regulations, and practice, in the state-owned enterprises, to a position where job protection even there is no more than moderate (Cooke 2005). (Recall that in mainland China, unlike the other countries, the period we are most interested in is the last decade.) Legal constraints on dismissal are not really an expression of employee power, merely a constraint on managers’ power. In some countries employees do clearly have a share of power, as guaranteed to them by various kinds of ‘codetermination’ laws – best-known in Germany. The German version, unique in its strength and breadth, involves employee representation on the supervisory board, plus strong works councils. In categorising the other countries, works councils are not very helpful, since they are rather widespread and extremely variable both in legal powers and in practical effectiveness (Niedenhoff 2005). Codetermination at board level, what Niedenhoff calls ‘enterprise codetermination’ (Unternehmensmitbestimmung), is a better indicator – and in any case tends to be associated with strong works councils. It does not exist among our non-European economies, i.e. the US, Japan,4 Korea (Whitley 1992b; Lee and Miller 1999), Taiwan (Han and Chiu 2000) and mainland China.5 Among pre-2004 European Union members it exists only in Germany,

70

How national systems vary

Table 3.3 Enterprise-level codetermination: employee representation on company boards,1 c.2000 Equal representation

One-third representation

Other representation

Germany (>2000 employees) Denmark2

Germany (<2000 employees) Austria (>300 employees) Luxembourg

Finland3 Sweden4 Netherlands5

Source: Niedenhoff (2005). Notes 1 Either Main board or Supervisory Board, depending on whether the board system is 1-tier or 2. 2 If employees vote for it; otherwise at least two directors. 3 One employee-director (up to a maximum total of four) for every four shareholder-directors. 4 Two employee-directors for between 25 and 1000 employees; above that, three; always a minority. 5 Works councils share in choice of directors. Works councils are (as in Germany) elected by all employees and only employees.

Luxembourg, Austria, Denmark, Finland, Sweden, and (in a sense) in the Netherlands (Table 3.3). We cannot however exclude Japan from the ‘codetermined’ category simply for lack of legislation. When asked ‘Whose company is it?’, and offered a choice of ‘All stakeholders’ and ‘The shareholders’, virtually all Japanese senior managers chose the former – while of course a large majority of US and UK managers chose the latter, as did substantial minorities in France and Germany (more in France) (Pagano and Volpin 2001, Table 2, drawing on Allen and Gale 2000). Again, when asked whether job security or the maintenance of dividends should be given priority, the Japanese opted overwhelmingly for job security, while the French and Germans only narrowly preferred it. Clearly, even without codetermination or strong employee protection laws, the Japanese manager is strongly influenced by employee interests – or believes he should be. At least for the core workforce in large corporations, ‘joint consultation is linked to collective bargaining, but often covers a very wide range of business decisions and subjects them to information, consultation and sometimes codetermination . . . . employee opinion has considerable importance in the internal promotion of management’ (Jackson 2003: 265). All the other East Asian societies are fundamentally different from Japan, with its decentralised, somewhat ‘feudal’ traditions (Whitley 1992b and Orrù et al. 1997). Thus, in Korea, where most firms are family-controlled, decision processes are centralised at the family level and management has been traditionally authoritarian (Whitley 1992b; Matsumoto 1983). Delegation of power to lower levels is limited to technical issues, and workers’ participation is not significant either through works councils or informally. While Japanese labour unions are predominantly company unions, Korean labour unions have traditionally been organised on an industry basis; job mobility and firm poaching from others in the same industry are much more common than in Japan (Matsumoto 1983, Tables 4.2 and 4.3). If we look at the employment protection and codetermination data together, we can again identify three groups. The first is made up of the English-speaking

How national systems vary

71

Table 3.4 Systems categorised by labour market/labour relations character Category of system

Characterisation

Countries in category

Labour market primacy

Weak employment protection, no codetermination

Strong employee protection

Strong employee protection, no codetermination

Employee inclusion

Moderate employee protection, and codetermination or strong influence (by law or custom)

English-speaking; Switzerland; mainland China and Taiwan France, Italy, Spain, Greece, Portugal, Korea Germany, Austria, Netherlands, Nordic countries, Japan

economies, plus Switzerland, mainland China and Taiwan. Here there is no codetermination, and little employment protection (although mainland China used to have a great deal, and Switzerland has a little more than the rest). The second group is made up of the Mediterranean economies (including France) and Korea. Here there is no codetermination, but a great deal of employment protection. The third group has codetermination, and mostly moderate employment protection. So some countries trust everything to the labour market; some rely heavily on legal interference with it; a third group interfere with it mildly as an adjunct to codetermination. We can sum up our categories (see Table 3.46): 1 2 3

The labour market rules. Strong employment protection. Employee inclusion.

3.5 Our four categories Happily it has turned out that using role of employees as a criterion leads us in the same direction as using type of coordination. We come out with four categories. 1

2

3

Outsider-dominated economies – a.k.a. liberal market economies, with labour market primacy: the English-speaking countries. We can name this category Shareholder Capitalism, for obvious reasons. Insider-dominated economies with business coordination and employee inclusion: the Germanic/Nordic countries and Japan. This category is Stakeholder Capitalism, as employees and other (related) businesses are major stakeholders in firms. Insider-dominated economies with government coordination and strong employee protection: France and Korea. This is State-led Capitalism: while the extent of state ownership varies greatly, the extent of state intervention is distinctive. (Or it was; these two countries’ FCG systems changed earlier and faster than most others.)

72

How national systems vary

4

Insider-dominated economies with strong employee protection and varying degrees and types of business coordination: Italy, Spain, Greece, Portugal. This category has to be described, rather clumsily, as Family/State Capitalism. The paucity of large privately-owned business largely accounts for the relatively high degree of state ownership. The central state is not strong or effective enough to provide government coordination.

Three of our 11 economies do not fit neatly into any of these categories. Switzerland stands between our first and second categories. It lacks employee inclusion, and the moderate protection that seems to go with it. On the other hand, it is in the Business-coordinated group, and like the rest of that group belongs to the ‘insider-dominated’ category. We saw in Chapter 1, however, that the insider/outsider distinction is not as reliable as it may seem, and that there are many powerful insiders in the US. Taiwan and mainland China stand between our first and last categories. Like the shareholder capitalist economies, they both, more or less, respect labour market primacy – mainland China less, and only recently. On the other hand they have relatively few large privatelyowned businesses and at least until recently a relatively high degree of state ownership.

3.6 Poles of control; or, where does stakeholder capitalism come from? We now have the four main categories with which we shall work, but before looking in more depth at each of them there is a fundamental distinction among them that is worth noting. In the Anglo-American world, ownership is supreme. Of course, ownership rights are limited by various laws, and every firm has voluntary constraints on its actions in the form of contracts it has freely, and normally temporarily, entered into. But the old rule is still deeply respected: ‘A man may do what he will with his own’. As we have seen, many large firms are now far from that rule, in the sense that the owners – the shareholders – do not directly control the managers. Nonetheless, the supremacy of ownership endures in the sense that the managers are seen as responsible to the shareholders alone. Everywhere else, except for some of the ex-socialist countries of Europe, there is less trust in market forces. Nonetheless, some of the ‘less-trustful’ countries have a key similarity with the US and UK: in Family/State capitalism (Italy, etc.) the state has severely restricted firms’ rights to dismiss employees, but within the field of action which the law leaves open to management, responsibility is to the shareholders alone; indeed this is usually more clearly apparent than in Britain or the United States, through direct shareholder control. The same, to a lesser extent, is true of State-led capitalism. It is only stakeholder capitalism that really challenges the supremacy of ownership. Of course, beyond a certain size, every firm becomes important to others besides its owners: to its employees; to its bankers, suppliers, customers; to local, regional, central government. All these may regard themselves as stakeholders.

How national systems vary

73

Table 3.5 Corporate governance types by ‘polarity’ of control Number of poles of control

Governance types

Uni-polar

Family/State capitalism Shareholder capitalism State-led capitalism Stakeholder capitalism

Bi-polar Multi-polar

Stakeholder capitalism implies that at least some of the stakeholders listed have a share in control, or some established way of influencing management actions and policies. There are three ways in which they may achieve such a position. First, they may gain by accident or design a strong bargaining position vis-à-vis management. This might apply to a strong trade union, or to a bank facing a firm that desperately needed a new loan, or could not make the payments on an old one. Second, and more generally, the law may decree that they should enjoy such a position. Third, the customs and culture of the firm and/or country may demand it. For all the economies we have selected in the category of stakeholder capitalism – Japan, Germany and Sweden – we shall examine in Chapter 5 how one or other ways to it opened. Here we will venture a preliminary generalisation. When we are looking at the corporate governance system of a country over any substantial period of time, there is some tendency for these three conditions to resolve to the third: a culture that encourages consensus-building among stakeholders. If there is no such culture, the managers and shareholders of a firm will be more inclined to resent and resist union, bank or other ‘intrusion on their affairs’. The managers and shareholders of firms in general will be more inclined to unite to fight against laws that mandate this. We find such consensusseeking cultures in the lands of Northern and Central Continental Europe – the Nordic countries, Germany, the Netherlands, Austria; and in Japan.7 A way of summarising the distinction we are drawing is to say that in stakeholder capitalism there is an acceptance of the principle of multi-polar control, while elsewhere control is regarded as naturally uni-polar. We have to complicate the distinction a little more when we recognise the special circumstances in State-led Capitalism: the large private firms there which are (were) privileged by the state do have, in effect, two masters, their owners and the state, and so we may call control there bi-polar. The only change in categorisation, using polarity of control, is thus that Family/state capitalism joins Shareholder Capitalism in the Uni-polar category (see Table 3.5).

3.7 Directness of control and degree of managerial autonomy We will conclude this taxonomy of corporate governance by returning to two dimensions of control introduced at the very beginning:

74

How national systems vary

•

Directness of control. The two uni-polar categories differ sharply in this respect. Family/state capitalism relies mainly on direct control. Stereotypically, shareholder capitalism relies on indirect control through financial markets, including the market for corporate control, although as we have seen, reality, in the US at least, is more complex. This precise mechanism is not available for stakeholder or state–led capitalism. However, in state-led capitalism a similar distinction can be made between the use of subsidised loans and other favours (indirect control), and state ownership (direct control); on this criterion, Korea has tended more than France towards indirect control. Stakeholder capitalisms vary a great deal in directness of control, with Germany (through the representation of both shareholders and employees on the supervisory board) much more direct than Japan. Degree of managerial autonomy. If top managers are professional managers (not major shareholders) how far are they under anyone’s control at all, direct or indirect? That question, as we have seen, was raised for the shareholdercapitalist United States more than 70 years ago. As we shall see in Chapter 5, it has been raised for some of the stakeholder capitalist countries much more recently. It is a vitally important factor, but one that cannot be used to accentuate the differences among our categories. Instead, we shall be showing how it creates differences within them – among countries and among firms.

•

It is important to recognise – as Soskice, and Pagano and Volpin, for example, do – how recent are whatever categories we might assign. Some ascribe insider domination largely to defective investor protection, and that in turn to the character of the French and German legal traditions (La Porta et al. 1997, 1998, 1999, 2000); but France had more developed capital markets than the United States around 1900 (Rajan and Zingales 2001) and in the nineteenth century the French Code de Commerce and legal practice had many advantages over the Anglo-American legal regime (Pagano and Volpin 2001). Investor protection was highly deficient in the UK until well into the twentieth century; nonetheless British manufacturing firms moved during the twentieth century steadily out of family control, before investor protection improved (Franks, et al. 2003). Our categories are creations of the twentieth century. In the chapters that follow we shall examine how it created them.

3.8 Mainland China,8 Taiwan and Italy The Chinese, as Marco Orrù saw years ago (1997) are remarkably like the Italians. Both countries are extremely diverse in terms of regions. Italy’s regional differences are partly due to political fragmentation in the past; China’s are partly due to political fragmentation now. It is conventional to simplify Italy’s multiple regional differences by talking of three Italies, of which the third (roughly, the North-East) is the most dynamic. It would be almost equally appropriate, as we shall see, to divide China into three and call Taiwan, possibly adding some of the mainland provinces near to it (notably Zhejiang), the third, most dynamic China.

How national systems vary

75

Nonetheless, both peoples have some strong features which apply to them generally. Their modern cultures have been formed by obstructive and remote central governments. The Chinese and Italian businessman by tradition does not expect help or useful guidance from the state: he expects damaging interference, and a strenuous attempt to tax him to death. All he can rely on is the loyalty of his family, and with luck the cooperation of his friends and neighbours. This makes family businesses, relying mostly on the family’s own capital, the predominant part of private business: any other kind depends on institutions that ultimately rely on the trust and trustworthiness of strangers, and/or the protection of the law. The Italians and Chinese generally do not trust strangers, or the law (see the next section). While family business predominates in private business, private business is not necessarily dominant in the economy. The ‘interfering state’ wishes to interfere, and it has the more reason to do so because family business is hard to expand fast and far: if no one else is in a position to build large-scale economic units, the state must step in. So the economy is mostly composed of small family businesses and large state-owned ones. However the quantitative role of the state is not matched by quality. The economy generally lacks ‘good government coordination’ because the government does not have the capability for it. But here is a difference between Taiwan and the other two: Taiwan has for the last 50 years had an effective state controlling an economic unit of manageable size, which has developed such capability. There are also differences in business coordination – Italy and Taiwan having developed strong informal mechanisms, in Taiwan’s case boosted by state support, China not yet having done so in most of the economy. The biggest difference is in employee protection – strong in Italy, weak in Taiwan, with mainland China moving in less than 30 years from the Italian camp to the Taiwanese.

3.9 Family capitalism and what remained of it near the end of the twentieth century We have referred to the key role of ‘family capitalism’ in one of our categories. But the role of families in corporate governance is far more extensive than that. We shall see that the variations in it cut across our taxonomy, and must be allowed for as an extra dimension within it. The default case is family capitalism – this is the natural way for capitalism to operate, the way in which almost every capitalist system began, and most capitalist systems round the world continue. Individuals or partners set up firms, mostly with their own money, and those firms that succeed are owned by their founders; when the founder dies, the firm passes to the heirs. One of the heirs runs it, or failing that, a number of them, probably as non-executive directors, keep an eye on the professional managers they have picked. When the family loses interest, or competence, the firm probably fades – or before it does, they sell it to one whose owners are more vigilant.

76

How national systems vary

This simple capitalism is limiting. It limits the firms’ longevity, according to the ‘staying power’ of the family. It limits their growth, because it is unsafe to borrow too much, and they cannot take in much external equity capital: if such capital carries voting rights, that jeopardises family control, and if it does not, the ‘outsiders’ depend on the efficiency and honesty of the family. It may also, as we shall see, limit their dynamism in other ways. But at all events it provides a simple robust control structure in which the firm’s main owners strive to keep the ‘principal– agent’ problem, of a clash of interests between owners and managers, in check. There are of course alternative ways of controlling firms, and as we have seen in Chapter 1 they may work well, whether because managers behave as stewards, or because ways are found, through monitoring or bonding mechanisms, of curbing or channelling their selfishness. Assuming that these ‘alternative ways’ work reasonably well, we can then say that the natural tendency is for family ownership and control to decline over time, simply because it is much easier for a big firm to pass out of family control than for it to pass into it. So the more mature the economy, the less family control one would expect. There are two quite different reasons why family capitalism may nonetheless remain dominant. One is negative: that the more sophisticated control structures required to control non-family firms, work badly. That may be because there is a low level of trust in society generally. (Trust is higher in Northern Europe than Southern, and higher in Japan than in China and South-East Asia. See Table 3.6.) Or it may be due to legal systems that fail to provide effective protection for minority investors (La Porta et al. 1997, 1998) – which fail either because the laws are not strict enough or because they are not effectively enforced. We see from La Porta that this is true – now – in France, Italy and the rest of Southern Europe, and in almost all less developed countries. (As it happens, these countries have a low Table 3.6 Trust, by country Country

Trust

Country

Trust

Norway (96) Sweden (96) Denmark (90) Netherlands (90) Canada (90) Finland (96) Japan (96) Germany (96) Switzerland (96)

65.3 59.7 57.7 55.8 52.4 47.6 46.0 41.8 41.0

USA (96) Italy1 (90) UK (96) Korea (96) Spain (96) France (90) Portugal (90) Turkey (96)

35.6 35.3 31.0 30.3 29.8 22.8 21.4 6.5

Source: Knack (2001). Definition: percentage giving answer ‘Most people can be trusted’ to question ‘Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people?’ Figures are for 1990 or 1996. Note 1 The Italian figure depends particularly heavily on the distribution of respondents by region, with the figure for the South much lower than the North (Putnam 1993). Knack and Keefer (1997) found a lower value, 26.3.

How national systems vary

77

general level of trust.) This does not in any way prevent high-trust relationships developing among firms, or within them – but it gives an advantage to firms controlled by shareholders with a long-term commitment, which are prepared to take the time needed to build up trusting relationships (Nooteboom 2002). The other main reason for family tenacity is positive: that families really wish to maintain control of ‘their’ businesses. They are more likely to do so within a social hierarchy in which there is no higher position to aspire to than the ownership and control of a business. In most countries at most periods, that has not been true: the highest position has been membership of the landed aristocracy – who most definitely did not run businesses. (Likewise, in pre-twentieth century China the highest social position was within the imperial bureaucracy.) Could one ‘aspire to’ become a landed aristocrat? Some aristocracies have been more open to the ‘new rich’ than others: the British aristocracy has long been notably open. This in a way increased the incentive to make money through business – but having made money a family could only become truly ‘respectable’ by stopping its industrial activities. There have, on the other hand, always been groups that were excluded from the top of the social pyramid, however rich they were: Jews almost everywhere until the twentieth century, Protestants in France, and the wrong sort of Protestants in England9 until the nineteenth century – and it is these groups that threw up the most successful business families; at least until Society softened, and let them in. Switzerland is one of the least aristocratic countries in Europe,10 and so one would expect to see tenacious family control there, in spite of its relatively high-trust culture. We shall now go on to look at the evidence about variations among economies in family control. Before we consider the data, however, we should give a warning: first, there are many different definitions of family control; second, the data relate almost invariably to listed firms, which are the tip of the iceberg. Unlisted firms will in their great majority be under family control, and so the balance between listed and unlisted firms within an economy says as much about the extent of family control as the data on listed firms. For that, see Table 3.7 Comparative stock market capitalization (as percentage of GDP, late 1996) Country

% of GDP

UK Switzerland US Sweden Japan Germany France Italy

152 135 122 103 63 27 38 23

Source: Vitols (2005: Table 2).

78

How national systems vary

Table 3.8 Ultimate control of publicly-traded firms, 1996–1999 Country

Number of firms examined

Widely held %

Family-controlled %

UK Switzerland Japan Sweden Germany France Korea Italy Taiwan

1953 214 1240 245 704 607 345 208 141

63.1 27.6 79.8 39.2 10.4 14.0 43.2 13.0 26.2

23.7 48.1 9.7 46.9 64.6 64.8 48.4 59.6 48.2

Source: Faccio and Lang (2002: Table 3), except for Japan, Korea and Taiwan, which are from Claessens et al. (2000).

the data on market capitalisation in Table 3.7, in conjunction with the data on family control in Table 3.8. (Tables 3.8 and 3.9 is based on a definition of family control which relies purely on ownership of equity, assuming that if any one family holds more than 25 per cent of the shares, it has control. Table 3.9 simply shows the percentage of ownership in each category.) Likewise, the figures for South Korea, given the very small sample (of presumably very large firms) are consistent with a high level of family control. We find the three ‘shareholder capitalist’ economies, all mature, leading the field in terms of market capitalisation, unsurprisingly, but with the UK well ahead of the US. Table 3.9 shows that for comparable samples of firms, US family control is far higher than in the UK (This is reflected in the much higher share ownership of US households shown in Table 3.10). So not only does the US have far more family control in listed companies, but unlisted firms, which can be presumed to be under family control, make up a higher proportion of its economy. Part of this difference can be explained by the far higher rate of immigration into the USA during the twentieth century, the immigrants containing their fair share of entrepreneurs and contributing to a faster growth rate, which provided opportunities for entrepreneurs generally. Part however may be due to the cultural factors mentioned above. Those factors may well account for the big difference between the UK and Switzerland – which must have at least as high family control as in the US, once family control via ‘non-financial holdings’ is taken into account (Table 3.9).11 There are similar differences among the ‘stakeholder capitalist’ economies, in which we have described cultures and institutions that should make forms of corporate governance without family control work well. Japan seems to bear this out: its market capitalisation figure shows that listed firms play an important role in the economy, and it appears that families play very little role in listed firms. (There is a caveat, however: there is evidence that in Japan family control can continue with negligible ownership, as shown by the continuing role of the

30 40 34 42 66 54 240 1036

Stakeholder capitalism Austria Denmark Finland Norway Netherlands Sweden Germany Japan

187 16

114 280 687 3070 500 66

Shareholder capitalism Australia Canada UK USA US (largest) Switzerland

State-led capitalism France S. Korea

No. firms

Economy

48.9 19.1

59.4 23.1 26.9 29.9 27.1 28.3 54.0 15.1

24.8 37.0 16.0 21.9 15.8 45.6

Mean largest holder

50.0 12.8

54.5 15.0 20.7 26.9 16.0 25.0 51.7 8.9

17.1 29.7 11.8 16.8 11.0 48.0

Median largest holder

Table 3.9 Ownership concentration and identities in large listed firms, 1990s

25.1 25.0

6.7 25.0 5.9 16.7 6.1 16.7 26.7 5.9

30.7 34.6 17.9 47.3 12.4 33.3

Family holdings

17.6 6.3

23.3 12.5 17.6 23.8 13.6 38.9 15.4 6.6

17.5 19.6 37.0 25.9 43.2 10.6

Financial holdings

51.3 25.0

53.3 25.0 38.2 47.6 43.9 33.3 48.8 58.1

30.7 40.4 15.1 14.6 18.6 42.4

Non-financial holdings

2.3 12.4

16.7 2.5 23.6 7.1 6.1 3.7 7.0 0.2

0.0 3.3 1.8 0.9 0.2 4.6

State holdings

(continued)

3.7 31.3

0.0 35.0 14.7 4.8 30.3 7.4 2.1 29.2

21.1 2.1 28.2 11.3 42.6 9.1

Dispersed holdings

57 11 59

No. firms

45.2 15.8 37.8

Mean largest holder

47.5 5.4 29.1

Median largest holder

3.5 18.2 1.7

Family holdings

40.4 9.1 23.7

Financial holdings

47.4 9.1 57.6

Non-financial holdings

3.4 9.1 8.5

State holdings

5.3 54.5 8.5

Dispersed holdings

Investors on the European continent . . . have made use of a number of mechanisms to separate capital contribution from control . . . Holding companies are important ingredients in many countries, particularly in Belgium and Germany. Closed-end mutual funds and dual class shares have been the prime vehicles of control in Sweden. In Germany and Sweden, and particularly in Italy, pyramiding, whereby chains of firms, sometimes as many as ten or 15, own each other, allowing the ultimate controlling owner to minimise its capital stake without affecting the concentration of control, plays an important role. Proxy votes held by banks on behalf of small investors and crossholdings of shares are other ways of concentrating control in Germany. Voting trusts and special golden shares serve the same purpose in Dutch corporate governance. Despite legal restrictions, corporations in France have complicated crossholding arrangements to ensure concentration of control, and the government has maintained potential influence in large privatized firms through golden shares.

Note In some economies the numbers of firms are disproportionately small in relation to the country’s population. Among our economies, the disproportion goes from greatest in South Korea, through Taiwan, Italy, France, to least in Germany. The effect this has can be seen by comparing the data for the larger and smaller sets of firms in the USA: taking a smaller set (of relatively large firms) sharply decreases family holdings and sharply increases dispersed holdings. If we were to add to the sample for each of these five economies, enough large firms (most or all necessarily unlisted) to even up the proportions, the ones added in each case would be overwhelmingly family-controlled. This might seem to leave Italy still low on family control; but as Berglöf (1997: 102) says,

Source: Gugler et al. (2004: Table 2). Most entries refer to 1995/6; Germany: 1985–2000; USA: 1991–1998; Japan: 1987–1998; UK: 1992–1998.

Family/state capitalism Italy Taiwan Spain

Economy

Table 3.9 continued

How national systems vary

81

Table 3.10 Ownership of listed stocks by sector (as of 31 December)

France

1977 1992 Germany 1970 1993 Italy 1993 United Kingdom 1969 1993 Japan 1970 1993 United States 1981 1993

Households Non-financial corporations

Government Financial Foreign institutions institutions owners

41 34 28 17 32 50 19 40 20 51 48

3 2 11 3 28 3 1 0 1 0 0

20 21 41 39 22 5 2 23 28 15 9

24 23 11 29 14 36 62 35 42 28 37

12 20 8 12 4 7 16 3 8 6 6

Source: Berglöf (1997: Table 5) (as of 31 December).

Toyoda family in Toyota; see Chapter 5.) On the other hand, Germany’s low market capitalisation and high share of family control in listed firms show that ‘stakeholder capitalism’ can also work with family firms in the centre of it. Sweden is intermediate between these two. In the two other types of corporate governance system family control is quite consistently important, although there are striking differences between Italy’s very high level (bearing in mind its very low capitalisation) and Taiwan’s.

3.10 Financial systems and the match with corporate governance We mentioned in Chapter 1 that the first attempts to categorise financial and corporate governance systems had put the emphasis on finance, by distinguishing between bank-based and stock-exchange-based systems. All the systems we have categorised as insider-dominated – the stakeholder-capitalist, state-led capitalist and family-state capitalist categories – were alleged to be bank-based, presumably because they clearly were not stock exchange based. In fact banks and stock exchanges are not the only sources of finance (see Tables 3.12(a) and 3.12(b) later). The main sources of external finance can indeed be divided into ‘stock exchange’: equity shares and fixed-interest securities, and ‘bank’: bank loans and overdrafts. However, external equity finance going into most firms is not raised on the stock exchange, but from the personal resources of the managers, their families and friends (there is also private equity, as we shall see). Loans for many firms come from similar sources. Moreover, most finance for most firms’ investments at most times is internal – recycled profits. So it is not exactly either/or. Let us take our four corporate governance system categories in turn and see whether they can be matched with financial systems.

82

How national systems vary

1 Shareholder capitalism It is one thing to have a high stock market capitalisation over national income, as the US, the UK and Switzerland do, and quite another to raise a large part of firms’ capital on the stock market (Lazonick and O’Sullivan 1998). The most obvious reason for a stock market listing is for existing shareholders to sell out at a good price. Another is to give the opportunity for acquisitions using the firm’s own shares to pay much or all the price. To pay for organic growth – real investment – by raising equity or fixed interest capital on the stock exchange is much less common. It takes a lot of explaining, and (if equity is used, in the classic manner) the increased supply of shares could easily depress the price – not at all attractive to executives with stock options. It is much simpler to use the firm’s own profits and cash flow to finance investment; that tends to raise the share price, at the expense of dividends. Nonetheless there are some features of financing which follow from the character of shareholder capitalism. Relationships with banks are not close, whether for large firms or for small: so there will not be heavy reliance on bank loans. Large firms will usually find corporate bonds a cheaper form of fixed interest finance, but debt in general will play a limited role, since without supportive banks there is too much risk of insolvency. On the other hand there will be, or can be, an important role for private equity. Private equity comes in two quite distinct categories: venture capital, for start-up and early-stage financing of new businesses in high growth industries, and the rest, put into established (even mature) businesses, typically to facilitate management buy-outs (MBOs). (After an MBO, the equity is normally owned mostly by the private equity firms and partly by the management team, with a large fraction of the capital provided by bonds – the bonds ‘leveraging’ the equity, thus the term ‘leveraged buy-outs’ or LBOs.) As we have seen in Chapter 1, venture capital plays a key role in high-technology industries with a high need for reconfiguration, and arguably private equity in MBOs may play quite an important role in more mature industries which at one point or another have a high need for reconfiguration too. Whatever the type, the role of the private equity provider is normally limited to, or at least focused on, an episode in the firm’s life: the aim is not to be a permanent major shareholder, but (if the firm succeeds) to take out most or all of the capital so as to be able to re-use it in more new firms or buy-outs. (But see Chapter 9 for recent changes.) Here is the connection with the rest of the financial system. To take out one’s capital from a firm, someone else must buy in. The typical occasion for this is an IPO – initial public offering – on a stock exchange. So while the stock exchange even here may fail to provide capital for the growth of firms listed on it, it is still indirectly providing capital – for the growth of firms not yet listed on it. It may play an even more important role in an even less visible way, in informal venture capital – capital provided very early indeed in the life of a firm by business angels, rich individuals usually familiar with the industry in which they are

How national systems vary

83

Table 3.11 Economies by flow of Venture Capital Investment, 1999 Economies

Amount US$ billion

% of GDP

United States United Kingdom Sweden Switzerland Taiwan France Germany Italy South Korea Japan

97.6 12.3 1.4 0.5 0.9 3.0 3.4 1.9 0.5 0.8

1.15 0.98 0.80 0.26 0.25 0.23 0.19 0.16 0.09 0.03

Source: Yang (2002).

investing. Where did they get that money from? Typically from the sale of shares in firms of which they were senior managers and perhaps founders. Again, selling such shares is easier on active, liquid stock markets. We see from Table 3.11 that venture capital is more abundant in shareholder-capitalist economies. 2 Stakeholder capitalism As we have seen, control here is naturally multi-polar: it is accepted that a number of different stakeholders can have some kind of share of control or at least influence over management decisions. This makes room for relational banking: a relationship between bank and borrowing firm in which the bank as an institution, and no doubt one or more individuals within it, engages with the firm, gets to know it and develops firm-specific understanding of it. A big firm that borrows from a number of banks, may have a ‘main bank’ (Hausbank in German) which plays this role on behalf of the others. Clearly a higher gearing (ratio of debt to equity) is manageable in relational banking than it is in the alternative, transactional banking. Typically therefore, stakeholder capitalist economies have relatively large levels of bank debt in industrial firms, and this is associated with a relatively large share of small and medium firms in the economy – for it is such firms that depend most heavily on external finance in general and bank loans in particular. (Big firms have the opportunity to balance cash-negative fast-expanding units with cash-generating mature ones, and on occasion, even in stakeholder capitalist systems, to make share or bond issues.) One way of institutionalising the bank–firm relationship is for the bank to take an equity stake in the firm. This gives it ways of monitoring management and even controlling it that a mere lender does not have while the borrower is solvent. It also allows it to balance whatever downside risk it may be facing, with an upside risk: the gains it will make if the firm makes high profits.

84

How national systems vary

Typically, banks will only take share stakes in large firms: the effort of involvement in smaller firms would not be worth while. Once the share stake has been acquired, it will naturally continue regardless of the firm’s status as borrower; so it is perfectly possible for Bank A to be a major shareholder in Firm X even if (with profits above what it needed for investment finance) Firm X has paid back all its loans. If it is, however, it is likely to be much less vigilant than it was if and when a large slab of its loan portfolio was at risk in Firm X. Clearly private equity, in its traditional guise, does not go with the stakeholder-capitalist grain. It involves transient rather than long-term relationships, and it depends heavily on active stock markets. Venture capital, when and where it is provided at all, is usually provided by banks. Getting banks to provide venture capital is akin to getting a dog to become vegetarian: entirely possible in principle, but unlikely to involve real enthusiasm. The essence of banking is minimising risk; the essence of venture capital is wallowing in it, with a view to finding, feeding and fostering a few firms that make very large amounts of money, so that the investor more than makes up for the many that fail. The Deutsche Wagnisfinanzierungsgesellschaft (WFG), founded by 29 German banks in 1975 with government support, provides a horror story of venture capital under bank (and government) control (Mayer 2002). 3 State-led capitalism Banks can play a big role in state-led capitalism too, but in a thoroughly different way from stakeholder capitalism. There is a central state that moves a limited number of pieces around the economic chessboard. A large bank is one such piece, which can be directed (or encouraged) to make loans, on favourable terms, to selected firms for investments which fit into the aims and policies of the government. The firms, and the loans, are naturally likely to be large, since small firms and small projects are beneath the central state’s notice. And how is the risk of such large loans to be contained? Some may not be risky because the ultimate buyer (of a road or harbour, say) may be the state, which will pay enough to give a profit; or it may be for a regulated home market where a profit is virtually guaranteed. And the bank may be stateowned and not required to make a profit. In some cases the state may specifically guarantee a loan. There is then very much a dual economy, where large firms, or the favoured among them, are heavily indebted to large banks, and the others must make do with transactional banking in shareholder-capitalist style. While in the stakeholder capitalist economy, R&D is undertaken quite intensively by a large number of medium firms as well as by the ‘usual suspects’, in the state-led economy it is highly concentrated in a small number of very large firms. The reluctance of banks to lend to smaller firms is partly due to the arms-length relationships large firms have with them. By contrast, Toyota (for example) might encourage a bank to lend to one of its sub-contracting firms; and the bank might not need encouragement, since it might well feel that the relationship with

How national systems vary

85

Toyota made the firm a very good risk. Neither would usually apply to a small supplier to a Korean chaebol. 4 Family-state capitalism Here is another type of dual economy, with a clear-cut distinction between a privileged core of large firms, in this case (almost) all under state ownership and control, and the rest. The extent of privilege varies. In Italy there are regional and local levels of the state that may function well and recognise their responsibilities for assisting small firms, through various agencies. At least in industrial districts where there is a convenient degree of sectoral specialisation, banks lend quite heavily to small firms. At the same time the large state-owned firms have been able to count on generous funding from various sources, including direct state subsidy. Much the same is true of Taiwan, which in addition has had a state sufficiently determined and sufficiently familiar with US models to set up an effective system of venture capital. On the other hand, at least until the last few years, there has been a huge gulf in mainland China between stateowned firms with access to large quantities of very cheap loan capital from state-owned banks, and private firms with little if any access to bank loans. What neither type of firm did to any great extent, in any of those countries, was raise capital on the stock or bond market.

3.11 Financial systems: the evidence The aggregate data for the 1980s (Table 3.12(a), for seven of our economies, and Table 3.12(b) for nine of them) and the 1970s and 1980s (Table 3.12(c), for four of them) confirm some of the contrasts we have drawn. The US and the UK are more than 60 per cent dependent on retentions and shares in both periods, and have ratios of debt to total equity below 2, as does Switzerland. Two of the three ‘stakeholder’ economies, Sweden and Japan, were less than 50 per cent dependent on retentions and shares for net financing in the 1980s. Sweden and Japan both got more than 30 per cent of their net financing from bank loans, as did Japan in 1970–1989. Both had high debt/equity ratios, Sweden’s more than three times that of any of the shareholder economies. The big surprise is Germany. The German figures for the 1980s are less disaggregated than the others but they still indicate a striking deviation from the stakeholder pattern: retentions plus shares contribute more than even in the US and UK. For 1970–1989 the similarity to the shareholder economies is also close – except for less reliance on debt finance! The debt/equity ratio is modest. Of the ‘state-led’ economies, France was less than 50 per cent dependent on retentions and shares for net financing in the 1980s, and its debt–equity ratio was similar to Japan’s, as was Korea’s. We can assume that this conceals higher debt ratios for favoured firms (see Chapter 6). Italy was nearly 60 per cent dependent on retentions and shares in the 1980s, and made more use of trade credit than bank credit, while its debt ratio was moderate,

86

How national systems vary

Table 3.12(a) Structure of net financing of non-financial enterprises (percentage: average for period 1980–1990) Source of funds

Country US

Retentions Shares Short-term securities Short-term loans Trade credits Long-term bonds Long-term loans Other5 Total

Japan1

70.6 – 4.9 2.0

39.9 7.7 –

2.7 6.9 14.2 9.0 0.5

15.1 10.1 5.6 21.6 0.0

100

100

France2

UK3

Italy4

73.6

37.0 12.3 –

48.6 12.9

48.9 10.4 –

43.0 6.6 0.0

23.8

26.4

16.3 16.2 0.9 8.2 9.6

5.0 18.1 2.1 6.9 8.7

18.7 7.1 –2.5 16.2 10.9

Germany

100

100

8.1 4.6 2.0 100

100

Sweden5

100

Source: OECD, New Financial Landscape, 1993, Table 2. Notes 1 1982–1989. 2 1980–1989; industrial enterprises. 3 1983–1990; large enterprises. 4 1982–1990. 5 1981–1989. 6 Increase in other accounts payable, net capital transfers received, statistical discrepancy, etc.

Table 3.12(b) Debt to equity ratios, 1980–1991 UK USA Switzerland Italy Sweden

1.480 1.791 1.750 3.068 5.552

Japan Germany France Korea

3.688 2.732 3.613 3.662

Source: Demirguc-Kunt and Maksimovic (1996: 354).

Table 3.12(c) Structure of net financing of non-financial enterprises (percentage: average for period 1970–1989)

Internal Bank finance Bonds New equity Trade credit Capital transfers Other Statistical adjustment

Germany

Japan

UK

USA

80.6 11.0 −0.6 0.9 −1.9 8.5 1.5 0.0

69.3 30.5 4.7 3.7 −8.1 – −0.1 0.0

97.3 19.5 3.5 −10.4 −1.4 2.5 −2.9 −8.0

91.3 16.6 17.1 −8.8 −3.7 – −3.8 −8.7

Source: Corbett and Jenkinson (1996: Table I).

How national systems vary

87

confirming the expectation for family/state capitalism of rather poor firm–bank relationships. The German exception points to the tendency we hinted at above for large firms in stakeholder economies to pay back their loans as their expansion slackens off and their profits and depreciation catch up with their investment.12 From 1978 to 1989 the bank debts of large non-financial firms in Germany declined from 13.7 per cent to 7.6 per cent of balance sheet liabilities (Deeg 1997). The smaller firms, the Mittelstand above all, continued to rely heavily on banks for their external finance. The situation was similar in Japan: the large manufacturing firms which had in the 1950s and 1960s depended heavily on bank loans for their expansion, mostly paid them back during the 1970s and 1980s. (The difference lay in the reckless way in which the Japanese banks found other borrowers: while manufacturing reduced its share of total bank credit from 44.7 per cent in 1970 to 15.7 per cent in 1990, the share of construction, real estate and finance rose from 9.7 per cent to 26.6 per cent (Hanazaki and Horiuchi 2000). When the bubble burst in 1990–1991, these sectors provided many bad loans.) A survey of over 2000 top executives in 22 OECD countries in the early 1990s showed ‘financial constraints to technological development’ ranging from least in Japan, followed by Denmark, Germany, Switzerland, Sweden, the Netherlands and the United States, to worst in Spain, followed by Finland (then in deep recession), Portugal, Greece, Turkey and Italy (OECD 1995). France and the UK were together in the middle. These figures should be treated with caution – the authors’ research in British firms has shown that chief executives often do not feel the financial constraints about which their subordinates are complaining loudly, perhaps because the CEO knows that holding down innovation spend will do wonders for his profit-based bonuses and stock-options. Still, they confirm the relatively comfortable position of the stakeholder capitalist firm.

3.12 Conclusion It turned out that the ‘outsider system’ did not serve very well as a category of corporate governance systems. As a stereotype, or a tendency, it served well enough, but only the UK deserved the title as a label for its whole corporate governance system. The US, on the other hand, had far too much insider power – mostly of founding entrepreneurs and their families – to fit the bill. Moreover, the way that shareholder power was supposed to work in the stereotypical outsider system – indirect control through share price movements and the market for corporate control – seemed to apply less well to the US than to the UK. It was possible to put the US and the UK together in the same category, of Shareholder Capitalism, however, if one defined it as a mature capitalist system in which management was responsible only to shareholders (and no other stakeholders) and in which there was little interference from the state with management’s right to manage. But that category could, more or less, accommodate Switzerland too.

88

How national systems vary

Two other types of corporate governance system were decidedly less mature and accordingly had a great deal more government interference in management. In one of them, Family/State Capitalism, family control was the rule in the private sector, and there government’s role was essentially negative and constraining. Alongside family firms, and to some extent complementing them, were large state-owned firms. This category included Italy, Mainland China and (less comfortably) Taiwan. In the second of these categories, State-led Capitalism, the role of the state was more positive, and it worked with family capitalists more than it acted to constrain them. This category included France and South Korea. The type of corporate governance system most different from Shareholder Capitalism was Stakeholder Capitalism, in which it was accepted that control could be multi-polar. That is, management could and should respond to the pressures and interests of a number of stakeholders – shareholders, employees, customers and suppliers, government. Depending on the country, these stakeholders might have legally-established rights to representation and power, or merely a tacitly-understood right to be heard and considered. In this category belonged the last three of our 11 countries, Japan, Germany and Sweden. Up to a point, one could extend our corporate governance categories to include finance. Shareholder capitalist economies – the US and UK at least – made little use of bank finance. They did not in general make much use of stock market finance either, but for that important segment of their financial and corporate governance system, private equity, the stock market did have an important role to play. Stakeholder capitalist economies did not depend heavily on the stock market. They might not, as a whole, depend heavily on bank finance either – large mature firms were certainly unlikely to do so, being able to manage very well with retained profits – but bank loans played an important role for small and middle-sized firms. Family/state capitalism was certainly not bank-based, if Italy was any guide, nor was it stock exchange-based: in general external finance was hard to find except for state-owned firms. State-led capitalism, judging by France, was not obviously bank-based or stock-exchange based either: the aggregates presumably concealed good access to bank finance for the privileged firms (state and private), and poor access to any finance for the rest. How then can we use our categories in explaining success or failure in technological change? We recall from Chapter 1 that where industries were seriously affected by competence destruction they needed expert finance to be available for new firms, and/or pressure from expert owners for higher value-added in such areas. We found no reason in this chapter to challenge the assumption in the literature that shareholder capitalism should be superior to the other systems in this respect, given its emphasis on stock markets and equity finance. Note the words ‘should be’: active stock markets provide the conditions in which equity investors can develop industrial expertise, and in which such investors can support a spearhead of venture capitalists who require very high expertise (and engagement) indeed. They do not guarantee that this will happen, as we see for Britain in Chapter 4.

How national systems vary

89

Likewise, when industries face high technological opportunity they need large amounts of reasonably expert risk capital to be available on acceptable terms. If firms are already well established in the area, most of the funding (and all the expertise) can be internal. A stakeholder-capitalist firm should have no difficulty here – given that further funding could be bank loans made on a relational basis. Nor should a shareholder-capitalist firm – unless it is under pressure from ignorant shareholders who do not understand what they are going to get from the reinvestment of ‘their’ profits. A family-capitalist firm might well have some difficulty, since the family would be required to tie up ever more of its assets in risky projects – or accept increasing dilution by outside equity (if it could get it), threatening its control. Getting into a high-opportunity area is another matter: the risk capital needs to be external – either external to the firm, as with venture capital, or from other parts of a firm which is diversifying into the area. For capital external to the firm, shareholder capitalism should have the edge, as argued above. For diversification, the issue is much more open. Firms designed to be conglomerates – for example the Korean chaebol – might do well here. So might Japanese kigyo shudan – horizontal multi-sectoral groups – mostly descendants of the zaibatsu conglomerates and still highly cohesive: a small high-technology firm within a kigyo shudan may have been spun off from a larger parent and will then be supported in every sense by the parent. Whatever its parentage, it can expect equity investments from a number of large firms in the group, and both equity and loans from the group bank. Technological opportunity opens a striking gap between the two great stakeholder capitalist systems. Germany has no horizontal groups nor anything resembling them. Moreover it has a very high degree of family ownership and control, while Japan is remarkable for the opposite. Many Japanese firms were torn from family control when the zaibatsu were broken up in the late 1940s, but that cannot account for the size of the difference. It is typical of Japanese entrepreneurs like Soichiro Honda or Konosuke Matsushita to take capital from where they can get it, putting expansion first, financial stability second and personal control last. While they are at the helm they can expect shareholders to defer to their status as founders. Similar deference may extend to their descendants in a firm with a family tradition – thus the Toyoda family long ago gave up a controlling shareholding in Toyota, but nonetheless one Toyoda after another rises to a high position in the firm (Chapter 5). What is not acceptable in Japan – but remains very much so in Germany – is control without managerial responsibility, such as the Quandt family exercises very successfully in BMW on the basis of its shareholdings. Thus, where a new firm, controlled by its founders, faced high technological opportunity in Japan, it would have had no inhibitions about taking external equity capital, at least if it was from ‘stable shareholders’ (other firms and financial institutions) which would not sell to a takeover bidder. A German firm might well have had grave misgivings about the dilution of founders’ shareholdings. Where innovative activities have low visibility and/or a slow pay-off, we saw that management autonomy and/or shareholder/financier engagement was

90

How national systems vary

needed. Engagement should be available from the insider shareholders in stakeholder and family capitalism, and the relational bankers in the former (although it is not guaranteed, any more than industrial expertise in shareholder capitalism). Where they disengage, the default is management autonomy. Managers may be autonomous under shareholder capitalism, too, as we pointed out in Chapter 1. It depends on how well they are protected from both the direct and indirect pressures of ‘outsider’ shareholders – protection which varies greatly between the United States and the United Kingdom, as we shall see in Chapter 4. (However, that protection may be used to entrench the power of minority – probably family – shareholders, rather than managers.) State-led capitalism is necessarily rather weak on engagement, except for selected major areas of state interest. The state may well leave the managers of firms it owns or favours, considerable autonomy. Where there are major spillovers in innovation, stakeholder inclusion is needed. Here of course stakeholder capitalism is clearly supreme. ‘Insiderdominated’ firms, in general, have an advantage over ‘outsider-dominated’ firms, because as Carlin and Mayer (2000) point out, managers backed by a controlling shareholder can commit to a cooperative relationship for as long as that shareholder exercises control. A firm that is exposed to hostile takeover bids may withdraw from any non-contractual commitment at any time because control changes hands – or indeed without a change in control, because of the resulting short-term pressures. We now have the tools with which to explain technological advantage, putting together the characterisation of sectors from Chapter 2, with the characterisation of economies in this chapter. In the next four chapters we shall use them.

Appendix Table 3.13 Business enterprise expenditure on R&D (BERD) as a percentage of value added in industry

United States United Kingdom Switzerland1 Germany2 Japan Sweden France Korea Italy

1981

1991

1996

2001

2.3 2.1 1.6 2.3 1.8 2.2 1.6 – 0.6

2.8 2.0 2.9 2.5 2.8 3.0 2.1 – 1.0

2.6 1.8 3.1 2.1 2.8 – 2.1 2.3 0.8

2.9 1.9 3.1 2.5 3.3 5.2 2.0 2.8 0.8

Source: OECD, MSTI database, May 2003. Notes 1 1992 instead of 1991, 2000 instead of 2001. 2 Figures for Germany from 1991 onwards refer to unified Germany.

How national systems vary

91

Table 3.14 Distribution of employment in manufacturing by size class (1999)

United States United Kingdom France Italy Germany Sweden Korea Japan Switzerland Taiwan*

0–49%

50–499%

500+ %

7.7 27.3 30.1 49.1 22.3 23.4 40.4 39.1 36.7

34.4 39.0 33.5 30.6 34.4 30.3 34.3 39.7 41.3

58.9 33.6 36.5 20.3 43.2 46.3 25.3 21.1 22.0

<200 78

200+ 22

Source: OECD (2002). Note *White Paper on Small and Medium Enterprises in Taiwan. 2000. Small and Medium Enterprise Administration. Ministry of Economic Affairs. ROC.

Table 3.15 Selected data from European Innovation Scoreboard 2001 Indicator

Sweden

UK

Germany

France

Italy

1 2 3 4

2.85 26.2 44.8 0.204

1.20 16.7 35.8 0.256

1.63 21.9 58.7 0.068

1.36 16.8 36.0 0.074

0.56 4.5 44.4 0.041

18.8

11.8

5.7

9.7

5.9

4.8 8.3

4.2 7.6

2.8 10.9

3.8 7.2

2.7 7.6

BERD/GDP high-tech pats/pop % SMEs innovating in-house % high-technology vent. capital/GDP 5 % high-tech value-added in manufacturing 6 % empl.h-tech services 7 % empl. m-h.- & h.-tech manufacturing

Notes Indicators: 1: Business spending on R&D, percentage of GDP, 1999. 2: Average, EPO hi-tech patent applications/million population, 1999, and USPTO ditto, 1998. 3: SMEs innovating in-house (percentage of manufacturing SMEs). 4: High-technology venture capital investment (percentage of GDP), 2000. 5: Share of manufacturing value-added in high tech sectors. 6: Employment in hightech services, percentage of total workforce, 1999. 7: ditto in medium-high and high-tech manufacturing, 1999. See European Innovation Scoreboard 2002, Annex tables: http://trendchart.cordis.lu/).

4

Corporate governance, finance and innovation in the US, the UK, and Switzerland

4.1 Introduction We recall that the dominant view has Britain and the United States in one category as ‘outsider-dominated’ or ‘liberal market’ economies which are, in consequence, specialised in high-technology sectors. We argued in Chapters 1 and 3 that there were important differences between Britain and the United States in their finance and corporate governance systems: notably, the United States had a great deal more insider control, particularly by founding entrepreneurs and their family heirs, and those managers not subject to insider control were more autonomous from ‘outsider’ control and pressure. Nonetheless, both countries belonged in the ‘shareholder capitalist’ category, defined by management as being only responsible to shareholders – not to employees or government. So did Switzerland, although it was clearly different from the other two, with weaker venture capital and stronger inter-firm links. In this, like the other ‘country chapters’, we shall look further into the differences, and give some historical background. We shall then show how they can account to a large extent for the differences in technological performance and specialisation that we shall set out during the chapter.

4.2 The United States: more direct control than meets the eye At the beginning of the 20th century, the US economy was dominated by family capitalism. In the large-scale capital-intensive sectors of the day, as Alfred Chandler (1990) has shown, a few US firms were taking advantage of outside, nonfamily capital to grow fast to optimum scale – the outside capital being supplied either directly by big banks, or through Stock Exchange issues under their sponsorship. (Others, such as Ford, managed the trick without any such dependence.) This continued into the 1920s. Meanwhile, more large firms were being formed by mergers that diluted the original family capital – as with General Motors. That was not, however, a certain route to indirect or management control. Very early in GM’s history, for example, a controlling stake was acquired – and exercised – by the DuPont company, itself controlled by the du Pont family (Monks and Minow 2001).

The US, the UK, and Switzerland

93

The key event in the evolution of US corporate governance was the Great Crash after 1929, which showed banks with close links to industry to be vulnerable: thus the Glass–Steagall Act of 1934, which decreed that they stay apart (Roe 1994). As Roe shows, there was also the anti-trust tradition at work, the desire to break up concentrations of economic power – that was why (in 1957) DuPont was obliged by the Supreme Court to give up its controlling stake in General Motors, and that is why shareholders are not allowed by law to form coalitions to put pressure on management. Such Federal legislation as applies to firms – notably the 1933 Federal Securities Act – is decidedly less favourable to outsider shareholders than the corresponding British legislation (Bush 2004). But most of the legislation relevant to corporate governance is at state level. Firms can choose in which state to incorporate, and most large firms have chosen Delaware, because its laws are unusually favourable to incumbent management, notably in permitting various anti-takeover devices (Roe 1994; Plender 2006b). Naturally other states did not wish to lose their firms, even their incorporation, to Delaware: by 1982, 37 states had legislation permitting antitakeover protection. This was then ruled to be pre-empted by the Federal Williams Act of 1968, in the Supreme Court judgment on Edgar v. MITE. For five years there was open season for sharks, and the United States seemed to be heading towards indirect control. Then, in 1987, the Supreme Court in effect reversed its ruling, in Dynamics v. CTS: since then state anti-takeover laws have been enforceable if they do not prevent compliance with the Williams Act. By 1990, a majority of states had passed such laws, and the crisis was over: the rate of successful hostile takeovers declined rapidly (Weston et al. 2004). We should not exaggerate the loss of shareholder power. The objection to du Pont family control of GM was that they also controlled DuPont. There was never any objection to the du Pont family controlling DuPont, nor do any state’s laws make it difficult for a family to maintain control of a firm. The Delaware laws, on the contrary, make it easier to do so with a minority stake, by helping to fend off predators. (It was presumably on those grounds that Rupert Murdoch’s News Corp in 2004 reincorporated in Delaware, from shark-friendly Australia (Plender 2006b). As we saw in the last chapter, families have a great deal of power in US industry. Gugler et al. (2004, our Table 3.9) found for the mid-90s that families held 47.3 per cent of ownership in 3070 listed US firms. They found only 12.4 per cent in the largest 500. Gadhoum et al. (2005) found 20 per cent of the Fortune 500 under family control, if one took a 10 per cent share of voting rights as giving control – and they admit that this must be a conservative estimate, since they are ignoring family trusts. Even this, they concluded, would make family control stronger than in Germany, Japan and the UK. We know that family control includes some of the very largest firms. Walmart is controlled by the Waltons. Ford is still controlled by the Ford family, and indeed as we write has a Ford as CEO. Other very large firms have grown large so quickly that the founders still have managerial as well as shareholder control – as in Microsoft. Most of the new big firms, in their rapid rise, depended heavily not only on the capital but also on the guiding hand of venture capital institutions. Venture

94

The US, the UK, and Switzerland

capital has played a key role in the development of US high technology industry (Global Insight 2004): in 2003 venture-capital funded (‘ventured’) firms provided 9.4 per cent of overall private sector employment, but 88 per cent of employment in computer software. US venture capitalists share in governance as well as finance. To quote a little more from The Economist article mentioned in Chapter 1 on ‘today’s best-known venture capitalist, John Doerr’: The reality is that venture capital [in the United States] is mostly a matter of managing and nurturing firms ... in many cases, along with the equity stake comes a seat on the board. Even without that, the venture capitalist is likely to stay deeply involved in the management of the company for years. Mr Doerr, for example, considers himself a ‘glorified recruiter’. The people he backs may not know much about management and finance, but he knows people who do. (The Economist 1997a: 20) ‘It is the venture capitalists’ experience, connections and willingness to become involved that differentiate them from other sources of capital’ (Kenney et al. 2004: 56). We said in Chapter 3 that the role of the private equity provider (including venture capital) was (at least until recently) focused on an episode in the firm’s life – up to the initial public offering on the stock market. True, but US venture capitalists do not necessarily sell out completely at the IPO. And their directors sometimes continue to serve long after it. Arthur Rock, the lead venture capitalist in funding Intel, stayed on its board for two decades. Donald Valentine, who played the same role for Cisco, was still on its board more than ten years after it went public (Kenney et al. 2004: note 7). Note that in the US ‘venture capital firms generally are private partnerships or closely held corporations . . . ’ (Global Insight 2004: 2). This is in addition to the ‘business angels’ who provide ‘informal’ venture capital and are wealthy individuals. So the distance from principal to agent is short indeed. Venture capitalists’ contribution to corporate governance can be invaluable. First, since they specialise by industry, they have industry-wide expertise, key in the high-opportunity and high-reconfiguration sectors in which they operate. Second, with large stakes and directorships, they have every reason and opportunity to engage and develop firm-specific understanding. But for all the services of an Arthur Rock or a Donald Valentine, the most important contributions venture capital makes to the governance of US businesses are indirect. First, as we said above, venture capital helps new firms to become big, quickly, while their founders are still keen and able to exercise effective control. So the largest shareholders may be the top managers – like Bill Gates in Microsoft. Second, the venture capitalists make sure that the ‘inside equity’ extends well below senior management. Employee shareholdings are of major importance in ‘ventured’ firms. It is standard practice in such firms to use stock option plans (sometimes also direct share distribution) to motivate all workers – and of course to economise on salaries when funds are short at the beginning (Global Insight 2004). About

The US, the UK, and Switzerland

95

three million non-executive employees (about 3 per cent of the private sector workforce) receive stock options on an annual basis (Blasi et al. 2003b). Fiftyfive per cent of stock option plans had produced employee (non-executive) shareholding over 10 per cent (Blasi et al. 2003b). In 100 large high-technology firms examined by Blasi et al. (2003a), in addition to the 14 per cent of shares held on average by top management, 19 per cent were held by other employees. Not that ventured firms have any monopoly on employee shareholding. Employees are shareholders in older firms mainly through tax-supported schemes like ESOPs (Employee Stock Ownership Plans) (Blasi and Kruse 1991; Walkush et al. 1997). In 2002, a total of 24.1 million workers, that is about 23 per cent of the total US private-sector workforce, were involved in some sort of stock ownership plan giving them share stakes in their own firms.1 The stakes that have been built up are substantial. Thirty-eight per cent of public company ESOPs and 80 per cent of private company ESOPs had built up non-executive employee shareholdings over 10 per cent (Blasi et al. 2003b). What is the significance of employee shareholding in governance? Having shares may be a powerful motivator, and it may make employees less obstructive of the sort of competence-destroying changes one would normally expect them to detest. But does it have any impact on the control of firms? There is no provision in US law for employee shareholders collectively to elect nonexecutive directors – that would be going a little too near to European codetermination. But even by sitting on their hands, employee shareholders may be able to help management to resist a takeover bid. Better to have employee shareholders doing nothing, than outside shareholders accepting the offer. In fact they can do better than that. Delaware law allows ESOP shares, with employee permission, to be deployed in management’s support during a takeover bid (Weston et al. 2004). Employee shareholdings thus seem capable of working in one of two directions. Either actively or passively, they can help founders in new firms, families in older ones, to maintain direct shareholder control. Given the evidence we have discussed for listed firms, and assuming that almost all unlisted ones are directly controlled, it may well be that shareholders rule most of the US economy directly. Still, there is a lot left which they do not directly rule. There, the role of employee shareholdings must be to bolster management autonomy. Either way, the extent and degree of indirect shareholder control in the US seems limited indeed. We do however have to make an important distinction between the firms under direct shareholder control and the rest. Managers in the former have every reason to take a long view: those in control of them expect to stay in for the long haul. The dominant shareholders have every incentive to engage and to understand even low-visibility activities intended to make money in future. Why should managers then sacrifice the long-term good of the firm to please ignorant outsider shareholders? True, they could by pleasing them raise their share price and thus make it easier to raise capital by issuing shares, or to finance a takeover by a share-for-share exchange. But that would dilute the dominant shareholders’

96

The US, the UK, and Switzerland

stakes and hazard their control. The situation is quite different for the managers of firms not under direct shareholder control. They have a big incentive to please outsider shareholders, even if they are not afraid of hostile bids, because the higher the share price, the more they can make from their stock options, and the easier they will find it to raise new share capital for expansion, including takeovers. They will therefore at least pay lip-service to the ‘ideology’ of ‘maximising shareholder value’, denounced by Lazonick as causing short-termism (see Chapter 1). Direct control certainly seems to make a difference to R&D spending. This is clearest for ventured firms. Ventured firms, adjusted for size, spend over twice as much on R&D as non-ventured firms. The fifth, seventh and eighth-largest spenders on R&D in the US in 2001 (Microsoft, Cisco and Intel) were ‘ventured’ firms (Global Insight 2004). Venture capital is mainly responsible for the remarkable rise in the proportion of R&D performed by firms with below 500 employees, from 5.9 per cent in 1984 to 20.7 per cent in 2003 (Global insight 2004). But it is also, at the very least, interesting that the first and sixth in the 2001 list were Ford and Motorola, family-controlled firms – and that Ford clearly outspent its larger non-family rival GM. Thus, five of the top eight R&D spenders are in some sense directly-controlled firms. Likewise, a study by Pugh et al. (1999) finds that adoption of an ESOP is followed by R&D increases. As we have seen, ESOPs may bolster direct control – or management autonomy.

4.3 The UK: families fade, and the City rules The UK corporate governance situation at the end of the 20th century had changed remarkably since the beginning of the century, when family capital was completely dominant. Indeed Chandler (1990) blames the backwardness of much of British industry in the first half of the century largely on the reluctance of ‘industrial capitalists’ who had built or inherited a family firm, to share control with ‘finance capitalists’ in the way that their US and German counterparts often did. One factor that underlay their reluctance was the geographical and cultural division between the industrial districts of the Midlands and North of the country, and the City of London, which was the main financial hub. The financiers of ‘the City’ had had very little to do with the development of manufacturing industry during the eighteenth and nineteenth century – most of their investments were overseas. Their ignorance of industry continued, but industry came to them nonetheless in the end. Franks et al. (2003) have traced the route: first one family firm merged with another, and another, through an exchange of shares, and each family saw its percentage stake diluted. This would usually happen without a listing on the London Stock Exchange: there were a number of active provincial stock exchanges. The City of London became attractive when the firms were large and some of the family inheritors wanted to sell out: the London Stock Exchange was the most liquid financial market in the country, if not the world. But why had all those families surrendered first control, then ownership? Franks et al. (2003) do not say. We have already hinted at the reason, in Chapter 3.

The US, the UK, and Switzerland

97

Wealth in Britain leads quite quickly to absorption into the British upper class, which has never had any interest in industry – but much interest in finance and thus the City (Tylecote 1982, 1996b). (If there is an upper class in the United States, it is not so cohesive or so anti-industrial.) By the 1980s the process was complete – without resistance, without legislation: family capitalism had become, and remains, uniquely weak in Britain. Recall, to begin with, the high market capitalisation/national income ratio shown in Table 3.7. This indicates that the small and medium businesses that are naturally family-owned are less important in the British economy than in the US. An unusually large proportion of British industry is in the hands of a small number of large firms. All of these firms, unless foreign-owned, are listed on the London Stock Exchange and owned mostly by the ‘new institutional investors’ – pension funds, insurance companies, and mutual funds. To an extent unique among major economies, these institutions dominate British share registers. As of 1993 British financial institutions owned 62 per cent of listed UK stocks, up from 36 per cent in 1969 (against 37 per cent in the US, up from 28 per cent) (Berglöf 1997). The ‘foreign owner’ share of 16 per cent (as against 6 per cent in the US) would have included a substantial stake by foreign financial institutions. The shareholdings of banks are negligible, as in the US.2 As the proportion of shares held by institutional investors has increased, so has the proportion of the market held by a select number of institutional investors – including ‘asset management houses’ managing the assets of other institutions, such as small pension funds. Eleven per cent of the UK stock market was held, in that broad sense, by the three largest institutional investors in 1996. The largest institutional stake in the top ten FTSE100 companies ranged from 12 per cent to 22 per cent (Mallin 1999). These institutions could easily have seized direct control of all of those firms – and they could do it tomorrow: there was and is no legislation to stop half a dozen of them (let us say) banding together and outvoting the incumbent management of any firm, to put in their own boards of directors. They did not do it because they chose not to: it was not the sort of thing they did. They did not own firms, they owned pieces of paper – until they saw an opportunity to make money by exchanging them for other pieces of paper. But while they may not have taken responsibility for firms through representation on their boards, the power they held should not be underestimated. Don Young and Pat Scott (2004) vividly describe its sources and how it is exercised. They could sell at any time to a takeover bidder – Britain being, with Australia, uniquely devoid of legal forms of takeover protection (Plender 2006a). And if a ‘shark’ did not happen along when they needed it, they could always look for one – go to a suitable company and solicit a bid. The sheer physical proximity of top managers to institutional shareholders is a factor. The latter are based in the City of London – a small part of East-central London. Most headquarters of major British firms are, significantly, also in Central London. The pressure can be personal and frequent. The obvious conduits of pressure are the chairman of the board – normally, quite unlike the United States, a non-executive director – and the finance director. Neither of these individuals need have any background in the firm or

98 The US, the UK, and Switzerland even its sector, and so they can more easily represent the interests of the ‘City’ – or be replaced by someone who will. But even CEOs are eminently replaceable, and replaceable by someone known to be amenable to City pressures: There is a definite bias towards external appointments. . . . we found a welldeveloped belief . . . in the financial markets and the executive search community that top managers should not remain in post for too long . . . five years in a CEO post is about right.. A typical process of recruitment . . . will start with the selection of an executive search consultant . . . the shortlist will be compiled . . . . The absolutely key question ‘What will the City think?’ has to be answered . . . if there is more than the slightest hint of hesitation from influential figures in the investment community, the chances of an individual being appointed decrease markedly. (Young and Scott 2004: 171–172) Young and Scott’s analysis of FTSE100 firms found that just under two thirds of CFOs had been appointed from outside their companies, half of chairmen, and approximately one third of CEOs. About half of all CEOs, CFOs and chairmen had been employed by their firms (in some capacity) for seven years or less; while ‘Twenty years ago, the norm was for top managers to spend the bulk of their careers with one company, and if they moved, to do so in the early part of their careers’ (Young and Scott 2004: 187). The City pressures will certainly come. Senior executives described to Young and Scott the influence of senior analysts and fund managers. ‘If Y [a senior industry analyst] says we should get rid of a particular business, we will most likely get rid of it’ (Young and Scott 2004: 173). As Ramirez and Tylecote (2004) found, those exerting the pressures generally knew less about both firms and sectors than their counterparts in the United States. What they had in common with their counterparts in the United States was a severe conflict of interest problem, when they are employed by investment banks to manage the banks’ mutual funds and/or provide external management for the portfolios of pension funds: In some years, top bankers, analysts, brokers and fund managers can count their annual bonuses in multiple millions of pounds. When the employing banks are profitable, the bonuses flow. How do banks earn profits? One of the largest sources is the fees earned for corporate finance advice, usually in the form of success fees for supporting transactions . . . . No wonder these influential individuals prefer ‘active’ corporate executives! (Young and Scott 2004: 181) Under their sway, the system of indirect control became much more complete than in the United States. One can distinguish two post-war eras in UK corporate governance. The first, during the 1950s and 1960s, was an era of management control, in which share ownership was fragmented, family owners had largely given up trying to

The US, the UK, and Switzerland

99

maintain control over large firms, and the financial institutions had not yet begun to play any important role. This was a time of generally slack management (to judge by the slow rate of growth of productivity) but high R&D spending, by international standards. By the 1980s the era of indirect shareholder control had arrived (Demirag et al. 1994). If our argument in Chapter 1 is correct, this should have led to a fall in R&D intensity. Certainly that is what followed. Since the 1960s, there has been a steady and continuing decline in the UK’s businessfinanced R&D intensity (business enterprise expenditure as a percentage of value-added) relative to its main competitors. It continued during the 1990s. As a result, business-financed R&D intensity was, by 2001, clearly below the OECD average and well below that of Germany and Japan, the USA and Switzerland, and even South Korea (Table 3.15). Let us pause to consider just how odd a development this was from various points of view. As we saw in Chapter 1, political economists and economists alike give the UK labels – variously Liberal Market Economy, OutsiderDominated, Stock-Exchange-Based – which imply that it should specialise in high-technology sectors. Such sectors by definition have high R&D intensity. In fact, for some economists that is precisely the point: funding for R&D, which is inherently high-risk, should be easier to raise in a stock-exchange based economy in which firms have easy access to equity finance. All that is consistent with the US figures, which show a significantly higher level of business-financed R&D expenditure than the OECD average. But the UK misbehaves, and it does so in a way that the reader of this book may now expect. Recall from Chapter 1 that indirect shareholder control is likely to lead to low engagement and thus to discourage ‘organic’ investment of various kinds, including spending on capital equipment and R&D. It will however facilitate the buying and selling of firms. It turns out that, across a number of R&D-based sectors, the UK’s rate of spend on R&D plus Capex (fixed capital expenditure) is less than half that on acquisitions; the rate of spend in the same sectors in the US is well above that on acquisitions (DTI 2004a). Likewise Driver and Shepherd (2005) found that capacity utilisation had risen since the mid-1980s in the UK (not in the US or Continental Europe). For one firm, in the short run, higher capacity utilisation is usually good news, showing an upturn in the economy or a gain in market share. For a whole economy in the long run it shows firms are being cautious in expanding capacity. That is precisely what is to be expected from firms under increased pressure for short-term profit. Such firms would be more willing to risk having to turn customers away, and thus lose market share, in a boom, than to risk losing money through excess capacity in a recession; they would generally be the first to retreat from a market when the going got rough. Further light on the UK ‘misbehaviour’ can be shed by considering the role of venture capital in the UK. The British use of the term ‘venture capital’ is instructive. George Bernard Shaw (a neutral observer, being an Irishman) once said that the British and the Americans were ‘divided by a common language’.

100

The US, the UK, and Switzerland

The British borrowed the term ‘venture capital’ from the Americans and blithely misunderstood it. They thought it meant all private equity. Statistics for British ‘venture capital’ were collected and compared with those for US venture capital, and around 1990 it was announced breathlessly by some that (as a proportion of national income) the British were raising and spending more venture capital than the Americans. By the time the British discovered their mistake and some at least tried to avoid confusion by coming into line, it was too late to change the name (or alternatively the nature) of the British Venture Capital Association, which sounds like the counterpart of the (US) National Venture Capital Association, but is in fact, in effect, the British Private Equity Association. There are, surely, reasons for mistakes of this kind. The reason for this one is easy to guess. Financiers in the City of London in the 1970s and 1980s would simply not have believed that anyone would make so much fuss over an eccentric fringe activity like financing completely new firms – firms mostly in strange new sectors that hardly anyone had heard of, and that no one who was anyone began to understand. The ‘new’ firms must be buy-outs, newly-separated divisions of existing firms – now that was the sort of thing that a sane man would put money into. In the end, sane men, and women, in the City of London did put money into biotechnology, chip design, etc. (some of them have by now even made money out of them); but by that time Britain was about 20 years behind the US. Its disadvantage is particularly pronounced in three vital elements or accompaniments of venture capital: • ‘business angels’ – individuals who usually make the earliest external investment (Bank of England 1996; Gill et al. 20003); • specialist banks willing to work alongside venture capitalists and provide significant debt finance: the US has such banks; the UK does not (Gill et al. 2000:3;) • government support. It was a long time (the late 1990s) before policy makers in Britain understood that in that beacon of private enterprise, the United States, an important role was played by specialist government agencies which lent money alongside venture capitalists’ equity. Even then the British missed the point that the government funds needed to be alongside rather than before or instead of the private funding (Bank of England 1996; Gill et al. 2000). Britain’s only consolation was that most of its Continental European competitors were even further behind (Tables 3.11 and 3.15). Even in 2000, it was still providing the largest venture capital investment into high technology in Europe (European Commission 2001), with 49 per cent of the European venture capital industry (Crossley 2001). Its preponderance in Europe is similar in the rest of private equity (BVCA 2004). The contrast is similar with employee shareholdings, although without the misunderstanding. As with venture capital, the UK is following the US – but

The US, the UK, and Switzerland

101

here, even further behind. Like the US, the UK has no sort of codetermination legislation: employees per se do not have control rights. While all the insider systems in some degree reject the view that firms are simply commodities to be bought and sold, that is what they are, according both to UK and US law and custom (Kay and Silberston 1995: Wymeersch 1994). Accordingly, the UK lags behind other members of the EU in worker participation. As of the late 1980s ‘the UK is alone in the European Community in not having a formal institutionalised system of industrial democracy at company level’ (CEC 1990: 162). Not surprisingly the UK was relatively poor in participation in planning for new technology (CEC 1990: 121). There is however nothing to prevent employees being, or becoming, shareholders. In the mid-1990s the percentage of work sites with some employee ownership in the UK was 11 per cent. On the Continent of Europe that percentage ranged from 1 per cent (France and Sweden) through Italy (2 per cent) and Germany and the Netherlands (3 per cent) to Denmark (5 per cent) (Blasi et al. 2003b). But ‘serious’ employee shareholding is another matter. Thus, in the UK, the number of ESOPs was very small, around 100 in the late 1990s – as against more than 6000 in the US (Poutsma 2000; Robinson et al. 2002). Cross-holdings between firms are another potentially helpful ingredient in corporate governance: they can indicate merely a form of insider-control, or a type of stakeholder inclusion – bolstering inter-firm relationships, notably with suppliers and customers. Comparative studies (Lane 1989 and Sako 1994) find buyer–supplier relationships in the UK tenuous and essentially short-term and contractual in nature. Cooke and Morgan (1998) criticise the quality of interfirm relationships in Britain in the food processing industry: With some notable exceptions . . . . British firms display the same kind of low-trust, short-term ethos in dealing with their suppliers in manufacturing as the City [of London, i.e. the financial institutions] does to manufacturing in general . . . An inquiry into the trade gap [of more than £3billion, in food products and beverages] found that one of the key factors was the lack of collaboration between producers, processors, and retailers. . . . Weak interfirm networks . . . pervade the food chain in Britain. (Cooke and Morgan 1998: 138–140). They take this sector as typical; we think they are right. Cantista and Tylecote (2003), in a study of relationships with suppliers and customers in the UK fine chemicals and electrical equipment industries, found a correlation between the quality of relationships and the ownership status of the firm: UK firms listed on the stock exchange were more likely to have loose, low-trust relationships than subsidiaries of Continental firms or unlisted UK firms. How does the UK compare with the United States? In 1993, the percentage of shares in listed stocks held by non-financial firms was 9 in the United States; far below the 21, 39, 22 and 28 in France, Germany, Italy and Japan respectively, but still four and half times the British figure – 2 (Berglöf 1997).

102

The US, the UK, and Switzerland

4.4 Switzerland: an oligarchy of families? The Swiss are famously discreet, and their discretion extends to such sensitive matters as corporate power and control. Vastly less has been written about Swiss corporate governance than about that of the US or the UK, and so we have to depend to some extent on inference. We shall begin, then, by reviewing some relevant facts of Swiss history and culture. Like the United States, but much earlier, Switzerland was created through a revolt against the rule of princes and aristocrats, and it thus developed a strongly anti-aristocratic culture. As we suggested above, that is good for business. In such a culture what better way can there be of not only getting and staying rich but enjoying power and respect, than creating a family business? (The perfect business to own might be a bank, on which many other businesses depend.) Switzerland thus began industrialisation early, and was never far behind Britain. Like Britain, it was able to develop gradually, and thus few businesses were obliged to depend heavily on external capital. What would we then expect to follow? Large Swiss firms would emerge slowly, through organic growth, or sometimes through merger. Families would tend to hold on to control, although of course not invariably, particularly once their stakes had been diluted by merger. Where they let go, they might be replaced by financial intermediaries of one sort or another, or by management autonomy. It is a high-trust and very cohesive society, where shareholders would not be greatly concerned by the principal-agent problem, rather expecting managers to act naturally as stewards, much as Lubatkin et al. (2005) find for Sweden and France. What do we find? We saw in Chapter 3 that Switzerland had a very high market capitalisation/national income ratio, similar to Britain’s, suggesting that the Swiss economy is, like Britain’s, dominated by listed firms.4 Indeed the largest listed firms are dominant: as of the early 1990s, the 30 largest Swiss corporations accounted for almost 80 per cent of total market capitalisation (Anderson and Hertig 1994). We saw also that there was strong evidence of widespread, continuing, family control (Table 3.8), although the level of family holdings seemed rather lower than in the United States (Table 3.9). In fact, there is every reason to think that family power in Swiss industry has been very strong indeed, at least into the 1990s. Look again at Table 3.9. In addition to those family holdings of 33.3 per cent, there are ‘non-financial holdings’ – shares held by other firms – of 42.4 per cent. And who controls those other firms? Families, largely. This is easily explained in the Swiss context. Suppose we have two firms, X and Y, which have a business relationship of some importance. X is controlled by family A, which holds on. Y is controlled by family B, which loses interest, a process watched with some concern by family A. They see to it that X buys a stake in Y which gives it, and them, some influence (at least) over Y’s management. One reflection of Swiss firms’ shareholdings in other firms is the very high density of interlocking directorships: individuals sitting on the boards of two or more major firms. In fact we find from Schreiner (1984) that it is between the three main banks – UBS, Crédit

The US, the UK, and Switzerland

103

Suisse and SBS – and firms that there is the highest density of interlocks; the four major insurance companies come next as ‘interlockers’. The three big banks are clearly very powerful: Anderson and Hertig find that about two thirds of the 30 largest firms have at least one representative from one of them on their boards. Their power arises not only from their own shareholdings,5 and their loans, but from the fact that (like German banks) they hold shares on behalf of their clients, and until 1992 they were allowed to vote as they chose.6 But we should not imagine that the power flows all in one direction. Who guards the guardians? Here is Schreiner on the Sulzer family, of the Sulzer Gebruder machine-making firm: Alfred Sulzer sits on the Nestlé board. Another Alfred Sulzer sits on the board of Sulzer Gebruder, and the la Suisse insurance company, and chairs the Zurich Handelsbank. Georg Sulzer sits on the boards of UBS, of Swissair, of Winterthur Insurance (among other firms) and chairs Sulzer Gebruder. Hans Sulzer is on the UBS board; Henry Sulzer is a director of Sulzer Gebruder; Henry G. Sulzer is on the board of Adolph Saurer and Peter Sulzer is a director of Sulzer Gebruder. (Schreiner 1984: 91; our translation. Schreiner has not troubled us with Sulzer activities outside the top firms.) Schreiner indicates that he has chosen the Sulzers only by way of example, among the ‘limited number of families who have often participated in the establishment of the most important firms and still exercise a considerable influence there’ (Schreiner 1984: 91). And in his concluding sentence he refers to the ‘structuration of Swiss financial capital in an oligarchic form due to the influence of family property in the majority of large firms’ (Schreiner 1984: 93). Why and how did the industrialist families keep this power so long in Switzerland? First, because, unlike their British counterparts, they wanted to. But rich families, even in Switzerland, preferred to have their cake and eat it: keep control over their firms and at the same time diversify their portfolios by moving much of their capital out of their firms. This brings us from the motivation to the means: in contrast to the accepted Anglo-American rule of one-share one-vote, Swiss company law and practice until at least the 1990s allowed an ingenious variety of forms of equity. As Anderson and Hertig (1994: 524) explain, there are ‘. . . two types of voting shares (bearer and registered) and two types of nonvoting certificates . . .’ (p. 524); and bearer shares have fewer votes than registered, relative to their value. We can guess the reason: This structure originates from the desire of shareholders who floated their companies on the market to collect funds from the public without losing the control over them nor the right to determine their strategy independently. This phenomenon was particularly prevalent in the case of family-owned corporations. (Anderson and Hertig 1994: 524)

104

The US, the UK, and Switzerland

Even old Swiss firms could thus easily be kept under family control – the control of big ones usually being shared among a number of families that would work together the better because they belonged to the same city. Höpflinger (1977: 88–91) gives a list of controlling families and in some cases the cities to which they belong – thus CIBA-Geigy was controlled by six ‘old Basel families’, four of which shared control of the major Basel-based bank, the Schweizerische Bankverein. Two other Basel families controlled Sandoz. In 1996, Sandoz and Ciba-Geigy joined to create the pharmaceuticals giant Novartis. Two other Basel families, Hoffmann and Oeri, controlled the other pharma giant Hoffmann-La Roche – and still did in 2004, with Novartis as the largest minority shareholder (Bärtschi 2004). We see below what a difference that made to the running of the firm. But do not imagine that Swiss industry is entirely dominated by old firms. The Swiss stock market is perfectly capable of financing new ones. One indicator of this is the rate of IPOs (Initial Public Offerings) on the Swiss stock market. In 1991, for example, there were 26 IPOs in Switzerland, which in proportion to population is more than in the UK (116) or even the US (663); and vastly more than in Germany (19).7 Venture capital is also strong by Continental European standards, although much weaker than in the US or UK (Table 3.11). We can see from the argument above that in one vital respect Switzerland is closer to the United States than is Britain. Britain has, since the 1980s, had a high degree and wide extent of indirect, disengaged, shareholder control. The United States has retained a much wider extent of direct control – by founders, families and private equity – and in the majority of large firms not under direct control, there is far more managerial autonomy. Family control seems to extend further still in Switzerland, at least until very recently, and where there is not direct control there is probably even more managerial autonomy than in the US – only recently challenged, in the last decade, by shareholder activists like Martin Ebner (The Economist 2000). Both direct control and management autonomy make for closer relationships with other stakeholders than does indirect control: as Carlin and Mayer (2000) have pointed out, family shareholders and other controlling insiders can commit to long-term high trust relationships because they will be there in the long term. Under indirect control, a takeover is possible at any time; and even the fear of one will shorten management’s time horizons. Fewer American and scarcely any British managers in large firms can count on their successors to hold to any deal that is not contractually watertight. All these features of Swiss industry are favourable to R&D spending, and it is therefore not surprising that the Swiss R&D intensity has been even higher than that of the United States, although the strength of US venture capital has recently been causing the gap to close (Table 3.13). Table 4.1 sums up.

The US, the UK, and Switzerland

105

Table 4.1 Characteristics of shareholder capitalisms, early 1990s

Extent of family control Extent of direct control of some kind Extent of managerial autonomy Extent of indirect control Cohesion of inter-firm networks

United States

United Kingdom

Switzerland

Moderate Quite high

Very low Very low

High High

Moderate

Low

Moderate

Moderate

High

Negligible

Low

Very low

High

4.5 Corporate governance and technological advantage: what would one expect? How will the three ‘shareholder capitalisms’ then compare in terms of the requirements we put forward for governing technological change? • In industry-wide expertise, needed to cope with the high need for reconfiguration and to a lesser extent high opportunity, the US clearly leads, and has led: venture capitalists are very strong qualitatively and quantitatively, and the industry analysts who advise institutional investors are well-informed. In the UK, the industry analysts are decidedly less expert, and venture capital has become strong too recently to have had much impact on performance. In Switzerland, we can only guess at the expertise of the dominant families, and indeed at their power, and at the expertise and power of the influential institutions (banks and other firms) in the higher-technology firms. Reconfiguration is relatively easy in all three systems because management power is untrammelled by regulation or codetermination. Pressure for higher value-added, which helps bring about reconfiguration in established firms, may well be highest in the outsider-dominated UK system – but only if the outsider-shareholders know how and where to bring it to bear (unlikely where technological change is involved). On the other hand, the complete reconfiguration attained through setting up new firms is clearly the forte of the US. • In coping with high technological opportunity, and providing the required risk capital, the highly-developed stock markets of all three firms should be an advantage. But that will be conditional on a sufficient level of industrial expertise, which appears missing in the UK. Likewise, where there are profitable established firms that could meet the challenge merely out of their own cash flow, their managers must be allowed to do this – which must be doubtful in the UK. One possible obstacle to fast growth is the unwillingness of entrepreneurs and their family successors to put their control at risk by accepting large amounts of outside equity. This does not seem to be a

106

The US, the UK, and Switzerland

major problem in the United States: there is very much a culture of serial entrepreneurship – set up a firm, sell out, then set up another – or as a business angel, play a part in setting up a number of others. In Switzerland, at all events, family control can, or could, clearly be maintained with well under a majority shareholding – as in the US but not the UK. In Britain, the priority given to making money suggests that maintaining control will be a secondary objective. • Engagement, leading to firm-specific understanding, must be high among those in direct control of US and Swiss firms, whether families, shareholding managers, or venture capitalists. It appears to be very low among the outsider shareholders in indirect control of most British firms. • Stakeholder inclusion varies by type: employee inclusion through shareholdings and stock options is strong in the US; the inclusion of key customers and suppliers is presumably strong in Switzerland, again through shareholding. The informal, implicit forms of employee inclusion that are associated with long-term employment can only be widespread in Switzerland and the US, in that order: in the UK there is too much exposure to short-term pressures and the possibility of changes in ownership and control. • Management autonomy, which tends to make the qualities of shareholders irrelevant, and to allow heavy spending on innovation and other investment at the price of a degree of conservatism, is much stronger in Switzerland and the US than in the UK. In the US, however, it has, since the 1980s, tended to tilt towards short-termist ‘maximisation of shareholder value’ much like that in Britain. Let us apply this first to high-technology industry. In general, as we suggested in Chapter 1, its most pervasive feature is high opportunity; and in important parts of it there is high need for reconfiguration too. However, we saw in Chapter 2 that engagement is always valuable, and may be important in some high-technology sectors where visibility is low. Stakeholder inclusion is a twoedged sword: it can bolster conservatism and obstruct reconfiguration, but it is less likely to do so where employees are included via shareholding than where it is done via codetermination. And in those high-technology sectors where progress is mainly cumulative, inclusion can be very valuable; this is particularly the case where there are key industrial customers and suppliers. Managerial autonomy is another two-edged sword in high-tech industry. It tends to make for high spending on innovation, since managers like growth, but then in high tech, so do intelligent shareholders; and managers, left to themselves, may be conservative. What would we then predict? The United States should excel in high technology, across the board. It will be rather less strong, however, where progress is more cumulative, and in particular where there are key industrial customers and suppliers. Those are precisely the areas where Swiss firms may be expected to do best; elsewhere the elements of conservatism in the Swiss system may be a handicap, although at least they do not extend as far as codetermination. At all events,

The US, the UK, and Switzerland

107

engagement in some Swiss firms, managerial autonomy in others, helps to ensure a high spend on innovation, which will always help. The UK system has glaring weaknesses so far as high technology is concerned. Management autonomy, of which it has little, is not an ideal arrangement, but indirect control in the British style must be worse. The low industrial expertise of the main institutional investors will always count against the UK, although very recently for some new firms this has been offset by competent venture capital. The lack of engagement of investors must also be a handicap, particularly where visibility is not high. In the more ‘cumulative’ sectors, and in particular those with key industrial customers and suppliers, the lack of stakeholder inclusion may well be fatal. In medium-high technology, the balance of advantage is generally different. Engagement and stakeholder inclusion count for more, industry-wide expertise and pressure/finance for reconfiguration, for less. Management autonomy is a more acceptable default position, since here intelligent owners may well not want fast growth and a high spend on innovation, whereas managers left to themselves probably will. The implications for technological advantage are clearly quite different. The United States can be expected to gain little or nothing from its strength in venture capital – which scarcely operates in medium-high-tech. On the other hand its family firms and employee shareholders should count as solid assets, contributing a good deal of engagement and inclusion. Likewise its moderate degree of management autonomy will be helpful here – so long as the autonomous managers do not ‘maximise shareholder value’ à la Lazonick. The Swiss system seems almost ideal here, high in engagement, autonomy, and inclusion, at least of related firms. Britain lacks all three: so far as medium-high-tech is concerned, it has the system from hell.

4.6 The high-technology sectors 4.6.1 Aerospace As this is our first specific discussion of national performance in a sector, we must begin by introducing the performance data we shall be making regular use of (see Table 4.2). The data on these national differences is (as always) imperfect. (It is set out in full, with definitions and sources, in the Statistical Appendix, and drawn on in Chapters 4–8.) We have, and present, a range of OECD data about the size of countries’ trade surpluses and deficits by sector, about their production specialisation by sector, and about their R&D intensity (R&D spending/sales). This is relatively reliable data, and rather inclusive – relating to small firms as well as large. For us, it is in one way a little too inclusive: it relates to foreign as well as domestic firms. Such data are (for example) often presented to show Ireland’s success in ICT hardware – which in fact amounts mostly to the successful attraction of American and Japanese investment; a creditable achievement but not to be compared with (say) Finland’s success in growing its own high-technology firms. The OECD does produce some data that distinguish between foreign and domestic firms, but are too patchy for us to use.

108

The US, the UK, and Switzerland

Instead, we have used the UK Department of Trade and Industry’s R&D Scoreboard data, which relate to, in 2005, the top 1000 of the world’s firms by R&D spend. This allows us to produce a rough measure of production specialisation by sector that does at least reflect the nationality of firms. By way of example, we can follow up the Irish/Finnish contrast above, looking at production specialisation in ICT hardware. Because Finland has Nokia and Ireland has no large firm in this sector, the DTI data show Finland as highly specialised in this sector and Ireland as not present in it at all. This is an understatement for Ireland, but one that provides a useful counterbalance to the OECD’s overstatement. The only data we have that show, so to speak, who did it rather than where it was done and include the contribution of small firms, are on patenting, and so in each table we show this first, for all its flaws. (It is for patenting by the country from which the patent was taken out, which will include some patenting by foreign subsidiaries, so it does not completely eliminate the ‘foreign element’.) However, all the DTI data on ‘who did it’, on the nationality of firms, must be taken with the reservation that there are international mergers that do rather violent, and misleading, things to the figures. The European aerospace giant EADS, for example, had, when it was set up by merger, French, German, British and Spanish shareholders, reflecting the location of its production operations. It was incorporated in the Netherlands and for the DTI therefore counts as a Dutch firm! In pharmaceuticals, perhaps the most globalised sector, Sanofi-Aventis and AstraZeneca are products respectively of Franco-German and Anglo-Swedish mergers, and should really count as such; but by location of HQ and incorporation they are French and British. The patenting data largely predate most of the really big international mergers; the DTI data on production specialisation are affected by them, and must therefore be treated with the more care. In interpreting our data, it will be helpful to keep some kind of norm in mind. That for patenting is 1: that would imply that the country was neither specialised nor ‘under-specialised’ in the sector – it had the same proportion of world patents in this sector as in all sectors taken together. For manufacturing trade balance, the default expectation might be that it would be zero: neither in surplus nor deficit for the sector. For production specialisation, as with patenting, and with the same logic, the norm is 1. Only for R&D intensity is there no obvious norm, and so below each table we give the mean for the sector for the OECD and for the DTI data.8 Now we can proceed to the specifics of aerospace (see Table 4.2). As we pointed out in Chapter 1, there is no mystery about the main requirement for success in this sector: being a large country with high military spending which was on the right side in the Second World War. Nothing more therefore needs to be said about Swiss weakness in this sector. But nonetheless a country’s performance in the sector should be at least affected by the extent to which it meets the corporate governance requirements of technological change there. We saw in Chapter 2 that these were in some respects not very different from typical medium-high technology: secrecy more effective than patents in protecting innovation; technological progress generally rather cumulative. On the other

The US, the UK, and Switzerland

109

Table 4.2 Aerospace:* US, UK, and Switzerland United States

United Kingdom

Switzerland

1990–1999 1.35

1963–1979 1.69

1990–1999 1.69

1963–1979 1990–1999 0.22 0.30

Manufacturing 1992 trade balance, +4.2 percentage of output

2001 +2.6

1992 +1.6

2001 +1.1

1992 -0.4

2001 -0.4

Production DTI – specialisation 2003 1.85

OECD – 2000 1.80

DTI – 2003 2.41

OECD – 2000 1.98

DTI – 2003 NA

OECD – 2000 NA

R&D intensity, per cent

OECD – 2000 10.3

DTI – 2004 8.6

OECD – 2000 6.7

DTI – 2004 NA

OECD – 2000 NA

Patenting: RTA

1963–1979 1.11

DTI – 2004 2.8

Notes * DTI: ‘Aerospace and defence’. R&D intensity: DTI mean 4.9 per cent; OECD mean of our countries 10.23 per cent. Summary definitions (for full definitions and sources see Appendix): Revealed Technological Advantage: country’s share of world patents (US Patent Office) in the sector, divided by its share of world (US Patent Office) patents in all (our) sectors. Manufacturing trade balance: approximately, exports less imports in the sector, as a percentage of output in the sector. Production specialisation: DTI, each country’s share of world (entire DTI scoreboard) sales in the sector divided by its share of world (entire DTI scoreboard) sales in all sectors; OECD, each country’s share of our countries’ (less Taiwan and mainland China) production in the sector divided by its share of our countries’ total production. R&D intensity: R&D spend divided by sales.

hand, the intensity of R&D is very high indeed. Given the elements of employee inclusion, direct control and management autonomy in the US system, these requirements should not pose an insuperable problem for US firms, and so (taken together with the US government’s huge military spending in this area) the strong US performance is easily explained. (The one oddity is the low R&D intensity registered by the DTI data, presumably because the Department of Defense rather than the firms themselves are paying.) It is the British corporate governance system that should, on the face of it, be at a serious disadvantage. It seems that shareholders are needed who engage very closely with management so that they can understand the value of the large amounts of their money that are being spent on R&D; failing that, autonomous managers would do quite well. British investors do not engage, and British managers are not autonomous. Yet measured by any yardstick – R&D intensity, patenting rates, sales – British firms in aerospace have invested heavily in innovation and they have done very well out of it: their position is not only strong but has been growing stronger over the last 20 years, compared with their US rivals. The oddity can be explained largely by one phrase: golden shares. There are two major British aerospace firms, British Aerospace (BAe) and Rolls-Royce.

110

The US, the UK, and Switzerland

Both were nationalised during the 1970s and privatised during the 1980s. But when they were privatised, the government took an exceptional step because of their military importance: it kept a ‘golden share’ in each which made them proof against takeover. The great fear of hostile takeover, which ensures management sensitivity to shareholder wishes, has been missing in these two firms. The history of Rolls-Royce is particularly instructive. Over much at least of the 20 years after privatisation, institutional shareholders have felt that it was overspending on R&D (Lazonick and Prencipe 2005; The Economist 2005b). Management took no notice, and continued spending heavily on its core aero-engine business – more heavily, it appears, than its two main US rivals, GE and Pratt & Whitney (the latter a division of United Technologies). It decisively overtook Pratt & Whitney in aero-engine sales and from the mid-1990s steadily took market share away from GE, until the latter fought back hard with the development of the GE-90. It also made a well-calculated synergistic expansion into marine propulsion, and other related areas. By 2005 its rising profits and sales had silenced its critics (The Economist 2005b). So Rolls-Royce succeeded in a sector in which a typical British firm should have failed, because its corporate governance situation was completely untypical: its management was highly autonomous. Much the same can be said of BAe, which has spent even more heavily on R&D, although given its dependence on military orders much of this may have been paid for by government. (It has also made the wings for Airbus aircraft, which have, notoriously, received a great deal of ‘launch aid’ from European governments, including Britain’s.) 4.6.2 Pharmaceuticals As we saw in Chapter 2, this sector is some way from the top in terms of need for reconfiguration. The market is still much the same as it was (say) 40 years ago, in the sense that now, as then, it consists mainly of doctors who have to be persuaded to prescribe a particular firm’s medicine to their patients, rather than one of its rivals’.9 The development process is still much the same, at least in the sense that the longest and most expensive part of it involves a series of clinical tests on humans. True, the discovery process that precedes this has changed in a number of important ways since the 1960s, partly, and recently, through the appearance of biotechnology. (Biotechnology has had some effect on the manufacturing process too.) But this is small beer compared, for example, with the transformation of software and computers. The proof of this is that the industry is dominated now by firms that were important in it 40 years ago – or rather, by the products of mergers among them. The exceptional features of pharma revolve around visibility and spill-overs. The relative effectiveness of patent protection, backed by the highly regulated process of testing (you may invent round the patent, but you cannot skip the testing) keeps visibility up and spill-overs down. High visibility means that engagement matters relatively little. Likewise, employee inclusion has little value outside a small core of highly-qualified technical staff, there are no key

The US, the UK, and Switzerland

111

suppliers with whom long-term relationships need to be nursed, and customers are too numerous for similar relationships with them. These features are clearly good news for the UK, but the UK corporate governance system, with its low industrial expertise, low management autonomy, and minimal engagement, confronts the extremely unpalatable fact that pharma spends an unusually high proportion of its turnover and value-added on R&D, which is normally counted as a current cost rather than an asset, and has to wait an unusually long time for it to pay off – with little confidence that it will do so. The Swiss system, with its higher autonomy and engagement, should be able to handle these challenges well, but its conservatism might pose some problems in dealing with reconfiguration. In fact, the Swiss and the British both excel in this industry (see Table 4.3). Making allowance for population, Switzerland tops the world in pharmaceuticals, in terms of sales per head of the country’s population. In 1999, out of the top ten pharma firms by sales, it had two (Novartis and Roche) (Nightingale 2003: Table 6.7). In 1995–1999, of the top 50 new chemical entities by sales, Swiss firms produced six, accounting for 7.8 per cent of sales (Nightingale 2003: Table 6.2). Britain’s pharmaceuticals firms come second (Nightingale 2003: Tables 6.14 and 6.15). The US-owned pharma firms lead the world in sales and profits by a long way; allowing for population differences, they are behind only Switzerland, Britain and Sweden (Nightingale 2003: Tables 6.14 and 6.15). (The US has a much smaller trade surplus on pharma than the UK or Switzerland, but that is mainly because the US spends far more per head on drugs than the UK and most other countries.10 Moreover, the trade balance tells us only where firms happen to choose to locate their manufacturing operations – a fact of little significance in pharma.) Where the Americans dominate is in biotechnology, as might be expected. The first successful ‘dedicated biotechnology firm’ (DBF), Genentech, was set Table 4.3 Pharmaceuticals: US, UK, and Switzerland United States

United Kingdom

Switzerland

Patenting: RTA

1963–1979 1990–1999 0.85 1.13

1963–1979 1990–1999 1.22 1.87

1963–1979 1990–1999 1.98 1.49

Manufacturing trade balance, percentage of output Production specialisation

1992 +0.3

2001 +0.2

1992 +0.8

2001 +0.9

1992 +3.5

2001 +3.8

DTI – 2003 2.31

OECD – 2000 1.13

DTI – 2003 2.89

OECD – 2000 1.06

DTI – 2003 9.68

OECD – 2000 NA

DTI – 2004 15.82

OECD – 2000 NA

DTI – 2004 15.29

OECD – 2000 NA

DTI – 2004 16.20

OECD – 2000 NA

R&D intensity, per cent

Notes R&D intensity, pharmaceuticals and biotechnologies: DTI mean - 15 per cent. For summary definitions, see Table 4.2 above; for full definitions and sources see Appendix.

112

The US, the UK, and Switzerland

50 1990–1992 1993–1995 1996–1998

40 30 20 10 0

US

UK

Germany

France

Japan

Figure 4.1 Relevance of biotech for discovery activity in pharmaceuticals (source: Zur technologischen Leistungsfähigkeit Deutschlands, 2000; Zusammenfassender Endbericht 2000, Bundesministerium für Bildung und Forschung, Bonn, March 2001, Figure 6.9).

up in the US in 1976, of course with the help of venture capital, and the American advantage in venture capital helped them to maintain their lead (Marks 2003).11 As Figure 4.1 shows, the US pharma industry in general was first to exploit biotechnology, and as Figure 4.2 shows, this was followed by a jump in the world market share of US firms. Even at the end of the century they remained dominant, with two to three times as many employed in US DBFs (mostly pharmaceutical) as in European DBFs; and of the 34 DBFs estimated as having reached profitability by 2001, all but three (one Canadian, one British and one Swiss) were American (Marks 2003). Likewise, if we take the citation of patenting as an early indicator of the quality of innovative activity, the share of citations to US patents in biotechnology is substantially higher than the share of US patents in total patents; in Europe that is only true for the UK (Marks 2003: 196). 80 70 60 50

1985–1989 1995–1999

40 30 20

Netherlands

Germany

Japan

France

Switzerland

UK

0

US

10

Figure 4.2 Market share of the best selling new medicines, by country in which the main providing firm is based, in percentage (source: Zur technologischen Leistungsfähigkeit Deutschlands, 2000; Zusammenfassender Endbericht 2000, Bundesministerium für Bildung und Forschung, Bonn, March 2001, Figure 6.5).

The US, the UK, and Switzerland

113

How then did the British and the Swiss stay so successfully in the game against the Americans? Britain came from nowhere in pharma during the twentieth century. Even up to the Second World War, as Tylecote and Vertova (2007) show from patent data, this was an area of severe relative (and absolute) weakness. The great advantage the UK firms gained just after the war was the National Health Service, and more particularly the pricing system it developed: the more they were spending on R&D, the higher they were allowed to price their medicines (Howells and Neary 1995). This must have been very soothing to their shareholders, and helps to explain their tolerance of high spending. But the pricing scheme only applied to selling and spending in Britain, and to foreign firms as well, so as British firms sold and researched more and more abroad, and foreign firms did the same in Britain, its importance diminished. During the 1970s and early 1980s, however, British pharma shareholders learned to be tolerant of high R&D spending even if it reduced profits in the short run. What taught them was success. As we saw in Chapter 2, the first paradigm shift in the pharma industry was the move to the pathwaysof-disease approach, in the 1970s. This was led by the British, in the shape of the Scot, James Black, who worked first for one UK firm (ICI) and then, balked, moved to another, Beecham, where he produced a blockbuster anti-ulcer drug (Nightingale 2003). A third, Glaxo, soon earned more than either from Black’s advances by the clever and quick development of a me-too antiulcer drug. Glaxo, under the dictatorial Paul Girolamo, who was, unusually, not a scientist, was a pioneer of what is now the accepted style of ruthless pruning of the portfolio of drugs under development with the aim of driving a few through to blockbuster status (Lynn 1991). As AstraZeneca managers argued to Ramirez and Tylecote, shareholder pressure could be helpful in driving reconfiguration: ‘The easiest way to change is to say “we’ve got no choice, this is what is being demanded of us”’ (CFO, AstraZeneca) (Ramirez and Tylecote 2004: 114.) Tylecote and Vertova’s patent data shows the steady British post-war improvement accelerating between 1965–1977 and 1978–1990. The UK industry gained also from the paradigm shift(s) of the 1980s, not against the US but against the rest of the world. During the 1990s the British venture capital industry began to play an effective role in pharma-biotech. Figure 4.1 shows UK pharma second to the US in making use of biotechnology, and as for the US this was followed, strikingly, by an increase in world market share. The British DBFs now come a good second to the US: in Europe, out of a total of 259 pharmaceutical DBF products in the pipeline in 2000, 128 were British (Marks 2003: Table 7.6). Switzerland has been strong in pharma for at least a century. What the Swiss had, they held. But as we see from Figure 4.2 they, like the British and Americans, improved their performance between the 1980s and 1990s. One might not have expected Switzerland to have exploited the biotechnology paradigm effectively, given Switzerland’s relative weakness in venture capital. But it did: of the 259 products in the European pharma DBF pipeline mentioned above, 20 were Swiss. Of the top ten listed European DBFs by market

114

The US, the UK, and Switzerland

capitalisation in 2000, Switzerland had two, totalling C18.7 bilion, against the UK’s five, totalling C14.92 billion (Marks 2003: 180–181). This performance becomes less mysterious when we learn that the larger of the Swiss pair, AresSerono, far ahead of the pack with C16.4 billion, is not the creation of venture capital at all: it was founded in 1906! The great Swiss firms Novartis and Roche did nothing so drastic as Ares-Serono: as pharma majors they did not need to. But they left nothing to chance in their determination to exploit the biotechnology paradigm. In 1995, Novartis acquired 45 per cent of Chiron, in 1990 Roche bought 60 per cent of Genentech (raised to 67 per cent in 1997), respectively the largest and the fourth largest US DBFs by employment. Thus (including Ares-Serono) three of the world’s top five DBFs are under Swiss control. Novartis and Roche’s insistence on joining the biotechnology bandwagon may reflect nothing more than the typical freedom of Swiss management – autonomous or directly-controlled – to spend very large amounts of money for long-term growth. It is notable that both appear to remain under family control – most clearly in Roche’s case, and that appears to make a difference: The tough ‘dough’ of the Hoffmann and Oeri families, with their 50.1 per cent of the voting shares, held well together. . . . The Roche capital structure makes it possible to make decisions simply and in an uncomplicated way. Roche is in the position, thanks to high liquidity, to finance growth with its own resources. . . . Roche belongs to the families like the land to the farmers, the family heirs believe. (Bärtschi 2004: 30; our translation) What Ares-Serono reflects is the fact that a Swiss firm, if it identifies a paradigm shift and wishes to take advantage of it, is able to reconfigure itself – having patient capital and little internal obstruction. The ‘ventured’ Swiss DBFs may reflect the fact that competent venture capitalists specialise by sector. Since Switzerland has little involvement in the ICT-based sectors, there is probably an ample supply of Swiss venture capital for this one. 4.6.3 ‘ICT hardware’ – the main electronics sectors ‘ICT hardware’ refers to two sectors: Office, accounting and computing machinery; Radio, television and communication equipment, as defined by the OECD. We suggested in Chapter 1 that, like aerospace, the electronics sectors show a good deal of path-dependence: some countries are ‘in’, some ‘out’, for historical reasons. In this case the defining period was not the Second World War but the 1960s and 1970s, when electronics really took off, after the development of the semiconductor as its technological foundation. In this period of sudden growth and flux it was relatively easy to get a seat at the table. At various points since then there have been similar new beginnings in parts of electronics, but it was a

The US, the UK, and Switzerland

115

great deal easier to seize the opportunities presented if one (an existing firm, or a new techno-entrepreneur) was in the right place: a location where there was an existing critical mass of electronics expertise – and of suppliers and customers. This meant those countries that failed to get established in electronics in the 1960s and 1970s, or at a pinch shortly after, would find it much more difficult to do so later. Of course, the United States made the pace: it made the main scientific and technical advances, and proceeded to exploit them, taking advantage of its huge home market, initially much richer than Europe’s or Japan’s, and of its high military spending. Its very high income level, however, gave its rivals one way of getting in: find relatively labour-intensive products or processes within the electronics sectors, such as the assembly of radios and televisions and other mass consumer goods, and win market share there through low labour costs. With the thin end of the wedge inserted, it could be widened out by producing components and equipment used by the assemblers. We shall see in subsequent chapters that this was the entry route used by the East Asian countries. It could never have been a suitable way in for Britain or Switzerland – these were countries whose labour cost advantage against the US was marginal (Britain) or nil (Switzerland), and whose labour cost disadvantage against successive East Asian entrants was very large. They had to fight it out against the United States at the higher end of the market. Initially, in the 1960s and 1970s, European firms were indeed reasonably well represented across the electronics sectors: they produced radios, televisions, computers. The situation they faced thenceforth, however, was grim. In any electronics area where progress settled into an established trajectory, the East Asians could make their low labour costs and critical mass work to their advantage. We look at how and where they did this in the next three chapters. (We shall see that part of their advantage lay in availability and acceptability of risk capital, in the face of high opportunity.) In any part, however, where the kaleidoscope went into action again, with a major paradigm shift, a European firm would have to take on the masters of reconfiguration in the United States. To show these ‘masters of reconfiguration’ in action, let us repeat part of a quotation we used in Chapter 1: between 1981 and 1990 the value of the new personal computer industry [in the United States] grew from virtually nothing to $100 billion, the largest legal accumulation of wealth in history. More than 70 per cent of these firms were venture-backed . . . in 1995 70 per cent of American venture investments went to technology companies; two-thirds of those were in information technology, mostly computer hardware, software, and networking equipment. (The Economist 1997: 19–20) What chance had a British or Swiss firm against that? Even against the Japanese, American firms’ superior ability to cope with the truly novel allowed them to make gains during the 1990s. This applied, for example, at the top end of the

116

The US, the UK, and Switzerland

semiconductor market. Having been displaced by Japan in 1986 as the largest supplier of semiconductors on the international market, the US regained this position in the early 1990s. The rapid spread of digitalisation across the industry must have been a helpful paradigm shift, and one probably associated with the rising effectiveness of patents in electronics in general, another shift that favoured the US against more ‘inclusive’ economies. Even in consumer electronics, its weakest area, the US overtook Europe during the 1990s (Hobday and Heighes 1999). By 1993, the ten largest manufacturers in the world of computers and office equipment were all US (six) or Japanese (four). By 1993, out of the ten largest manufacturers of semiconductors were the US (three, with Intel top), Japanese (five) or other East Asian (Samsung, Korea): one European firm, Philips of the Netherlands, was tenth. Only in the relatively stable area of telecommunications equipment, where US firms held four of the top ten positions, was the European performance respectable, with three of the top ten producers (none of them British or Swiss, however). It was the only subsector of electronics where the Europeans held a positive balance of trade (Hobday and Heighes 1999). (We look at telecommunications in Chapter 5.) We have not, so far, referred to our standard sectoral data, which is presented in Tables 4.4 and 4.5. This has to be interpreted with more than usual care. The DTI Scoreboard uses categories that cut right across those of the OECD: its ‘IT hardware’ (ITh) includes computer manufacturers such as Apple and HewlettPackard, but also telecoms firms (Nokia, Ericsson, etc.) and semiconductor manufacturers, headed by Intel; also Cisco. This seems a laudable attempt to combine ‘Office, accounting and computing machinery’ (OAC), which as we have seen is the top sector in R&D spend/value-added, with the very high-technology parts of ‘Radio, television and communication equipment’ (RTC). The rest of RTC are classified as ‘Electronic and electrical equipment’ (E&E). ITh certainly has a higher average R&D intensity (over sales) than E&E: for the whole Scoreboard, 8.6 per cent against 5.5 per cent in 2004/2005. But the split is inevitably messy because of the diversification of firms: thus Samsung Electronics, a major semiconductor and telecoms manufacturer, is in E&E. We have put the ITh data in Table 4.4 and the E&E data in Table 4.5 as the least inaccurate approximation, but in both tables we show the combined ITh + E&E figure alongside. We see in Table 4.4 that the US as a location does not have any particular specialisation in production in OAC (see the OECD manufacturing trade and production figures) – much of the manufacturing is more cheaply done abroad – but US firms, from the DTI figures, do have a pronounced specialisation in IT hardware; and the high US R&D intensity indicates where their strength comes from. British firms by contrast – as would be expected from the argument above – are conspicuous by their near-absence from the sector, while Britain as a production location is reasonably attractive to US and Japanese firms. The few British firms in the sector are new, ‘ventured’ firms: thus their high R&D intensity. The performance of the British economy in the electronics sectors has been far better in terms of production and trade measures than in the DTI measure of production specialisation, which shows the extreme weakness of British firms.

8.2

ITh 9.76

ITh+E&E 9.03

OECD – 2000

DTI – 2004 ITh 15.94

ITh+E&E 8.96

DTI – 2004

ITh+E&E 0.08

0.8

OECD – 2000

1.16

OECD – 2000

DTI − 2003 ITh 0.05

2001 0.0

1990–1999 0.56

1992 −0.5

1963–1979 0.76

United Kingdom

ITh+E&E 0.64 ITh 8.01

ITh+E&E 4.30

DTI – 2004

ITh 0.03

DTI − 2003

1992 −1.8

1963–1979 0.24

Switzerland

NA

OECD – 2000

NA

OECD – 2000

2001 −1.9

1990–1999 0.14

Notes R&D intensity: DTI mean for IT hardware 13.1 per cent; DTI mean for IT hardware + Electronics and electrical equipment: 7.0 per cent; OECD mean: 5.27 per cent. For summary definitions, see Table 4.2 above; for full definitions and sources see Appendix.

R&D intensity, per cent

1.08

ITh 2.31

ITh+E&E 0.89

OECD – 2000

DTI – 2003

Production specialisation

1990–1999 1.07 2001 −0.1

1963–1979 1.09

Manufacturing trade 1992 balance, percentage −0.3 of output

Patenting: RTA

United States

Table 4.4 Office, accounting and computing machinery: US, UK, and Switzerland

OECD – 2000 6.9

ITh+E&E 9.03

DTI – 2005

ITh 4.59

ITh 4.49

ITh+E&E 8.96

DTI – 2004

ITh+E&E 0.08

4.5

OECD – 2000

0.72

OECD – 2000

DTI − 2003 ITh 0.11

2001 +1.4

1990–1999 0.85

1992 −0.3

1963–1979 0.91

United Kingdom

Notes R&D intensity: DTI mean for electronics and electrical equipment: 5.5 per cent; OECD mean: 6.65 per cent. For summary definitions, see Table 4.2 above; for full definitions and sources see Appendix.

R&D intensity, per cent

0.86

ITh 0.30

ITh+E&E 0.89

OECD – 2000

DTI – 2003

Production specialisation

1990–1999 0.97 2001 −1.1

1963–1979 1.06

Manufacturing trade 1992 balance, percentage −1.4 of output

Patenting: RTA

United States

Table 4.5 Radio, television and communication equipment: US, UK, and Switzerland

ITh+E&E 0.64 ITh 3.91

ITh+E&E 4.30

DTI – 2005

ITh 1.33

DTI − 2003

1992 −0.8

1963–1979 0.32

Switzerland

NA

OECD – 2000

0.43

OECD – 2000

2001 −1.0

1990–1999 0.43

The US, the UK, and Switzerland

119

The electronics factories, and even R&D centres, located in Britain have been, since the 1980s, mostly owned by American and Japanese firms, which seem to find the British labour market favourable for these operations. That does at least mean that there are a large number of highly-skilled people working in those sectors in the UK. Combined with the strong science base, and improving venture capital, this has made it possible recently to launch successful ventures, like the chip designer ARM. Both tables simply confirm the general Swiss weakness in electronics that we explained above. 4.6.4 Software and IT services We saw in Chapter 2 that the software development industry can be divided roughly into three parts, standard (or application-based) software, middleware, and enterprise software, the first being a classic high-tech area with high patent protection and high competence destruction, the last being much more mediumtech in its more gradual progress and need for close relationships with industrial customers, and middleware being in the middle, with a particular need for close relationships with a dominant industrial customer. We should also add the IT service industry, and embedded software, a very suitable title since those who produce it are usually in units embedded within the ‘hardware’ firms whose hardware the software will control. Both seem to be like enterprise software in relatively low competence destruction, low appropriability, and important relationships with customers. In general, as we have seen, software has the very high opportunity and need for reconfiguration one would expect from the spearhead of the ICT revolution. Thus, the enormous importance of venture capital in the industry; and thus the preponderance of very young firms, including those that are now subsidiaries of older ones. This all favours the United States. The spread of component-based software helped it vis-à-vis Japan (see the next chapter) and the extension of patenting to software in the 1980s helped it too. However, the US advantage is naturally most pronounced in packaged software (Hobday and Heighes 1999), and least in enterprise and embedded software. IT services are a particularly interesting case: on the face of it the conditions in it are not particularly favourable to US corporate governance (less still to UK corporate governance). However, IT services are a classic Knowledge-Intensive Business Service in being largely, and traditionally, provided in-house. Which large or even medium firm does not have an IT department? This means that the creation of a major IT services industry required wholesale reconfiguration of industry so that what was previously provided in-house was (to some extent) out-sourced. The relative readiness to reconfigure of US firms in general gave the US an advantage in developing an IT service industry. Another advantage was its strength in IT hardware: thus the world’s largest firm in ‘software and IT services’ (mostly in IT services) is IBM, which started by producing software and services for its own hardware (Table 4.6). Relative readiness to reconfigure is a feature of UK firms too, and indeed by now the UK has a trade surplus in IT

120

The US, the UK, and Switzerland Table 4.6 Top ten world software producers, turnover in FFm. 1997 IBM (US) Microsoft (US) Fujitsu (J) Computer Associates (US) Oracle (US) NEC (J) SAP (G) Hitachi (J) Novell (US) Digital (US)

69.3 51.5 24.4 15.8 12.5 11.9 9.2 6.9 6.3 6.3

Source: Hiroatsu and Verdier (2001).

services that is proportionately much greater than that of the US; however the IT services industry in the UK is dominated by US firms (Abramovsky et al. 2004). So IT services is another case, like ICT hardware, of a sector in which the UK is merely strong as a location of production, dominated by foreign multinationals, because its corporate governance system is (or was) thoroughly unsuited to the sector’s requirements. In software development, the UK’s firms show just the pattern that would be expected from its outsider-dominated corporate governance: relatively strong in package software, very weak in enterprise software; weak also in middleware, for want (presumably) of the close relationships needed with one or more large buyers. We have this from Casper and Whitley (2004), who do not look at Switzerland; but clearly, from the DTI figures in Table 4.7, Swiss firms are not strong in software and IT services, although (from the OECD figures) foreign Table 4.7 Software and IT services: US, UK and Switzerland* United States

United Kingdom

Switzerland

Patenting: RTA

1963–1979 1.09

1990–1999 1963–1979 1990–1999 1963–1979 1.12 1.00 0.72 0.68

1990–1999 0.37

Manufacturing trade balance, percentage of output

1992 NA

2001 NA

1992 NA

2001 NA

1992 NA

2001 NA

Production specialisation

DTI – 2003 4.49

OECD – 2000 1.43

DTI – 2003 0.70

OECD – 2000 1.94

DTI – 2003 NA

OECD – 2000 1.21

R&D intensity, per cent

DTI – 2004 10.76

OECD – 2000 NA

DTI – 2004 7.36

OECD – 2000 NA

DTI – 2004 NA

OECD – 2000 NA

Notes * OECD: ‘Computer and related activities’. R&D intensity: DTI mean for Software and IT services: 10.7 per cent. For summary definitions, see Table 4.2 above; for full definitions and sources see Appendix.

The US, the UK, and Switzerland

121

firms find Switzerland, like Britain, a convenient location. The dominance of US firms is clear in the DTI data.

4.7 The medium-high-technology sectors 4.7.1 Chemicals As we saw in Chapter 2, chemicals (with pharmaceuticals subtracted) has for some time ceased to be the leading high-technology sector it had been early in the 20th century, although in its upper reaches, so to speak, it still has hightechnology elements. What high-tech chemicals and almost all the rest of the sector have in common is that they are sold to industrial customers, and apart from basic or commodity chemicals, the relationship with these customers is key to innovation. This makes it a rather typical medium-high-tech sector, and as such it is one in which the Swiss should excel, with their high engagement, autonomy, and stakeholder inclusion. They have excelled in chemicals, in fact, for at least a century (Vertova 2002) and so it was necessary merely to maintain their strength. This they have certainly done, to judge by the position of the large Swiss chemicals companies on the world market (Table 4.8), and we can see from the same table that one reason for their strength is their willingness to outspend their rivals on R&D. (They produce largely abroad, so that the manufacturing trade surplus is not very high.) The United States chemicals firms became decently, although not remarkably, strong during the inter-war period, and have remained in this position since then, to judge by all our data; again, such performance is rather what one Table 4.8 Chemicals: US, UK, and Switzerland United States

United Kingdom

Switzerland

1990–1999 1999 0.99

1963–1979 1979 0.90

1990–1999 1999 1.05

1963–1979 1979 1.54

1990–1999 1999 1.71

Manufacturing 1992 trade balance, +2.6 percentage of output

2001 +1.7

1992 +1.5

2001 +1.4

1992 +1.9

2001 +1.7

Production specialisation

DTI – 2003 1.22

OECD – 2000 1.12

DTI – 2003 0.83

OECD – 2000 1.00

DTI – 2003 3.59

OECD – 2000 NA

R&D intensity, per cent

DTI – 2004 3.03

OECD – 2000 NA

DTI – 2004 2.05

OECD – 2000 NA

DTI – 2004 5.4

OECD – 2000 NA

Patenting: RTA

1963–1979 1979 0.96

Notes R&D intensity: DTI mean: 3.7 per cent. For summary definitions, see Table 4.2 above; for full definitions and sources see Appendix.

122

The US, the UK, and Switzerland

would expect from our judgement of the US system. The British industry is a more interesting case. If Britain now has the ‘system from hell’ for mediumhigh-technology, we would expect British firms’ performance in chemicals to be weak, and weakening further. It is weak, as we see from the DTI production specialisation and R&D intensity figures in Table 4.8, but this is a very recent development, as the patent data shows. In debates over British technological strength and weakness in the late 1980s, chemicals was identified as an area of strength (together of course with pharmaceuticals), with some speculation that Britain was for some reason well-suited to chemistry-based industries (SCITEB 1991). Even at that stage, however, the pattern of British strength was tilted towards consumer rather than industrial chemicals12 – which is to be expected because industrial chemicals demand good inter-firm links. In fact, much of British chemicals production and most of its R&D spending in chemicals was accounted for by one firm, ICI, whose full name, Imperial Chemical Industries, reflects the key role it had played ever since it had been created in the early 1920s, largely from the confiscated subsidiaries of German firms. It was still holding out against growing institutional pressures for profit and dividend – a clear case of management autonomy. Asked how the City of London had tolerated ICI’s relatively slow rate of increase of its dividend, and fast rate of increase of its R&D, ‘a chemicals sector analyst observed that the company concerned was virtually takeover proof, due to its size and national importance’ (IAB 1990: 5). So ICI’s management thought, too, but they turned out to be wrong, as was shown by the hostile takeover bid from Hanson Trust in 1991 (Demirag and Tylecote 1992). Although it failed, this bid set off a demerger and obedience to the normal rules and pressures of the British system. These took British chemicals firms from relative strength to relative weakness in barely a decade; a weakness whose origins become clearer when we divide these firms into listed (R&D intensity average 1.7 per cent in 2004–2005) and unlisted – mainly owned by private equity (R&D intensity 11.9 per cent) (DTI 2005). 4.7.2 Machinery Machinery, particularly medium-high technology machinery, is another area in which Swiss engagement, autonomy and stakeholder inclusion should work to their advantage. In fact most of the ‘medium-high’ machinery areas come into Pavitt’s ‘specialised supplier’ category in which long-term cultivation of close relationships with industrial customers is of vital importance – which makes engagement and stakeholder inclusion the more valuable. So we would predict that Swiss firms will heavily out-produce and out-spend the British, with American firms in between. That is precisely what we find (Table 4.9). The finding is more significant because it is relatively new. If we go back a century we find that Britain and the US were much more specialised than Switzerland in most of the machinery sectors (Vertova 2002). They had a crucial advantage: they were the two great manufacturing economies, and as such their machine-making firms would have important industrial customers close by. Moreover, at that point

The US, the UK, and Switzerland

123

Table 4.9 Machinery and equipment not elsewhere classified: US, UK, and Switzerland* United States Patenting: RTA

1963–1979 0.98

United Kingdom

Switzerland

1990–1999 0.94

1963–1979 1990–1999 1.01 0.90

1963–1979 0.73

1990–1999 1.55

Manufacturing 1992 trade balance, 2.4 percentage of output

2001 2.1

1992 1.2

2001 0.9

1992 5.6

2001 4.6

Production DTI – specialisation 2003 1.43

OECD – 2000 0.57

DTI – 2003 0.29

OECD – 2000** 0.96

DTI – 2003 2.32

OECD – 2000 2.11

R&D intensity, per cent

OECD – 2000 2.0

DTI – 2004 1.75

OECD – 2000 2.0

DTI – 2004 3.03

OECD – 2000 NA

DTI – 2004 2.30

Notes * DTI: ‘Engineering and machinery’. ** Excludes domestic appliances. ** R&D intensity: DTI mean for engineering and machinery: 2.5 per cent; OECD mean for machinery and equipment nec.: 2.15 per cent. For summary definitions, see Table 4.2 above; for full definitions and sources see Appendix.

there was nothing wrong with their corporate governance from the point of view of machinery – in Britain, notably, the great age of family capitalism was not over. Even for 1963–1979, our patent data shows them still ahead.13 As the founding families lost interest in British firms, British machinemaking declined, and it declined further when disengaged shareholders gained indirect control. Swiss families, like the Sulzers, held on, and the competitive situation moved in their favour: from the 1950s the Continental European market boomed, and trade barriers declined. Their small home market scarcely mattered any more. Developments in the United States, as usual, were more diverse. Forrant (2002) tells a story of decline of the US machine tool industry which is much like that of British machinery generally. Interestingly, this industry was concentrated in New England, a region more English than most in its culture, and one of old industry in which family capitalism had certainly had time to fade. Machinery generally in the United States is concentrated in the mid-West,14 a region with strong German and Scandinavian influence and with apparently stronger family capitalism. A machine-making firm in a small mid-Western town many miles from a large centre of industry can, moreover, easily develop a degree of employee inclusion: the firm and its employees need each other. The DTI figure for production specialisation for the US shows that such firms – now internationalised – are still strong; but the Swiss firms are, proportionately, stronger. The DTI figure for British firms is extraordinarily low, given their proud past; but what can one expect, given that for such a sector, Britain has the worst finance and corporate governance system imaginable?

124

The US, the UK, and Switzerland

4.7.3 Automotive The motor vehicles sector is a scale-intensive one which Switzerland was never in a position to enter, given its small home market. The United States, on the other hand, as everyone knows, once completely dominated this industry, with their greatest automotive innovator, Henry Ford, giving his name to a whole system of production. His firm and its great rival, General Motors, had established an extensive network of foreign subsidiaries by the end of the 1920s. What is less well-known is that the UK was once second only to the United States in this industry; indeed, during the 1950s the UK industry (including US subsidiaries) was the greatest car exporter in the world. The decline of the British-owned car industry cannot be blamed on indirect control, because it took place earlier, in the 1960s and 1970s, when entrepreneurial control had given place to management autonomy, without any substantial intervening period of family control. The changing fortunes of the British (and US and German) car industries during the 20th century are described and explained in Tylecote and Vertova (2007). The ‘Fordist’ system of production followed F.W. Taylor’s principles of strict management control over the production process, with minimal worker initiative. No British management (even in Ford and GM’s subsidiaries) ever succeeded in enforcing this system for very long. In the face of strong unions, management control was always precarious – maintained by forceful entrepreneurs like Morris, but quickly lost by the professional managers who succeeded them, and the industry soon become notorious for bad industrial relations and indiscipline. The components firms, in which the assembly line played less of a role, weakened more slowly. The position of management in the US automobile industry was always stronger, and it was defended with more determination. Families did what American families often do: held onto power. The Ford family, as we have already seen, maintained its controlling shareholding, and used it. The du Pont family only gave up its control of GM when it was forced to in 1957. ‘Fordist’ control of the labour process was maintained, in the face of union opposition: this was more effective than British indiscipline, but it involved employee exclusion which became an increasing disadvantage as rivals in other countries showed how to use manual workers’ initiative without sacrificing management control (Tylecote and Vertova 2007). By the 1980s, as we see in the next chapter, stakeholder capitalism provided very much the best basis for success in the motor industry, and US firms, as well as the US as a production location, began to weaken quite rapidly, although they did not go down without a fight, as the patenting figures in Table 4.10 suggest.

4.7.4 Telecommunications services: the Vodafone case This is the only place in the country chapters where we shall mention telecommunications services, owing to lack of data. We do so here, only to mention one firm, which fits neatly into our argument. We argued in Chapter 2 that there was

The US, the UK, and Switzerland

125

Table 4.10 Automotive: US, UK, and Switzerland* United States

United Kingdom

Switzerland

Patenting: RTA

1963–1979 0.93

1990–1999 0.75

1963–1979 1.40

1990–1999 0.97

1963–1979 1990–1999 0.56 0.74

Manufacturing trade balance, percentage of output

1992 –3.1

2001 –3.2

1992 –0.5

2001 –2.0

1992 –3.9

2001 –3.6

Production specialisation

DTI – 2003 1.54

OECD – 2000 0.99

DTI – 2003 0.11

OECD – 2000 0.66

DTI – 2003 NA

OECD – 2000 0.05

R&D intensity, per cent

DTI – 2004 3.64

OECD – 2000 4.3

DTI – 2004 2.19

OECD – 2000 3.1

DTI – 2004 NA

OECD – 2000 NA

Notes *R&D intensity: DTI mean for ‘Automobiles and parts’: 4.3 per cent; OECD mean for ‘motor vehicles, trailers and semi-trailers’: 3.68 per cent. For summary definitions, see Table 4.2 above; for full definitions and sources see Appendix.

or had been a particularly high need for reconfiguration in mobile telecoms – for service firms as for manufacturing ones. This might argue for starting new firms from scratch. However, there were existing technological competencies in telecommunications which would, in themselves, be a great advantage for a mobile telecoms firm. There were, on the other hand, entrenched ways of working in existing telecoms firms – ‘core rigidities’, to use Dorothy Leonard-Barton’s term – which would be a great disadvantage. A firm that could start off with the one but not the other would be in the best position. This would mean taking those with the appropriate competencies in an existing firm and turning them loose; not a manoeuvre with which most top managers, or controlling shareholders, would be comfortable. However, in Britain in the 1980s the American mantra of maximising shareholder value, to be achieved by demerger if necessary, was quite thoroughly absorbed in the financial and corporate governance system. There were, compared to the US, fewer entrenched managers, or controlling shareholders, to resist it. What followed was, then, entirely in tune with the system, although of course not inevitable. The British defence electronics firm Racal had a unit that specialised in battlefield telecommunications and, accordingly, was up to date with technological developments in mobile telecommunications. The managers of this unit persuaded its superiors to allow them to bid for the first civil mobile telecoms licence. As their civil business grew, those superiors made the right responses: the civil and military operations were separated, and the civil unit became a subsidiary in 1984, and was spun off into complete independence, as Vodafone, between 1988 and 1991.15 Since then it has been a ‘pure-play’ mobiles firm, unlike any of its main rivals, mostly part of the fixed-line firms which set them up – except for Mannesmann, which was still largely an engin-

126

The US, the UK, and Switzerland

eering firm when it was acquired by Vodafone in 2001. Its exclusive focus on mobiles has served it well, and it has been highly profitable, without needing to spend very heavily on R&D (0.4 per cent of sales in 2003–2004, for example): an ideal proposition for the British corporate governance system.

4.8 Conclusion We showed in this chapter that the differences between the two ‘outsider-dominated’ or ‘liberal market’ economies, the US and the UK, were even deeper and wider than we had previously indicated. Notably, the financiers providing the ‘outsider’ pressure (and finance) showed more industrial expertise in the United States. We showed also that Switzerland had some striking similarities with the United States – in the absence of ‘disengaged’ indirect control – while being nonetheless in some other respects different from both the US and the UK. The three countries turn out to be diverse in terms of specialisation, and their differences in finance and corporate governance explain a good deal of this. The one sector in which they are all strong is pharmaceuticals, which is the high-tech sector most tolerant of British ‘disengagement’. Aerospace is not tolerant of disengaged indirect control, and British strength here turned out to be partly explicable by deviant corporate governance – golden shares – while Swiss weakness is simply due to history. The exceptional qualities of US finance – particularly venture capital – help to explain why it alone is strong in the ICT areas. For medium-high-tech sectors we argued that disengaged indirect control and stakeholder exclusion gave Britain the ‘system from hell’, and indeed the position of British firms is weak and has worsened, in all of these sectors. The weakening is very recent in chemicals because that system was only recently extended to it. In the relevant respects, Switzerland has been the most different from Britain, and it is the strongest of the three in medium-high tech sectors – apart from motor vehicles, from which its small home market excluded it. Overall, there is a stark contrast between Britain on the one hand, and the United States and Switzerland on the other. The British system of finance and corporate governance, as it has been since the 1980s, has shown itself in its normal working (i.e. without golden shares) incapable of supporting innovation up to world standards in British-based firms, with the exception of pharmaceuticals and recently ‘ventured’ firms in the newest sectors. The American and Swiss systems have both done far better, though unevenly. Unfortunately, supporting innovation in US- and Swiss-based firms is not the same as doing so in the US and Switzerland. As is the nature of shareholder capitalism, the US and Swiss systems have not put any pressure on ‘their’ firms to keep the activity generated within their borders – although family firms can choose to be loyal, like Hoffman-LaRoche to Basel (Bärtschi 2004). The shrinking of manufacturing industry in the US, and its huge trade deficit, is partly due to that. So is the (lesser) de-industrialisation of Switzerland (Bärtschi 2004).

5

Corporate governance, finance and innovation in Japan, Germany, and Sweden

5.1 Introduction Germany and Japan, as we saw in Chapter 3, are the two great standard-bearers of stakeholder capitalism, albeit in different ways: one largely through law, the other mostly in spite of it; one with relations organised largely at sectoral level, the other with cooperative relationships across sectors. They have also differed for some time in ownership and financing patterns. In this chapter we shall show briefly how these differences arose, and at more length how they contributed to the longstanding differences in technological performance and specialisation. We shall also show how Sweden belonged with them, 50 years ago, as a stakeholder capitalist country, but how it subsequently moved in the direction of shareholder capitalism (much more American than British) – and how this affected its performance and specialisation.

5.2 Germany: how stakeholder structures developed Much as in the United States, the German corporate governance system at the beginning of the twentieth century consisted of family capitalism supplemented, so to speak, by a small number of large firms that had expanded with the help of bank loans and/or bank-sponsored share issues. As Jeidels (1905) showed, Germany’s dual board system of corporate control, unique at that point, had been developed largely to give the big banks good arrangements for oversight. It was not until the 1970s that bank influence in German industry began to wane. The banks survived the Crash in good shape: indeed this and other recessions rather tightened their grip, as insolvent firms conceded share stakes to them in return for loan forgiveness. But the balance between bank and family power was not a zero-sum game: a family that wanted to maintain control of a fast-expanding firm might well prefer bank loans and even a bank share stake to exposure to the dangers of external equity capital via the stock exchange. Where Germany was relatively weak, until the 1940s, was in the tiers of banks below the Big Three (Deutsche, Dresdner, Commerz) which could nurture smaller family firms. In the late 1940s, the Federal Republic set up two networks of banks, both publicly owned, at the provincial (Land) and municipal levels. While recession had

128

Japan, Germany, and Sweden

increased banks’ share stakes, the post-war boom increased existing firms’ dependence on them for loans – and produced a new crop of entrepreneurs who needed their loans most of all. Just as banks and families could coexist as sources of power, so (it turned out) employees could coexist with both of them. In the acute social tensions following both world wars, with widespread industrial strife and the threat of worse, democratic governments saw the best hope for harmony in ‘codetermination’ (seats for employee representatives on supervisory boards) plus strong works councils. Managers and owners accepted them as a lesser evil. They found that family firms could accommodate themselves to employee influence. It turns out indeed, that the two stakeholders have strong interests in common: they both tend to have a long-term attachment to the firm, and so family owners (or managers with their support) can make long-term commitments to the workforce that they can be trusted to keep. The harmony of interest among family firms in Germany was even more easily perceived and realised. The guild tradition of organisation by sector was never broken, and was built on both by government initiatives and by those of the firms themselves. Employers’ associations, for example, remained dominant in German wage bargaining – and in training – long after they had withered in Britain and the United States. Trade associations were also active. Clearly banks with interests across an industry would encourage the firms in it to cooperate in this way. Crossholdings must also make for cooperation. Among listed firms, as we saw in Chapter 3, there has been a high degree of crossholding, and of interlocking directorates. The dynamic tensions of German stakeholder capitalism began to ease as the post-war boom went on. Big firms (in particular) were inclined to repay their loans; and once they were no longer much in debt to the banks, it began to seem strange and even rather dangerous that the banks had so much power over them. Must it not undermine competition, for example, if a number of firms in one industry were under the sway of the same big bank? The banks became wary of using their votes, and proxy votes, to intervene; their legal rights to do so were circumscribed. What they did not do – at that stage – was to shed their holdings. The German banks’ share of total shareholdings was still, as of 1996, over 50 per cent higher than in 1960: 12.3 per cent against 8 per cent (Woczik 2002). It must have become increasingly comfortable for management to have large friendly bank shareholders to help protect them from the demands of other shareholders. Schmid (1996) found a positive relationship between equity positions of German banks and firm performance in a 1974 sample, but none in a sample for 1985. Meanwhile, the bank-financed family-owned medium-sized firms, the Mittelstand, remained remarkably unconstrained by finance (Table 5.1). Nonetheless, even German families showed that their Sitzfleisch (sticking power) was not indefinite, and began selling out. In many cases, as in Switzerland, big firms with business connections to them, protected the relationship by buying a stake – if they did not buy the whole firm. The seven biggest corporate shareholders held, as of 2001, 80 per cent of the 40 per cent of the market

Japan, Germany, and Sweden 129 Table 5.1 Ranking of ‘lack of appropriate sources of finance’ as a factor hampering innovation, 1990–1992* Employees

Belgium

Denmark

Germany

Spain

Ireland

Italy

Norway

20–99 100–249 250– 499 500+

5 4 5 4

3 5 4 4

2 8 12 7

2 2 3 2

2 4 5 12

2 3 3 3

5 9 7 9

Source: own calculations on CIS database. Eurostat (1997). Notes * The question asked to the managers was the following: if any of the list of difficulties hindered the realisation of innovations in your enterprise during 1990–92, please indicate its relative importance to any of your innovative activities. Scale: 1 = insignificant; 2 = slightly significant; 3 = moderately significant; 4 = very significant; 5 = crucial. The 18 factors were then ranked in order of importance by Eurostat (1 = most important) and this table reports the ranking of ‘lack of appropriate sources of finance’.

capitalisation of Germany’s 460 largest companies that was tied up in crossholdings (Woczik 2002). The journalist Guenther Ogger (1994) painted a scornful picture in Nieten in Nadelstreifen (Drips in Pinstripes) of a bunch of oldish men sitting on each others’ boards and scratching each others’ backs. Put more politely, there is every indication of a high level of management autonomy in big German business by the 1990s (Hackethal et al. 2005).

5.3 Japan: how stakeholder understandings developed Family capitalism in Japan was strong until the 1940s. During the early twentieth century Japan developed a dual economy in which large-scale activities were almost all undertaken by the great zaibatsu conglomerates, each under the control of one or two families. Perhaps the key difference from Germany was that each zaibatsu had a bank within it, equally under family control (Morikawa 1992). Some non-zaibatsu family firms – like Matsushita and Toyota – grew from small beginnings early in the century to substantial size by the end of the 1930s. By that point the initial emphasis which Japanese capitalism, and the government, had placed on liberal market rules had been modified. Some large firms had found it convenient to build long-term relationships with their more important suppliers and their more important employees, and to draw on Japanese tradition to some extent in doing so. The 1940s and early 1950s, however, brought a transformation. The American occupation authorities broke up the zaibatsu into their component parts and did their best to confiscate family shareholdings and eliminate family control. Later, the component firms came back together, but as kigyo shudan, industrial groups bound together by reciprocal shareholdings: the family control was gone (Dore et al. 1999). The history of family control in other large firms has been varied. Japanese tradition insists that a firm is a community, and as such can only (in normal times) be controlled from within. There is therefore no legitimacy for control by

130

Japan, Germany, and Sweden

a family which leaves management to others. Many founding entrepreneurs, like Soichiro Honda, were happy to give up a controlling shareholding for themselves and their heirs, in order to accelerate the firm’s growth (Matsumoto 1983: 211). Some large firms have therefore passed abruptly out of family control after the death of the founder – Honda, for example. On the other hand, a family that is willing to manage – like the Toyoda family in Toyota – is able to do so with a small shareholding.1 The other ‘stable shareholders’ – financial institutions and other firms – give support, if only by protecting the firm from takeover. Small and medium enterprises are of course another matter. As in Germany, a myriad of SMEs grew up during the post-war recovery, and in these the controlling family is still in its second or third generation, and still often very much engaged. But clearly, as we concluded in Chapter 3, the extent of family control, and the determination to maintain it, is much less than in Germany. Strong management autonomy, on the basis of reciprocal, ‘stable’, shareholding, is the rule. As in Germany, the recovery depended heavily on bank lending, both by the ex-zaibatsu banks, mostly within their groups, and by the ‘city banks’, which lent mostly to small and medium enterprises in their areas.2 What was different was that there was no corporate governance structure through which banks could – or at any rate, did – exercise influence systematically (Hanazaki and Horiuchi 1999). Nonetheless, ‘Japanese banks monitor more actively than other countries’ (Corbett 1987: 45) and this was the more true during the period of very high borrowing up to the 1970s. There would be a dramatic change if the borrowing firm got into difficulty. At that point the ‘main’ bank at least would start to act like a major shareholder. For the duration of the emergency, the bank would put in one of its employees as a (full-time) top manager of the firm – if the size of the firm, the size of the loan, or the ‘social importance’ of the firm was big enough to justify the trouble. It would then act strenuously to avoid bankruptcy if at all possible. The behaviour of the main bank during a crisis means that bank loans to large firms are partly, in effect, equity. The risk attached to heavy borrowing is not as great as would be the case for a British or US firm – and indeed the rate of interest charged and paid during normal times is higher than the market rate, to compensate for the ‘downside risk’ (Corbett 1987). The legal structures of corporate governance made even less provision for employee representation – no codetermination or works councils. The modus vivendi between the core employees and management was worked out within each firm, yet the forces driving it were much the same as in Germany – the reality of industrial strife, and the fear of worse. What was conceded to the core employees was commitment and representation: commitment to treat them as permanent members of a community, which would rather accept a cut in profits than fire them; and representation by a company union whose views would be taken very seriously by top management. The firm gained because the commitment was mutual, and because management infinitely preferred the company union to the left wing ones, which had terrified them in the late 1940s (Dore et al. 1999).

Japan, Germany, and Sweden 131 The lifetime employment/company union system covers only a small minority – some 10 per cent – of the Japanese labour force. Equally important are less formal understandings and commitments in medium-sized, non-unionised enterprises. As in Germany, family ownership and control means that such commitments can be meant and met. As we saw in Chapter 3, Japan comes top in the average length of employment of male employees – ahead of all the countries that have much stronger legal protection against dismissal. But what is most remarkable is the length of tenure of managers. While only 18.5 per cent of US top managers lacked working experience in other firms, and 28.3 per cent of German ones, 81.5 per cent of Japanese top managers lacked such experience (Waldenberger 2004 citing Sato, 1998). While German managers move quite freely among the firms in their sector, Japanese managers generally do not even move to other firms in their group, let alone to rivals. Even in ‘normal’ times Japanese (and German) managers’ remuneration is as closely tied to the firm’s performance as in the US (Kaplan 1997). (The stock options that are supposed to ‘align’ managers’ incentives with those of shareholders in the US are less effective, by contrast: managers can sell their options in good time and walk away.) They, like the whole ‘core’ labour force, are – in a real sense – owners of their firms: for a Japanese manager the decline, let alone collapse, of his firm would be disastrous. So although managers have strong autonomy from shareholders they are as a group still bound to their interests in the sense that they too need rising profits for many years ahead. As in Germany, stakeholder inclusion also applies to relationships among firms: informal, highly personalised among smaller firms, cemented by crossholdings among larger ones. The main difference from Germany is that interfirm cooperation is less at sectoral level – no common arrangements for training or wage bargaining, for example – and more between suppliers and customers even in different industries, brought together either by local links or by those of the kigyo shudan ‘horizontal groups’ (Waldenberger 2000). Every horizontal group includes a bank.

5.4 Sweden: stakeholder capitalism gained and largely thrown away A peculiarity of Sweden, compared with our other ten countries, is that it is a large, thinly-populated country with very large quantities of certain raw materials from which key downstream industries were developed – notably iron ore (no longer important) and timber (which remains important). This was only possible because the firms at various points on the production chain – raw materials producers, processors, machinery manufacturers – worked very closely together, in clusters of related firms. ‘Within such clusters, Swedish firms have very frequent and close business contacts, with buyers and suppliers, firms in related industries, and also with competing firms. These dense networks facilitate the flow of information and promote innovation’ (Solvell et al. 1991: 216).

132

Japan, Germany, and Sweden

The close relationships among firms are not unlike Germany’s; and not by coincidence, since German influence was strong in the early years of Swedish capitalism, indeed up to the 1920s. Family firms blossomed, and the largest and fastest-growing of them depended heavily on close relationships with banks. They cooperated closely with others in their sector, and their employers’ associations clashed sharply with the strong and growing union movement. There were crucial developments in the 1930s: the Slump and the Krueger scandal convinced government that the bank–industry relationship must be controlled, and not be allowed to be too close – bank shareholdings in industry were forbidden, for example; although it turned out later that these restrictions could be largely evaded. More important was the arrival in power of the Social Democrats in 1932. They were (in effect, although not formally) the party of the unions, and from then on for 60 years, capitalism in general and family capitalism in particular existed on sufferance. On the face of it capitalism was not under threat. State ownership of industry (or banks) was not part of the Social Democratic plan, and was only resorted to in the crisis years of the 1970s. It was capitalists, and their capital, that were threatened. Personal income and personal wealth were subject to steeply progressive taxation. The very rich were able to put their shareholdings into foundations that were partly protected from taxation, and to protect themselves from it if they were prepared to live abroad. Profit recycled into investment was much less heavily taxed. The effect was to favour large firms over small, and reinvestment within large firms against investment into fast-growing small firms. If wealth was to be taxed away, who was to own industry’s capital? The answer from the 1970s onwards, was the ‘wage-earners’ funds’: the pension funds of the population at large – with the threat that if, as the Social Democrats proposed, they were statecontrolled, this would be a sort of back-door nationalisation. For a time – let us say very roughly for 30 years from 1940 – it was possible to contain these pressures within a stakeholding compromise. The powerful unions had their say within industry through various mechanisms including board membership. The State completed the trio of ‘social partners’. Firms with any reason to do so, did what Swedes do best: talked to each other, reached high-trust understandings with each other.3 Among larger firms these relationships were often assisted by crossholdings and by membership of industrial groups. Miraculously (given the tax position) industrial capital remained generally under the control of capitalists. The miracle largely depended on the dual class share system, in which B shares accounted for most of the capital and A shares for most of the votes. A modest majority of the A shares gave control. But which capitalists? There was a gradual process of concentration of control, into the hands of just two groups: first and foremost the Wallenberg family group, who controlled the Skandinaviska Enskilda Bank and the Investor holding company,4 and second the Handelsbank group with its holding company Industrivärden. More and more A shares passed into their hands, and more and more firms were bought by the giants of Swedish industry – like Ericsson and ASEA – which they

Japan, Germany, and Sweden 133 already controlled (Henrekson and Jakobsson 2005). Swedish stock market capitalisation is high by Continental European standards. By the mid-1990s the two main groups controlled more than 50 per cent of Swedish industry by stock market capitalisation – with a far smaller percentage of its total equity capital in their hands. The families who kept control of family firms did so mostly from abroad, safe from Swedish taxation. Meanwhile the B-class shares that made up most of big firms’ capital but a minority of the votes, were being picked up by domestic and foreign pension funds: so the pattern of ownership of Swedish industry was becoming increasingly Anglo-American, even though the control structure of most of it was becoming, if anything, less so. Stakeholding capitalism requires intimacy, real engagement on all sides. The controlling capitalists were becoming too distant for that, their interests too diverse. The problem of distance rapidly worsened during the 1980s, as many of the Swedish giants went on something of an international acquisition campaign. It is significant that they were able to do this without Investor or Industrivärden losing control. Technically, the explanation is that they were able to pay with (low-voting) B shares. The fact that the B shares were acceptable reflects the open, high-trust nature of Swedish society: US and other foreign investors felt comfortable with Swedish insider-controlled firms, as they would not have done with (for example) Italian ones. There is no danger, given Swedish law and custom, of the ‘expropriation’ of minority shareholders by controlling shareholders;5 and new principles of good corporate governance like the separation of the chairman’s role from the CEO’s, are old in Sweden (Adolfsson et al. 1999). But much of the capital came from the pension funds, which accounted for a large and growing share of Swedish equity capital. The effect of the ‘acquisition campaign’ on the firms involved was varied.6 It was the effect on Swedish capitalism that was definitely negative. The relationships and understandings among stakeholders that develop over time within a particular national culture and within a restricted geographical space, cannot be replicated globally: a difficulty which (as we see below) now besets all those stakeholding capitalisms coming to be dominated by globalised firms.

5.5 Stakeholding capitalisms compared It is ironic that, of the three stakeholding capitalisms we compare above, it is in the one where the employees have been most strongly organised that stakeholder power, and with it the employees’ own inclusion, was most early and most thoroughly undermined. The Swedish unions used their political power to destroy – or drive offshore – the family ownership that was employees’ natural stakeholding partner. The dual class share system, which allowed two groups to maintain an increasingly precarious and disengaged version of family control, served as the basis for early globalisation – fatal for employee inclusion, and tending to exclude other stakeholders too. Germany and Japan, much larger countries, could develop major exporting and even multinational firms without (at first) undermining the dense networks

134

Japan, Germany, and Sweden

Table 5.2 Characteristics of stakeholding capitalisms, late 1980s

Main levels of inclusion (employee and other) Basis of employee inclusion Internationalisation of industry Extent of family ownership/control Crossholding Bank shareholding in industry Bank lending to industry Bank directorships in large firms

Japan

Germany

Sweden

Firm

Firm and sector Firm and sector

Formal (10 per cent); Legal informal Moderate Moderate

Legal

Very low/low

High/high

Low/high

Very high Substantial

High Substantial

High

Moderate

High Illegal; via investment companies substantial Very high

Only in crisis

Normal

High

In effect normal, via investment companies

of related firms at the core of their economy. Nor did their tax systems discriminate so harshly against entrepreneurs, let alone attack private wealth in general. So while Swedish unions, on the face of it, maintained their power – codetermination rights etc. – they were increasingly talking to managers neither willing nor able to do the old sort of deal with them. Nothing so dramatic had happened to German or Japanese capitalism by (say) the early 1990s. German employees had a formidable apparatus of legal rights to codetermination in the broadest sense; and in addition to that their unions had close bargaining relationships at sectoral level with the employers’ associations responsible for agreeing pay rates and training regimes. Japanese employees had no such legal rights, and formal representation only in large firms for core employees, but strong informal understandings in smaller firms. The German Mittelstand of small and medium family-owned enterprises, and its Japanese equivalent, were still vigorous. There was a great deal of shareholding by firms in related firms, and the directorships to go with it. Table 5.2 sums up.

5.6 Corporate governance and technological advantage: what would one expect? How would the three ‘stakeholder capitalisms’ (if we can still give Sweden that label during the 1980s and early 1990s) then compare in terms of the requirements we put forward for governing technological change? Of industry-wide expertise sufficient for the needs of reconfiguration, there is little evidence in Japan or Germany. Controlling families, strong in both countries, knew their own firm and its existing technologies and markets. The technological expertise that German banks once had had, and used, was little more than a memory, and their habit of intervention in industry is going the same way.

Japan, Germany, and Sweden 135 Japanese banks had never had a controlling role in industry, except during crisis. Japanese horizontal industrial groups, held together by reciprocal shareholdings, were and are cross-sectoral – and in any case seemed to involve managers’ mutual protection rather than real governance. Swedish banks had long had some industrial expertise, but only had a corporate governance role through investment companies linked to them. It is the two great Swedish investment companies, Investor and Industrivärden, that showed industry-wide expertise, as well they might, given their overview of the economy. There are many examples of the Investor group (in particular) having played an important role in accelerating the restructuring of firms and industries. The two investment companies made intelligent use of outsider pressure: as Johansson (2002: 56) puts it, ‘the controlled companies are usually listed on the stock exchange. The stock market has been viewed as an important instrument for external evaluation and control’. The recent rise of Swedish venture capital offers an alternative route to complete reconfiguration; so might the strength of Japanese ‘venture capital’, even though (as we mentioned in Chapter 1) it has been available within industrial groups rather than for entirely independent firms. There has been some constraint from the employee side in all three systems: in German and Swedish firms, management power visà-vis the workforce has been limited by codetermination (more in Germany), by union power (more in Sweden) and to a lesser extent by regulation. In Japan, the sense of the large firm as a community with strong obligations to the (permanent) workforce, has inhibited management. High opportunity is in most ways a less severe test than reconfiguration of the finance and corporate governance system. We argued in Chapter 1 that the simplest way for enough finance to be available (and acceptable) would be for established profitable firms to recycle their profits into innovation – which they would be likely to do even without shareholder support, given management autonomy. In a ‘steady state’ in which past innovations are yielding adequate cash – as for example in the big pharma firms for the last decade or two – that would provide enough internal funds. But newer industries in periods of fast growth are not in such a state. One solution is a firm that spans sectors – a conglomerate, at the extreme. At some price in loss of top management focus, divisions serving mature sectors can then provide the funds for fast-growing ones. (The Dutch firm Philips’ lighting division is a well-known example.). The Japanese horizontal groups provide an interesting case of semi-internal funding. A member firm growing particularly fast would naturally look to other members of the group (including the bank, trading company, etc.) to enlarge the shareholdings they had in it. By doing so they would allow it to draw heavily on outside share capital too – while maintaining a proportion of ‘stable’ shareholdings adequate to protect incumbent management and ward off takeover. At the same time it could be borrowing heavily from banks, secure in the knowledge that to some extent the debt would be treated as equity. So the availability and acceptability of risk finance in Japan was excellent for established firms. This is less so in Germany and Sweden.

136

Japan, Germany, and Sweden

Engagement, leading to firm-specific understanding, must have been high among those numerous families in direct control of German and (to a lesser extent) Japanese firms. Proportionately fewer families have been in this situation in Sweden. The larger the sphere controlled by Investor and Industrivärden, the less they (and the Wallenberg family behind Investor) could be expected to engage with individual firms and managers. Bank engagement should not be seen as high in any of the three countries: at least over the last half century, it never was during normal times in Japan or Sweden, and it has been declining since the 1970s in Germany. Stakeholder inclusion was of course the forte of this group, particularly of Germany and Japan: • •

employee inclusion through codetermination in Germany and Sweden, and through company unions and informal methods in large Japanese firms; inclusion of key customers and suppliers through shareholding, sometimes reciprocal, in Japan; through shareholding, not usually reciprocal, in Germany; through shareholding and informal connections in Sweden.

Clearly the evolution of Swedish capital into multinationalised firms controlled by large investment companies complemented by international outsider capital, has been adverse to both kinds of inclusion. Management autonomy also seems strong in this group, particularly in Japan and Germany. In Japan, the horizontal industrial group probably was partly designed with this in mind, while in Germany the fading of bank control in firms with otherwise dispersed shareholdings must have increased management autonomy greatly. As for Sweden, there was certainly a considerable degree of management autonomy in Wallenberg governance: it was the practice of Jacob and Peter Wallenberg over many years to pick men they trusted to run ‘their’ companies, and let them get on with it.7 Sweden being Sweden, there were many trustworthy managers to choose from, who would not abuse the freedom they were given to spend heavily and think long (Lubatkin et al. 2005). Likewise there would have been more autonomy for managers of family-owned firms, because the families concerned lived outside Sweden in order to reduce their tax bills. On balance, the high degree of management autonomy must make for high R&D spending in all three countries. So must the high engagement and stakeholder inclusion in Japan and Germany, particularly in the typical mediumhigh technology sector. Likewise in the typical high-tech sector, the developing industry-wide expertise of the Swedish system would be favourable to R&D spending. We need to bear in mind, when interpreting or predicting R&D spending, that it is affected by specialisation, as well as affecting it. So, other things being equal, a country with a strong bias towards medium-high technology sectors (like Germany) would spend less than one with a bias towards high-tech – like Japan and, increasingly, Sweden. It is thus not surprising that, as we saw in Chapter 3, Sweden led our R&D intensity rankings in 2001, with a rapid rate

Japan, Germany, and Sweden 137 of increase during the decade. Japan was second, with a modest rate of increase (Table 3.13). Germany was sixth of nine, having been equal first in 1981. As we have already mentioned, Germany has been famous for the vigour of its Mittelstand of medium-sized family firms, and up to the early 1990s they were remarkable for their freedom from financial constraints on innovation; by the end of the century, however, their relations with banks were less close, and the commitment of their family owners rather less intense (Major 2002). Moreover, its specialisation has shifted further away from high-technology sectors, as we shall see.

5.7 The high-technology sectors 5.7.1 Aerospace The rather cumulative nature of change in aerospace, and the complex assembly process bringing a multitude of components together, would make this sector more favourable to stakeholder capitalism than any other in the high-technology areas. There is, however, the fatal problem for all three countries: none of them is a large country that was on the right side in the Second World War. Sweden was at least not on the wrong side, and made its own military planes from then on, with the SAAB company clinging to life with the help of a protected but far too small local market.8 Germany had a close political and economic relationship with two countries, France and Britain, with strong aerospace industries. It used this, with government support, to edge back into the market (see the discussion of Airbus in the next chapter). Japan had the same ambition but lacked the useful friendly neighbours. It seems so far to have made little Table 5.3 Aerospace: Japan, Germany, and Sweden Japan

Germany

Sweden

Patenting: RTA 1963–1979 1990–1999 1963–1979 1990–1999 1963–1979 1990–1999 0.13 0.10 0.73 1.08 1.38 0.56 Manufacturing 1992 trade balance, −1.0 percentage of output

2001 −0.4

1992 −0.5

2001 −0.2

1992 −0.3

2001 −0.2

Production DTI – specialisation 2003 NA

OECD – 2000 0.15

DTI – 2003 NA

OECD – 2000 0.64

DTI – 2003 0.79

OECD – 2000 0.45

R&D intensity, per cent

OECD – 2000 8.3

DTI – 2004 NA

OECD – 2000 16.7

DTI – 2004 4.52

OECD – 2000 11.7

DTI – 2004 NA

Notes DTI: ‘Aerospace and defence’. R&D intensity: DTI mean 4.9 per cent; OECD mean: 10.23 per cent. For brief definitions see Table 4.2. For full definitions and sources see Appendix.

138

Japan, Germany, and Sweden

progress. Sweden’s position is now weak: it is too small in a naturally scaleintensive industry (see Table 5.3). 5.7.2 Pharmaceuticals We saw in Chapters 2 and 4 that visibility and spill-overs were never much of a problem in pharmaceuticals, while from about 1970 competence destruction and reconfiguration did become so, particularly when biotechnology arrived on the scene around 1980. The industry must then have suited the Japanese and German systems of corporate governance less and less. On the other hand, just as competence destruction became a key problem in pharma, Sweden’s system became quite good at coping with it. It happened that until the 1960s, revealed technological advantage among the three had been just the other way about: the patent data of Vertova (2002) shows the Japanese (by their then low standards) consistently extremely strong in pharma, Germany (by its then very high standards) more than averagely strong there; and Sweden, with its quite high standards, going from decent strength early in the century to weakness in the 1940–1964 period. Yet by the end of the century Sweden had left the other two countries for dead in pharma – then lost control of both its main companies (Table 5.4). The Swedish advance was led by the ‘Wallenberg’ company Astra in the 1970s and 1980s, as it followed the new pathways-of-disease paradigm in pharmaceuticals in a close relationship with some of the best Swedish medical researchers – to such effect that it emerged in the 1990s as one of the top ten pharma firms in the world. The superior Swedish performance is reflected in patenting, the OECD statistics for production specialisation, and the manufacturing trade balance data, though not in the most recent figures for the specialisation of Swedish firms – for the Wallenbergs came during the 1990s to the Table 5.4 Pharmaceuticals: Japan, Germany, and Sweden Japan Patenting: RTA Manufacturing trade balance, percentage of output Production specialisation R&D intensity, percentage

Germany

Sweden

1963–1979 1.38 1992 −0.9

1990–1999 0.49 2001 −0.7

1963–1979 1.13 1992 +0.3

1990–1999 0.92 2001 +0.4

1963–1979 1.29 1992 +1.0

1990–1999 1.16 2001 +1.6

DTI – 2003 0.67 DTI – 2004 11.00

OECD – 2000 0.80 OECD – 2000 NA

DTI – 2003 0.67 DTI – 2004 14.92

OECD – 2000 0.74 OECD – 2000 NA

DTI – 2003 NA DTI – 2004 NA

OECD – 2000 1.35 OECD – 2000 NA

Notes R&D intensity, pharmaceuticals and biotechnologies, DTI mean: 15 per cent. Definitions and sources: as Table 4.2.

Japan, Germany, and Sweden 139 conclusion that it was time to subject Swedish pharma fully to the disciplines of the Anglo-American system, and merged Astra with the British firm Zeneca in 1999. At about the same time, its great rival Pharmacia merged with the US firm Upjohn, and neither of the merged firms is now Swedish by incorporation. Sweden’s advantage might have been expected to be greatest in biotechnology; and so it has been. By the end of the century it had more biotechnology firms per capita than any other country in the world (Barnes 2001). It was as biotechnology came to the fore in pharma that German and Japanese weakness became most pronounced. As we saw in Figure 4.1, Germany and Japan lagged behind the US and UK in making use of biotechnology in pharma. Between the late 1980s and the late 1990s, the world market share of German and Japanese firms in the bestselling medicines collapsed (Figure 4.2). German chemical/pharma conglomerates needed to reconfigure by floating off their pharma divisions, and did so late (Hoechst) or not at all (Bayer). Our British pharma informants accuse German pharma of slowness to reconfigure generally: In Germany, scientists, technologists and manufacturers didn’t have to justify their existence to anyone. This has meant that companies haven’t been able to respond quickly enough to changing needs. When the market suddenly opened up, when shareholder value started blowing through Germany, companies were not equipped enough to meet them. (AstraZeneca CFO, Ramirez and Tylecote 2004: 114) 5.7.3 ‘ICT hardware’ – the main electronics sectors This section refers as usual to, Office, accounting and computing machinery (OAC); Radio, TV and communications equipment (RTC). We described and explained the main features of the European defeat in most of electronics in Chapter 4. Telecommunications, as we pointed out, is an exceptional sector. Change was not so radical in the 1960s, 1970s or 1980s as to produce much turnover in the ranks of the dominant firms. Those established firms that were prepared to invest heavily in assimilating the relevant advances in electronics, software, and optics, were able to maintain their positions. Heavy longterm investment to maintain an established position is a forte of the German and Swedish systems, and so it is scarcely surprising that among the three European firms in the top ten in 1993 were Siemens, of Germany, in fourth place, and Ericsson, of Sweden, in sixth (Hobday and Heighes, in Dyker 1999). Given the relative size of the two countries, the Swedish specialisation in telecoms was much greater. Then came a revolution, in part of the industry – the rise of mobile telecommunications. Geography gave Sweden, along with Finland, an initial advantage: countries with large very sparsely-populated territories had more use for this innovation. Swedish Ericsson and Finnish Nokia fought for the lead in Europe – and the world. On the face of it, Nokia won, at least as of the time of writing; but matters are not quite so simple. Mobile telecoms manufacturing divides into equipment, such as base stations, sold to the service firms – and handsets, sold to

140

Japan, Germany, and Sweden

a mass consumer market. Alhough the equipment side involved quite considerable technological innovation, the marketing task there was familiar – selling to much the same industrial customers as bought the fixed-line equipment. Ericsson, strong already in fixed-line, proceeded to take and hold a leading position in mobile equipment. Where Nokia won was in handsets – the area of real revolution, where new technology combined with new customers, as with the personal computer in the early 1980s. Telecoms manufacturers were accustomed to satisfying the requirements of a rather small number of middle-aged technical experts representing their industrial customers. Suddenly in handsets they had to try to anticipate the wants and whims of millions of teenagers. That required complete reconfiguration. At the very least handsets needed to be spun off into a completely autonomous division run by people who knew about producing for a mass consumer market and had responsibility for nothing else. It was with Ericsson in the 1990s that the Wallenbergs (and their investment company Investor, which controlled Ericsson) most clearly showed their strengths and their limitations. In the early 1990s the Ericsson management asked for permission for massive long-term spending on R&D for mobiles, which for several years would seriously depress profits. Investor agreed. Its engagement with the firm, and its industrial expertise, was enough for it to appreciate the case that the management had made. Who cared if profits went down for a few years? The Wallenbergs could always wait. The outsiders who held the large majority of the B shares would care, but they did not count: they did not have enough votes to make difficulties.9 The share price would go down and then come up again – as it did. So far so good. But what Ericsson’s management did not propose was the major reconfiguration that would give handsets autonomy. Managers of large successful firms rarely volunteer for such major organisational surgery – they have to be forced into it. That was Investor’s job, but it did not do it. What did anyone in Investor know about consumer electronics, or consumer goods in general? They only owned one firm that produced consumer goods in any quantity, Electrolux; and refrigerators, vacuum cleaners and lawn mowers are really not in the same league as cellphones. Ericsson continued to give handsets nowhere near enough autonomy. Meanwhile, in the early 1990s, a struggling Finnish conglomerate called Nokia, which happened to include mobile telecoms among its disparate collection of manufactured products, was facing the worst recession in Finland’s post-war history. To survive, it reconfigured with a vengeance, ending up making little else but mobile handsets (Ali-Yrkkö et al. 2000: 4). Worse-funded but better-focused than Ericsson, it came out on top – as Ericsson finally conceded when in 2001 it put its battered handset operation into a joint venture with Sony. Siemens was even less successful than Ericsson in handsets, lacking its initial advantage and sharing its reconfiguration problem. Meanwhile, Japan was succeeding in electronics almost across the board. As Hobday (1995a) points out, the East Asian countries that succeeded in electronics started with a set of competencies in mechanical and electrical technologies which appear to be prerequisites; but Germany and Sweden had all those. As we suggested in Chapter 4, one important factor seems to have been labour costs in

Japan, Germany, and Sweden 141 the period when the electronics bandwagon really started to roll – from the 1950s to the 1970s. Japan’s labour costs in the 1950s and 1960s, like Taiwan’s and South Korea’s even in the 1970s, were a long way below those in the United States, which was initially by far the largest producer of, and market for, electronic goods; and for political reasons had no major import barriers against those countries’ goods. Japan, then the others, first inserted themselves into those electronic activities which, like assembly, were labour-intensive, and then, helped by its close relationships among firms, moved into all those linked activities where there was a degree of stability and predictability in the technology – so that one could define what competencies were needed, and develop them. It seems clear, also, that the close relationships within industrial groups made it easier to raise adequate finance – for high-opportunity areas, on acceptable terms. By the time Japanese wages were too high to allow them to continue assembling consumer product A or B, Japanese producers were firmly established on the higher ground of machinery and components for A or B. Moreover they could conveniently move their lower-technology operations to lower-wage locations nearby – first Korea and Taiwan, later mainland China. The accumulation of competencies (and capital) allowed them to challenge US firms in successively higher-technology areas of the industry – and to beat them where conditions favoured stakeholder capitalism. When and where they did not – wherever reconfiguration ruled – the Japanese advance was, as we saw in Chapter 4, sharply beaten back. We mentioned above that the Japanese point of entry into electronics was the consumer sector – then mostly radios, televisions, tape recorders – where labour costs counted most. Consumer goods, other things being equal, are not the forte of stakeholder capitalism, which excels in fostering relationships among firms, and thus favours the producers of intermediate and capital goods, who deal only with other firms. Of course electronic consumer goods are very much assembled goods, and so one might expect their producers to benefit from close relationships with producers ‘upstream’. We saw, however, in Chapters 2 and 4 that digitalisation has made arms-length relationships rather convenient – not only with component producers but even with specialist manufacturers of products designed and marketed by others. One expects Japan then to weaken in consumer electronics. In telecommunications there was no particular reason for the Japanese producers to be strong in the consumer goods part, since mobile telecoms are much reconfigured. Accordingly, while strong in telecommunications generally, the Japanese producers are quite weak in mobile handsets. Our ‘standard performance data’ in Tables 5.5 and 5.6 show how both Germany and Sweden have been weak and growing weaker in computing etc. (OAC), and Germany is weak and growing weaker in radio, television and communications (RTC). The DTI figures for specialisation and R&D in ‘IT hardware’ however pick up the success of Ericsson and related telecoms firms in Sweden, as do the figures for RTC generally. The picture for Japan in OAC and RTC is of strength across the board, but there is some evidence that the American offensive in OAC was doing Japan damage in the late 1990s: the trade balance by 2001 was negative and the more detailed patent data of Table A9

142

Japan, Germany, and Sweden

Table 5.5 Office, accounting and computing machinery: Japan, Germany, and Sweden Japan Patenting: 1963–1979 RTA 1.51 Manufacturing 1992 trade balance, +2.3 percentage of output Production DTI – 2003 specialisation ITh ITh + E&E 2.34 2.18 R&D intensity, DTI – 2004 per cent ITh ITh + E&E 5.10 5.71

Germany

Sweden

1990–1999 1.34 2001 −0.8

1963–1979 0.51 1992 −1.4

1990–1999 0.24 2001 −1.9

1963–1979 0.51 1992 −1.4

1990–1999 0.31 2001 −2.0

OECD –

DTI – 2003

OECD –

DTI – 2003

OECD –

2000 ITh 2.34 OECD –

ITh + ITh E&E 0.59 0.10 DTI – 2004

2000

ITh

2000

2000 ITh 5.10

ITh + ITh 2000 E&E 7.53 16.94 10.6

1.24 OECD –

ITh + E&E 2.13 NA DTI – 2004

0.14 OECD –

ITh

2000

ITh + E&E 16.79 NA

6.6

Notes * R&D intensity: DTI mean for IT hardware 13.1 per cent; DTI mean for IT hardware + Electronics and electrical equipment: 7.0 per cent; OECD mean: 5.27 per cent. Definitions and sources: as Table 4.2.

shows that Japan’s RTA fell sharply between the early and late 1990s. There is very little difference in Japan’s performance in the DTI data between ITh and Electronic and electrical equipment, which is largely to be explained by the difficult of assigning large diversified firms between the two categories. Table 5.6 Radio, television and communication equipment: Japan, Germany, and Sweden Japan Patenting: 1963–1979 RTA 1.17 Manufacturing 1992 trade balance, +4.6 percentage of output Production DTI – 2003 specialisation E&E ITh + E&E 2.1 2.18 R&D intensity, DTI – 2004 per cent E&E ITh + E&E 6.23 5.71

Germany

Sweden

1990–1999 1.20 2001 +1.9

1963–1979 0.64 1992 −0.7

1990–1999 0.47 2001 −1.2

1963–1979 0.64 1992 −0.4

1990–1999 1.34 2001 +0.8

OECD –

DTI – 2003

OECD –

DTI – 2003

OECD –

2000 E&E 2.1 OECD –

ITh + E&E 2000 E&E 0.59 1.1 1.42 DTI – 2004 OECD –

E&E ITh + E&E NA NA DTI – 2004

2000

2000 E&E 6.23

ITh + E&E 2000 E&E 7.53 6.65 57.66*

E&E ITh + E&E NA NA

1.49 OECD – 2000 0.8

Notes * R&D expenditure includes other classes. R&D intensity: DTI mean for electronics and electrical equipment: 5.2 per cent; OECD mean: 6.65 per cent. Definitions and sources: as Table 4.2.

Japan, Germany, and Sweden 143 5.7.4 Software and IT services We saw in Chapter 4 that the UK and US conformed quite well to the specialisation within software that one would predict from Chapter 2: they are stronger on packaged or standard software than in the rest. This is because the ‘appropriability risks’ in this area are limited, and relatively easy to guard against, particularly by patents and copyright, but that radical innovation is liable to destroy competencies. Casper and Whitley (C&W), our main source for this view of the sub-sector, have studied the German and Swedish software industries as well as the British one. Given what we know of German corporate governance, we would expect Germany to be weak in packaged software – and that is what C&W find. Only 5 per cent of their sample of German software companies are in this area (against 66 per cent of British). Enterprise software, we saw, is at the other extreme – and neatly enough, 90 per cent of German firms in their sample are in this area – against a mere 26 per cent in Britain. (This of course is the area of the mighty SAP, the largest German software firm and seventh in the world in Table 4.6.) Sweden is perhaps the most interesting case among the three countries that C&W study, for it is conventionally categorised with Germany as a ‘coordinated market economy’, as we saw in Chapter 3, and initially expected by C&W to show the same pattern of specialisation. We would not expect that, since software is a young industry and they are looking mostly at young firms, which were set up when Sweden was already a long way away from typical stakeholder capitalism. We would expect Sweden to be half way between Britain and Germany – and that is what they find in the two areas we have mentioned. Fortyfour per cent of the Swedish firms in their sample are in enterprise software; 34 per cent in standard/packaged software. There is however a third area, ‘middleware’ where Sweden is not intermediate: it is strong when both the others are weak (22 per cent of the Swedish C&W sample are in middleware against 5 and 8 respectively in Germany and UK, and Sweden has the largest concentration of listed middleware firms in Europe). Now C&W had been at first inclined to categorise this area with ‘standard’ as having radical innovation and the associated competence destruction. However, they noted an extra twist – its need for interfirm coordination. Sweden has had a firm – Ericsson – willing and able to take a strong lead in this respect. Britain has not. Casper and Whitley do not, unfortunately, look at Japan; but Berggren and Nomura (1997) do, and they perhaps find a situation perhaps more different from Germany than might have been expected. The German software producers had taken the market as they found it and chosen the part of it that suited them – the part most customised to individual firms’ requirements. The Japanese software producers were mostly operating in tandem with computer manufacturers – indeed the four largest ones, Fujitsu, NEC, Hitachi and Toshiba were computer manufacturers – and they developed a home market, of semi-customised systems bundled to hardware (mainframes or minicomputers), which did not exist in North America or Western Europe. This differentiation matched the

144

Japan, Germany, and Sweden

intense rivalry among their customers and helped to produce high switching costs and thus higher profit margins for the suppliers. It also suited the Japanese expectation that suppliers would work closely with customers. The result was that the relative importance of customised software in Japan was about 30 times that in the United States, by 1985. This led the Japanese firms down a disastrous blind alley. While they were making themselves more and more efficient customisers by developing ways to write lines of code more and more efficiently, the Americans were changing the rules by producing more and more capable standard packages – and by producing an alternative, vastly-cheaper style of customisation, component-based software, in which there were many fewer lines of extra code to write. In the mid 1990s much of the peculiarity of the Japanese market disappeared rather suddenly, and the Japanese software industry shrank. One important part of it, however, was unaffected. Embedded software, the fourth category which C&W do not examine, emerges as a Japanese forte. This type of software is necessarily bundled with the hardware: one does not choose which program to run one’s camcorder or car on. Customisation and a close relationship with the hardware producer remains a virtue. Our performance data in Table 5.7 show German weakness overall – strength in enterprise software is not enough to make up for weakness everywhere else. The OECD production data for 2000 pick up Sweden’s spurt in middleware – the DTI data does not because the firms involved are too small. The patenting data for Japan clearly reflect the strength of embedded software within the big electronics groups – but because this strength is in the big groups it is invisible in the DTI figures. The American offensive we referred to above is not visible in the patenting figures for the 1990s as a whole – but it is, in the sharp fall of the RTA (from l.36 to l.16) between the early and late 1990s (Table A9). Table 5.7 Software and IT services: Japan, Germany, and Sweden Japan Patenting: RTA

Germany

Sweden

1963–1979 1990–1999 1963–1979 1990–1999 1963–1979 1990–1999

1.09

1.21

0.43

0.30

0.72

1992

2001

1992

2001

1992

2001

NA

NA

NA

NA

NA

NA

Production specialisation

DTI – 2003

OECD – 2000

DTI – 2003

OECD – 2000

DTI – 2003

OECD – 2000

0.18

0.71

0.43

NA

0.18

1.33

R&D intensity, per cent

DTI – 2004

OECD – 2000

DTI – 2004

OECD – 2000

DTI – 2004

OECD – 2000

4.26

NA

12.01

NA

14.54

NA

Manufacturing trade balance, percentage of output

Notes * R&D intensity: DTI mean for Software and Computer services: 10.7 per cent. Definitions and sources: as Table 4.2.

0.58

Japan, Germany, and Sweden 145

5.8 The medium-high technology sectors 5.8.1 Chemicals We saw in Chapters 2 and 4 that most of chemicals – the products sold to industrial customers – could be regarded as a rather typical medium-high-tech sector. That is the position now; on the other hand, in the late nineteenth and early twentieth century, chemicals counted very much as a leading high-technology industry, alongside electricals. As such, chemicals is a thoroughly German sector – suiting Germany in its period of high-technology glory when it was a pioneer of the exploitation of science, and matching it as it transformed itself during the twentieth century into an economy best suited to medium-high technology. It merely had to hold the high ground it already occupied, and it did so in industrial chemicals, where the strong stakeholder-capitalist relationships among firms were valuable. In consumer chemicals, on the other hand, it lost ground (Tylecote and Vertova 2007); but this is a small part of the sector, and so the German performance as measured by patents and the production specialisation of firms is strong (Table 5.8). As its firms increasingly internationalised their production and sourcing of commodity products, its trade position however weakened (Table 5.8 again). Sweden in the late nineteenth and early twentieth century was, as we saw, pulling itself up by focusing on the clusters related to its raw material riches. Only one part of chemicals fitted into those clusters – explosives, for mining – and the Swede Alfred Nobel duly gave his country a dominant position in explosives. In most of the rest, Sweden has never been strong, and such chemicals industry as it now has, is dominated by foreign firms – no Swedish firm made it into the DTI Scoreboard. Japan has suffered from a serious structural problem in chemicals. The Table 5.8 Chemicals: Japan, Germany, and Sweden Japan Patenting: RTA

Germany

Sweden

1963–1979 1990–1999 1963–1979 1990–1999 1963–1979 1990–1999

0.96

0.82

1.24

1.59

0.73

1992

2001

1992

2001

1992

2001

−0.3

+0.6

1.2

0.0

−2.0

−1.9

Production specialisation

DTI – 2003

OECD – 2000

DTI – 2003

OECD – 2000

DTI – 2003

OECD – 2000

1.76

0.75

2.4

0.99

NA

0.65

R&D intensity, per cent

DTI – 2004

OECD – 2000

DTI – 2004

OECD – 2000

DTI – 2004

OECD – 2000

3.76

NA

4.97

NA

NA

NA

Manufacturing trade balance, percentage of output

Notes * R&D intensity: DTI mean for chemicals: 3.7 per cent. Definitions and sources: as Table 4.2.

0.84

146

Japan, Germany, and Sweden

relationships among large firms have been, as we have seen, mainly within the rival industrial groups – Mitsui, Mitsubishi, Sumitomo, etc. – which were each until recently to a large extent self-sufficient, ‘mini-economies’. Each group had its own chemicals firm, from which group members would buy if they could. Further, during the 1950s many medium-sized firms ventured into chemicals, encouraged by government incentives. But the chemicals industry is a scale-intensive and science-intensive one. ‘It is necessary to invest in basic research, which is the source of future competitiveness, but which also takes a long time to bear fruit. Yet the small scale of the Japanese companies means that, even if the value of basic research is recognised, they are still unable to invest heavily’. (Teramoto et al. 1994: 310). In the last two decades, the demarcation among groups has faded, and firms have been able to specialise and to supply the whole Japanese market in materials (such as semiconductors) in which Japanese firms were ‘lead’ customers. As the structural flaw diminished, the underlying advantage of stakeholder capitalism in industrial chemicals – strong relationships among firms – came into play, and the Japanese chemicals industry grew stronger, as the Manufacturing Trade Balance and DTI production specialisation data indicate. 5.8.2 Machinery As we saw in Chapter 2, most areas of machinery come into Pavitt’s ‘specialised supplier’ category, in which innovation depends on a close relationship between producers and their main customers. In fact, there is also generally an upstream relationship between the machinery supplier and its own suppliers – which may be subcontractors of components it does not care to make itself, or producers of components which it is unable to make. Machine tools has long been a key machinery sub-sector and is the one most fully examined in the literature. In his explanation of the success of German machine tool manufacturers versus American, Herrigel (1994: 120) mentions that in Germany ‘many companies did maintain trusting relations with suppliers . . . in contrast to producers in America’. They also, he argued, gained greatly from the fact that they established various collective sectoral institutions for skill development and for research. These characteristics go back a long way, and so does German success. By 1913, Germany was second in the world in machine tools production, behind the US – but first in the world in exports. The further development of German stakeholding capitalism, particularly during the late 1940s, could only help this industry. By 1970, it was first in the world in machine tool production, too. The German machine tools industry, at the height of its success, was about to get a severe shock. It was vulnerable because of the particular nature of its structures of cooperation – exclusively within the sector. The rising Japanese machine tool industry, like the Japanese motor industry, had long had a close-knit system of subcontracting that produced small vertical networks within it, but beyond that there was much more rivalry than cooperation within the industry. On the other hand, as we have seen, Japanese firms are traditionally not averse to cooperation across sectors. It was cooperation between machine tool firms and electronics

Japan, Germany, and Sweden 147 firms that produced the breakthrough into NC, then CNC machine tools in Japan. Makino Milling Machine cooperated with Fuji Tsushinki (now Fanuc) to produce the first Japanese NC milling machine in 1958, only six years after the US MIT group had developed the first one (Berggren and Nomura 1997: ch. 8). Fanuc then became the world’s leading producer of CNCs – the control devices. Further cooperation with motor firms allowed the development of a major area of CNC machine tool specialisation. By 1980, 49.8 per cent of Japanese machine tool production (by value) was CNC (B&N): 22,000 Japanese CNC machine tools, against 4800 German (Herrigel). The shock was not fatal, merely bracing. Siemens emerged as a strong rival to Fanuc in the supply of CNCs, and worked closely with producers to help them adapt CNC technology to their special products. The collective sectoral institutions for skill development and for research worked strenuously to play their part. By 1986, 53 per cent of the value of German output in metal-cutting machines was accounted for by CNC (Herrigel). Not every sub-sector of machinery was exposed to such a sharp change in paradigm as machine tools, and, accordingly, Germany did better in machinery in general. Judging by manufacturing trade balance, Germany’s specialisation in machinery n.e.c. is similar to that of Japan – and highly positive (see Table 5.9). Judging by the DTI Scoreboard, which ignores the small firms common in this industry, Germany is considerably more specialised than Japan. For Sweden, the two measures give the most divergent picture. The DTI Scoreboard figures show a massive specialisation in ‘engineering and machinery’, thanks to the (mainly foreign) operations of multinationals such as ABB; but the manufacturing trade balance shows no significant specialisation in machinery n.e.c. The effect of the Table 5.9 Machinery and equipment not elsewhere classified: Japan, Germany, and Sweden Japan Patenting: RTA Manufacturing trade balance, percentage of output Production specialisation R&D intensity, per cent

Germany

Sweden

1963–1979 0.93 1992 +3.9

1990–1999 1.04 2001 + 4.1

1963–1979 0.99 1992 + 4.0

1990–1999 1.18 2001 +3.2

1963–1979 1.76 1992 + 1.0

1990–1999 1.50 2001 + 0.9

DTI – 2003 1.35 DTI – 2004 3.04

OECD – 2000 1.16* OECD – 2000 3.5

DTI – 2003 2.34 DTI – 2004 1.81

OECD – 2000 1.62* OECD – 2000 2.5

DTI – 2003 12.7 DTI – 2004 3.57

OECD – 2000 1.24* OECD – 2000 3.6

Notes * Excludes domestic appliances. R&D intensity: DTI mean for Engineering and machinery: 2.5 per cent; OECD mean for Machinery and equipment n.e.c.: 2.15 per cent. Definitions and sources: as Table 4.2.

148

Japan, Germany, and Sweden

decline of Swedish stakeholder capitalism on the smaller firms in the industry can be inferred. The disaggregated RTA figures of Table A9 provide further insight into recent trends. Between the early and late 1990s the German and Japanese RTAs were rising, the Swedish RTA falling, confirming the divergence between the systems staying with stakeholder capitalism and the system departing from it. 5.8.3 Automotive Like industrial chemicals, the automotive industry is one that thrives on close relationships among firms, since motor vehicles are, as we saw in Chapter 2, put together (assembled) from a multitude of sub-systems and components, most of which can be best made by specialists, rather than by the ‘assembling’ firms whose name goes on the vehicle. These assembling firms, whose own processes are highly scale-intensive, tend to be the largest in the chain and thus dominant. Whereas chemicals firms have their most important relationships downstream, the vehicle assemblers have theirs upstream, with their suppliers. (Many cars, and almost all trucks and buses, are sold to firms or other organisations; but the purchases are usually too numerous and too small to be the basis of close interfirm relationships.) The most conspicuous difference from chemicals, however, is the greater importance of another stakeholder, the manual employee, because the production process involves far more of them. Stakeholder capitalism, which naturally ‘includes’ employees as well as customers and suppliers, seems therefore ideal for this industry, and one therefore expects good performance from all our trio – but fading in Sweden. One is not disappointed. As soon as the elements of German stakeholder capitalism had been assembled – in the 1950s – Germany began rapidly to overtake its American and British rivals in the motor industry. By the early 1960s it had established a clear world lead in terms of productivity, and it steadily increased its specialisation in the industry (Tylecote and Vertova 2007). The German lead is greatest in commercial vehicles and up-market cars, in which high skill levels and worker initiative are more valuable than in volume cars. The Swedish producers faced from the start the problem of a very small home market. This was a particular problem during the 1920s when the US industry became scale-intensive and far more efficient than its rivals. The solutions found were typically Swedish and typically stakeholder-capitalist. The truck and bus manufacturer Scania-Vabis quit the market for standardised trucks and decided ‘to concentrate on the demand from institutional customers for heavy vehicles with special characteristics, [developing them] in close cooperation with its customers’. (Kinch 1995: 112). The challenge in cars was even harder to meet. The first to succeed in cars was Volvo, although this company was, until the 1950s, mainly a truck manufacturer. Volvo depended to the maximum on components produced by five main Swedish subcontractors and a large number of smaller suppliers. This allowed them to draw on the production experience of various established firms in an area (mechanical engineering) in which Sweden was already strong. The flow was two-way: ‘Volvo had to introduce to the Swedish

Japan, Germany, and Sweden 149 supplier firms the methods and mentality that had given the American industry its exceptional position’ (Kinch 1995: 121). The network was a very tight one: Assar Gabrielsson, Volvo’s founder, referred to ‘the smaller Volvo’ – the firm itself – and ‘the larger Volvo’, which included the subcontractors and dealers. It was on this basis that in 1947 the breakthrough into mass car production was made, with the PV 444–544, of which sold more than 400,000 units in 18 years, many to the USA. But just as Volvo was becoming a major player in the world motor industry, it began to dilute its network system, so far as component supply for cars was concerned. ‘A description of the purchasing function of Volvo from this period [the late 1950s] reveals a new production policy in which the idea of single sourcing and long-term commitments was abandoned’ (Kinch 1995: 132).10 Sweden’s position in the car market gradually faded, and there is now no Swedish-owned car manufacturing operation; but Volvo and Scania-Vabis remain strong in commercial vehicles, particularly heavy trucks. As Volvo was retreating from its network system, at least as far as cars were concerned, the little-known Japanese firm Toyota was perfecting its own – a system that not only included several tiers of component suppliers, but even related firms which did some of its own assembly (Shiomi 1995). Although there are features peculiar to Toyota, the Japanese motor industry as a whole has until recently depended heavily on rival networks of related firms. These are not the so-called ‘horizontal groups’ of large firms (kigyo shudan) which we referred to in the discussion of the chemical industry, but ‘vertical groups’ in which there is a dominant assembling firm to which all the others are very much subordinate. On the face of it, there was essentially the same flaw in these groups as in the others: if Toyota’s suppliers produced only for Toyota, and Honda’s for Honda, and Mazda’s for Mazda (etc.), how could they (at least when each dominant firm was quite small) reach an economic scale of production? Why were the Japanese auto firms not trapped in the same vicious circle of small scale and inefficiency as the chemicals firms? The Ministry of International Trade and Industry (MITI) thought they would be, and so tried persistently through the 1950s and 1960s to consolidate the industry into two or three firms, each specialising in a single size segment of the market (Altshuler et al. 1984: 31). It failed completely; yet its prophecies turned out completely wrong. There were two key differences between auto and chemicals. One was that with cars at least, the dominant firms were selling mostly to individual households, not to captive inter-group markets – so the strong could easily become larger and stronger. The other was that the Japanese firms changed the rules of the game by introducing equipment based on numerically-controlled and computer numerically-controlled machine tools – developed for the American aircraft industry in the early 1950s. These could be reprogrammed to switch from one model of car (or type of component) to another, and thus permitted short production runs. In the end – in the 1980s and 1990s – the dominant firms encouraged their suppliers to sell to other firms too, thus exploiting economies of scale in development spending, but the practice of close coordination was already established. It was the basis on which Just In Time production was

150 Japan, Germany, and Sweden developed – the basis on which not simply the production process but the product development process too became the model to which the rest of the world aspired. Of course, just as in Germany, ‘employee inclusion’ was part of the recipe too. It was the basis on which quality circles and kaizen (continuous improvement) was built. By the 1990s, our three stakeholder capitalist countries had gone a long way towards carving up the automotive world between them, like the triumvirs of ancient Rome. The Germans and Swedes, having arrived first and having until recently decidedly higher wages, shared the high ground of high-value cars, and heavy trucks. The Japanese dominated the manufacture of volume cars and vans, having built up their own strength when Japanese wages and home market purchasing power were relatively low. By this time, as we have seen, their erstwhile rivals in Britain were virtually defunct, and the great US firms, huge as they still were, were hanging on by their fingertips. Other countries’ firms were apparently of little significance. But as we warned in Chapter 2, by this time the situation in the industry was moving rather against stakeholder capitalism. Globalisation was weakening inter-firm relationships. As to employee inclusion, the completion of the computerisation of the industry – CAD linked up seamlessly with CAM – left much less scope than before for manual worker initiative. This was clearly recognised by 1995, within Toyota: Electronics and robots have become black boxes for kumicho and hancho [first line foremen and team leaders], they are only open for production engineers. The attitude of production engineers vis-à-vis the kumicho and hancho is ‘don’t touch it’. (Production and personnel managers interviewed in a Toyota group company on a plant visit in 1995; Berggren and Nomura 1997: 117.) Table 5.10 Automotive: Japan, Germany, and Sweden Japan

Germany

Sweden

Patenting: RTA

1963–1979 1990–1999 1963–1979 1990–1999 1963–1979 1990–1999 1.12 1.32 1.26 2.01 1.45 1.45

Manufacturing trade balance, percentage of output

1992 +8.6

2001 +8.6

1992 +3.2

2001 +4.1

1992 +2.2

2001 +0.6

Production specialisation

DTI – 2003 1.64

OECD – 2000 1.01

DTI – 2003 2.58

OECD – 2000 1.38

DTI – 2003 0.47

OECD – 2000 1.11

R&D intensity, per cent

DTI – 2004 4.43

OECD – 2000 3.5

DTI – 2004 4.92

OECD – 2000 5.0

DTI – 2004 4.82

OECD – 2000 5.5

Notes R&D intensity: DTI mean for Automobiles and parts: 4.3 per cent; OECD mean for motor vehicles, trailers and semi-trailers: 3.68 per cent. Definitions and sources: as Table 4.2.

Japan, Germany, and Sweden 151 The stage was set for an attack on the triumvirate, at least as regards volume cars, from an unexpected quarter (see next chapter). But this is too recent to affect our data, which show them in a dominant position (Table 5.10). Note Germany’s greater specialisation in terms of both patents and production, which in a sense reflects her weakness in ICT hardware as much as her strength here. Sweden’s slippage in trade and DTI under-specialisation reflects the growing weakness of her car manufacturers. As with machinery, the disaggregated patent data of Table A9 confirm the trend of divergence, during the 1990s, between the two countries staying with stakeholder capitalism and the one departing from it. The rise in Germany’s RTA from 0.99 in 1963–1979, through 1.70 in 1990–1994, to 2.30 in 1995–1999, is particularly striking.

5.9 Conclusion Of our three ‘stakeholder capitalist’ countries, it is Germany’s specialisation – overwhelmingly and increasingly in medium-high-tech sectors – which conforms by far the best to the predictions of the varieties-of-capitalism school; as that school has already pointed out. Sweden’s used to conform rather well to that pattern, too, but has moved away from it; which is in accordance with its early movement away from stakeholder capitalism towards shareholder capitalism. It is Japan which, as we pointed out earlier, does not fit well, being very strong indeed in the two main ICT manufacturing sectors, and strong in some important parts of software. Our framework explained the difference – showing how the strong cross-sectoral relationships among (and sometimes within) Japanese firms helped to provide the finance, and the competencies, required in the more predictable parts of these high-opportunity sectors. While they have increasing differences in specialisation, the three more-orless stakeholder-capitalist economies continue to have a great deal in common in terms of behaviour and performance. This is not apparent from some of the overall data. As we have already seen, Germany’s overall R&D intensity has fallen further and further behind the other two, due to a move in its sector mix away from high-tech sectors. Sweden’s move in the other direction has given it an increasing lead. However, Japanese, Swedish and German firms generally spend heavily on innovation and show high R&D intensities by the standards of their sectors. This is as their stakeholders, autonomous managers and engaged shareholders (and in Sweden’s case their venture capitalists) would wish; and as their stakeholders would wish, they do a great deal of this spending at home. Their de-industrialisation is less apparent than that of the shareholder capitalist trio, and they all have, at the time of writing, large trade surpluses based on the export of manufactures.

6

Corporate governance, finance, and innovation in France and Korea

6.1 State-led capitalism – changing fast Most of the six countries we have examined so far have shown a reasonable degree of stability in their structures of finance and corporate governance, at least until the last decade. Japan’s financial structures were shaken by the deregulation of the 1980s and the crisis of the 1990s, but without rapid underlying change. Only Sweden had made radical changes by the mid 1990s. The two countries examined in this chapter also saw early radical change. This was only to be expected for South Korea, given the speed of its economic development. It is more remarkable that France’s changes were at least as radical. It is equally remarkable that (as we maintain) it should be appropriate to discuss two such different countries in the same chapter. And yet there is, from our point of view, a strong resemblance. Neither country’s history and culture show any particular stakeholding traditions or inclinations: both are decidedly hierarchical societies in which family firms will be managed to maintain the owners’ authority at all costs. Both have a tradition of a strong central state. In each, that state was confronted at some point in the twentieth century with a shattered economy, which those in power, with their countrymen’s full support, were determined to bring with the utmost speed to a position of respectable development. What were they to do? They were not foolish enough to nationalise the whole or even the bulk of the economy: they had therefore to work with family capital rather than against it.1 We shall see however that they chose different ways of doing so, and that this affected their technological specialisation and performance.

6.2 France In France, a far from left-wing government took power at Liberation in 1944, and proceeded to nationalise a substantial part of industry and a large part of the banking system. Further, it set up a Planning Commission (Commissariat au Plan) with which at least to orchestrate the actions of major firms, whether public or private. This orchestration required a cohesive network of senior managers, bureaucrats and politicians. There was already an educational elite which

France and Korea

153

received its undergraduate education at a few Grandes Écoles, headed by the école Polytechnique. The Polytechnique had been set up by Napoleon to train military engineers: it and some other Grandes Écoles now produced engineers of a very particular, refined, kind: strong in mathematics and physics but without any specific engineering competence. (More practical and applied schools, like the École Nationale Supérieure des Telécommunications, were set up later, but their graduates did not have the same status.) In 1946, the École Nationale d’Administration was created to give the elite of this elite a complementary, social science postgraduate education. Any member of this super-elite could reasonably expect to rise quickly to a high position in a large organisation – which might be in the private or the public sector, in industry or government or banking. Wherever in the French stratosphere he (it was probably he) was working at any stage, he might easily be moved to almost any other part at short notice – because his qualifications were general, and one of his most important competencies was the ability to work with others of his kind elsewhere in the network. As Soskice (1999: 104) puts it, ‘much of business co-ordination takes place through the networks of the elite of business leaders whose careers have interpenetrated public and private sectors and which include senior civil servants’. With such a well-networked elite, it was quite easy for the government to exercise influence, but it still had to give the private sector incentives to cooperate. Thus, private sector firms that expanded at the speed and roughly in the way the government wanted, would benefit from cheap long-term loans from stateowned banks, from subsidies of various kinds, and where appropriate from public sector contracts. The private tax affairs of their managers, moreover, would not be closely or unsympathetically scrutinised.2 By the 1970s, the French economy was too open for the national planning system to be of much relevance, and state intervention, or orchestration, became increasingly focused on a number of relatively high-technology sectors in which its main weapon was massive subsidy to R&D in centrally-directed sector-wide programmes – combined, as before, with public sector purchasing. State-owned banks continued to provide cheap long-term loans to favoured sectors and firms. The Socialist government which came to power in 1981 was not content with this degree of state control, and it proceeded in 1981–1982 to nationalise most of the remaining privately-owned large firms in high-technology sectors, and those others which were regarded as strategic: engineering, steel, glass, paper, metals, aluminium, chemicals, textiles, electronics and communications. In consequence, as of 1986, the government owned 100 per cent of the shares in 13 of the 20 largest companies and had a controlling block in many others (O’Sullivan 2001). During this period, more banks and financial institutions, such as the investment banks Suez and Paribas, were taken over, giving almost complete public ownership of banking and insurance (Dumontier and Laurin 2003). Scarcely had the second wave of nationalisation been completed, than a long process of privatisation began, in 1986. The trigger was the election of a rightwing government. All the 1982 nationalisations were reversed, but the privatisations of 1986–1988 also included long-nationalised industrial groups plus most

154

France and Korea

of the banking sector. After a pause during 1988–1993 (while the Left had a majority) another right-wing government sold large stakes in more firms (including Renault) – and this time, when the Left returned to power in 1997, the process continued (Coriat et al. 2007). Governments of both complexions were at first determined to ensure that the privatised firms remained firmly within the network of state coordination, and so a majority or large minority of shares went to the so-called ‘hard cores’ of stable long-term investors (families or financial institutions), and organised in networks of cross shareholdings (Schmidt 1996; Goyer 1997). The result was that, as of the mid-1990s, ‘the pattern of equity ownership reproduced the relationships that had prevailed prior to the nationalization program of 1982’ (Goyer 2001: 145–146). The decisive change came only in 1995 with the publication of the first Viénot report on corporate governance. It was decided that further share sales would be on the open market, and that even part of the existing ‘hard cores’ would be sold there too. The effect was dramatic. By 1997 foreigners – that is, mostly Anglo-Saxon institutional investors – held over 35 per cent of French stock market capitalisation (Morin 1998) and in 1998, 43 per cent of the shares of CAC40 firms (the 40 top listed firms). The loosening of the hard core system made it possible for the German insurance company Allianz to take control of Axa, which had been at the heart of one of the three financial poles, or webs of control, in the French economy. Nonetheless, that left a considerable number of large family-controlled firms (many of them old ones in consumer sectors where state leadership and subsidy were neither offered nor wanted). Families were indeed tenacious. As we saw in Chapter 3 (Table 3.8), even in 1998 64.2 per cent of 607 publicly-traded companies were controlled by families – against 5.1 per cent under state control. As of 2000, nine of the CAC40 were under effective family control, against two (Renault and France Télécom) under effective state control. Most of the rest were firms privatised since 1986: and that was where the foreign ownership was concentrated (Goyer 2001). What France always lacked were firms controlled (or at least influenced) in stereotypical German style by commercial banks. This is the more surprising since French companies up to the early 1980s were the most debt-laden of the OECD (Hancké 2001) and, as we saw in Chapter 3, they had on average high debt ratios in the 1980s. But it was the custom of the government to discount the loans of favoured firms – which could then borrow very heavily (Goyer 1997). Others borrowed much less. In neither case did banks need to play a strict monitoring role. The relationships of French managers with other stakeholders have to be seen in the context of a strongly-hierarchical system. The centralisation of control at the vertex of the organisation necessarily implied a low delegation of power towards the lower levels in the company. As for the employees, even though various means of representation exist – notably those set up by the Loi Auroux in the early 1980s (Moss 1988), no forms of effective participation in decisionmaking have developed in practice (Rogers and Streeck, 1995). As O’Sullivan (2001: 11) argues: ‘French employers have traditionally attached greater importance to the protection of their “right to manage” than their counterparts in other

France and Korea

155

nations, with the possible exception of the United States’. The industrial relations system has always been rather antagonistic and characterised by a strong distrust between the union representatives and the employers. The organisation of production was strongly inspired by the Fordist model (Crozier 1964), with many responsibilities which, in Germany, would have been held by ordinary production workers, assigned in France to the engineering function. So until recently the number of unskilled and semi-skilled workers was very high, due to the underdevelopment of the training system (Goyer 2001). Centralised control also had implications for relationships with other firms. Among large firms there was no particular difficulty, because top could deal with top. For those included in the elite networks there was of course no difficulty at all, and indeed links were cemented by the considerable crossholdings among large firms (as shown in Chapter 3, Tables 3.9 and 3.10). Likewise, in some areas (like Lyon – Lorenz 1989b) there were close relationships among smaller firms. The problems arose in the relationships between large and small. In a large firm, dealings with small firms have to be delegated to lower levels of management – who had no significant authority in France. Thus, the relationships of large companies with their smaller suppliers were not of the collaborative type. Small and medium enterprises, it should be borne in mind, were truly a lower form of industrial life. Not for them the large cheap long-term loans underwritten by the State. They were underfinanced and with much lower technological levels, which made them often little more than mere workshops of large companies (Hancké 2001). To put it brutally, they were starved in the hope and expectation that many would die or be swallowed up – for French planners the smaller companies were a nuisance, as they were considered to lack the market power and the economies of scale necessary to achieve acceptable levels of efficiency (Trumbull 2004). Only during the 1980s were the planners and the larger firms forced to reconsider their neglect of smaller firms – as French industry came to terms with the spread of Japanese-style lean production and Just-in-Time systems which demanded far more of suppliers. Now they had to be helped to achieve the quality levels necessary for this system to function. Together, the state and large firms invested in the upgrading of vocational schools and in the development of specialised training programmes for the benefit of their suppliers. It worked: the qualifications of the workforce improved rapidly (Courtois 1995) and the vast majority of SMEs succeeded in achieving good standards and qualified for the ISO 9000 (Hancké 1998). Notwithstanding these achievements, however, suppliers are rarely closely involved in product development. As reported by Hancké (1998), the design of new products is carried out in the large firms’ development departments and suppliers are specialised in the manufacturing of one or few standardised parts employed across a wide range of product models. Beginning in the mid 1990s, a new period of profound transformation appears to have driven the French system of corporate governance – or a large part of it – towards the British version of the outsider model. Most of the changes took place in formerly state-owned firms. As we mentioned above, as

156

France and Korea

privatisation proceeded, the policy of finding a hard core of trustworthy shareholders for each firm was abandoned: shares were simply sold on the open market and it was accepted that the main bidders would be pension funds – not French, because France still scarcely had any, but mostly American and British. These and other large firms increasingly accepted the principle of shareholder value, and applied it by following the Anglo-American practice of concentrating on the core business, and selling the unrelated subsidiaries.3 A similar logic led to sweeping reductions in crossholdings (Morin 1998). In consequence, more and more firms were exposed, for the first time, to a real risk of hostile takeover – for example the double bid of Banque Nationale de Paris for Paribas and Société Générale, and the bid by Total for Elf-Aquitaine, both in 1999 (Goyer 2001). Thus the increased pressure for shareholder value was self-reinforcing: by leading to reduced crossholding it exposed more managers to the market for corporate control. Another reason for the increased managerial interest in shareholder value was a more positive form of self-interest: stock options. Suddenly, with the help of legislation, stock options became popular – particularly in the privatised firms. By June 2000, 38 of the CAC40 had stock option plans for directors and managers, and the stock market value of French stock option plans was 40 times bigger than that of their German counterparts (Goyer 2001). So France now had an American means for getting managers to commit themselves to shareholder interests – or pretend to do so while enriching themselves. Less thoroughly, adopted an American means to get a similar commitment from those below them: employee shareholding. Privatisation during the late 1990s always involved a substantial allocation of shares to employees: for example, in BNP, after the privatisation of October 1993, employees’ ownership accounted for 6 per cent and in Elf Aquitaine, after February 1994, for 4 per cent (Schmidt 1996).4 In parallel with the transformation of corporate governance went a transformation of the financial system. As the state divested itself of ownership and control of the banks, French industry ceased to depend on bank finance. A range of specialised financial markets was developed to provide every sort of direct finance, replacing the intermediation of the banks (Coriat et al. 2007). The United States example was followed also in the determined moves to develop the venture capital market,5 the lowering of administrative barriers to new firm formation and the creation of a new legal form for high-tech start-ups (Trumbull 2004).6 What was driving this transformation? How could the French elite choose to work by such different rules, moving in a few years from a ‘capitalism of financial networks’ to a ‘capitalism of financial markets’ (Coriat et al. 2007)? Partly at least because the character of that elite had been changing. The France of state control had been a France dominated by engineers – generalist engineers, mostly from the École Polytechnique, in control at the apex, with more specialist engineers running things, lower down. At first the École Nationale d’Administration may have done little more than give a managerial polish – and a better network of contacts – to the top engineers. But ENA recruited increasingly from ‘Sciences Po’ (the top social science school) and the new business school grandes écoles. The economics and

France and Korea

157

management learned there was very much Anglo-American. There has now been time to see, as we show below, how differently the new elite behave.

6.3 Korea The state orchestration of Korean economic growth started later than in France and even then was rather weak at first. At the end of the civil war (1953), the government adopted an import substitution policy, favouring the development of domestic production of goods, previously imported, by imposing high tariffs and often under monopoly conditions. The main aim was to foster the development of local industries, mostly in the labour-intensive sectors considered as ‘strategic’ for the development of the country. Companies in these sectors were encouraged to pursue strong export strategies through tax incentives and preferential financing (Amsden 1989). The ‘real thing’ began after General Park Chung Hee’s coup in 1961. Park decided to base his strategy for accelerated growth not on state ownership – though he set up one major state-owned firm, the steel maker POSCO – but on state support of private firms. This support led to the domination of the South Korean economy by a small number of family-controlled conglomerates, the chaebol, headed by Hyundai, Samsung and Lucky Goldstar. But those chaebol we know are the survivors of a much larger group in which the mortality was high, particularly in the early years. Where Korea differed from other developing countries in promoting big business was in the discipline its state exercised over these chaebol by penalising poor performers and rewarding only good ones. Good performers were rewarded with further licences to expand. For those entering risky industries, the government rewarded entrants with other industrial licences in more lucrative sectors, thus leading to further diversification. In contrast, the government refused to bail out relatively large-scale, badly managed bankrupt firms in otherwise healthy industries, instead selecting bettermanaged chaebols to take them over. (Kim 1993: 363) The state could award or refuse licences; it could also allow or refuse cheap long-term loans from the banks. Commercial banks were nationalised in 1961 and privatised between 1981 and 1983 (Cho and Kim 1995). Even after privatisation, they remained very much under state influence. The Korean government borrowed large amounts of money on the international markets and channelled it to chaebol, which allowed them to make large capital investments and gain economies of scale – vital in heavy industry, where they contributed very little of their own capital. As of 1983, 400 large firms, belonging to 137 chaebol, had 69.6 per cent of outstanding bank loans and 47.6 per cent of total financial institution loans. The ratio of debt to equity in the 50 largest chaebol was at least 524 per cent in 1980, 454 per cent in 1985 (Woo 1991: 170). The initial

158

France and Korea

proposals to move into new manufacturing sectors came generally from public agencies. In addition, the state took on most of the arrangements for imports of foreign technologies and competencies necessary to start operating in new sectors. To get very large bank loans required state favour, but to get export loans, which throughout the 1970s were between 6 and 16 percentage points cheaper, required strict compliance with government policy (Woo 1991: 164–165). A new phase in the relationship of government and industry began with the political and economic crisis of 1979–1980, from which the Korean government emerged under strong pressure from its IMF and World Bank creditors for financial and trade liberalisation. The bias in lending against small and medium enterprises sharply decreased, and consequently the debt-equity ratio of SMEs, less than half that of large firms in the early 1970s, was higher by the late 1990s. The chaebol, finding bank loans harder to come by, borrowed heavily from the ‘nonbank financial institutions’ which grew up during the 1980s (Wook 2004) and then from the growing bond market (Chang and Park 2004). They also increased their raising of equity on the Korean stock market (Woo 1991). It was however not until the financial crisis of 1997–1998 that their debt-equity ratios started to fall sharply, under pressure from the government, itself under pressure from the IMF. This was achieved through selling off peripheral businesses (Lee 2004). In some sense the chaebol’s extreme indebtedness, until the 1997 crisis, meant that they remained highly dependent on the government, which might be called upon at any point to bail them out. But in the early 1990s the government gave up its control of investment in large-scale industries – contributing to competitive over-investment by chaebol in a number of industries, notably semiconductors, steel and automobiles (Chang and Park 2004). As mentioned above, chaebol are family-controlled businesses. The extent of family ownership, however, fell, as the speed of their expansion made it necessary to attract a great deal of outside equity capital, as well as debt. For the top 30 chaebol, family ownership declined from 17.2 per cent in 1983 to 10.2 per cent in 1993–1996 (Chang and Park 2004: 34). In 1997, just before the financial crisis, the average ownership concentration of the controlling shareholders of the 70 largest chaebol was 17.1 per cent, and the percentage drops to 9.9 per cent, when considering the asset-weighted ownership (Joh 2003). Nonetheless, control has remained firmly in the hands of the founding families. This is achieved partly (as we shall see for Italy in the next chapter) by means of pyramids of ownership – 51 per cent of firm A which holds 51 per cent of firm B which holds 51 per cent of firm C – and similar arrangements. But even where outside shareholders have had a majority, they have been too dispersed to exercise any monitoring role (La Porta et al. 1999; Claessens et al. 2000). Opaque accounting and management prevented banks and investors from receiving accurate information. Until 1997 Korean laws protected incumbent controlling shareholders by prohibiting both hostile and foreign mergers and acquisitions; when, after 1997, this protection was removed, ‘insider’ ownership through inter-subsidiary holdings rose sharply to ward off the threat (Chang and Park 2004).

France and Korea

159

As in France, the banks are an obvious candidate for a share in control over the chaebol, given the size of their loans to them. Banks, moreover, held around 10 per cent of listed firm shares in 1997 (Joh 2001). But much as in France, their loans were guaranteed by the government or by the chaebol’s own collateral; and at bottom they were not independent agents, but servants of the government (Cho and Kim 1995; Cathie 1998). It was, then, only the state that exercised any external control over the chaebol. As in France, though to a lesser extent, it operated through networks of like-minded individuals. In the 1960s and 1970s an important role was played by ex-comrades of General Park in the corps of military engineers. Since then the alumni of elite educational institutions have played a similar role. The institution that has exercised most enduring influence, both through its own direct powers and through its alumni, is the Ministry of Finance. Many high-level positions (in chaebol, banks and other organisations) have been filled by its former staff – although they tend to be there for their lobbying value rather than as key decision-makers (Amsden 1989). Within the chaebol, power is exercised in a way reminiscent of France. As in France, the board of directors in Korean firms has traditionally played a nominal role. The owner/manager carries through the decision making process in a very authoritarian way (Whitley 1992b). Only operational and technical decisions are delegated to the lower levels of the hierarchy. Strategic decisions and the allocation of resources are taken from the top for the whole group. This means that a misjudgement of the owner or, more simply, his inadequacy to take effective strategic decisions can result in repeated mistakes and could lead to the bankruptcy of the whole group.7 This is also due to the common policy of using internal capital markets as means of financing new ventures or supporting companies in decline. Shin and Park (1999) report that chaebol make corporate investments and financing decisions as a group, rather than as separate individual firms, which means that if a decision is strategically wrong the negative consequences are not confined to a single company but affect the whole group as a domino effect. There is certainly no tradition of worker participation. Authoritarian behaviour by management towards workers has had two bases in Korea. One was the suppression of unions and the banning of strikes under the dictatorship (Jones and Sakong 1980). The other is the Confucian tradition, which demands respect and obedience towards the more senior members of a group (whether company, family, or society). Certainly in Korea, complete loyalty (or the appearance of it) to the ruler (company president, manager, the state, etc.) was accompanied by strong inequality among ranks, power and prestige (Alston 1989) and various seniority-based HRM practices (Kim and Yu 2000). There is however another side to Confucianism: it sets the goal of keeping harmonious relationships and trust as the basis of business activities (Dorfman et al. 1997; Cazal 1994). Those in authority are expected to take responsibility for the wellbeing and future of the young and the maintenance of an atmosphere of harmony and smooth, conflict-free interpersonal relations (Steers et al. 1989). Anecdotal accounts suggest,

160

France and Korea

at all events, that the Confucian tradition did help to create a climate in which the firms most committed to their employees received unusual dedication in return (Lee and Lee 1994; Lee and Miller 1999). More generally, long-term employment was the rule until the end of the 1990s – partly because of restrictions on firing, partly because there was a low level of certification, leading to underdeveloped labour markets (Sohn and Kim 2004). The appearance of general harmony lasted until the late 1980s. Following the development of strong and independent unions demanding wage rises, strikes and lockouts increased rapidly, and wages rose by an average of 15 per cent per annum in the decade to 1996 (Lee 1999a), jeopardising the low-cost strategies of chaebol and seriously undermining their competitiveness. In general, then, it would be naïve to suppose that employee inclusion is or has been characteristic of Korean industry; nonetheless, long-term employment and Confucianism has provided the potential for an authoritarian version of it. Such ‘authoritarian inclusion’ as existed, has recently been considerably diluted. During the 1990s, and particularly after the 1995–1998 crisis,8 it became evident that chaebol needed a substantial restructuring and downsizing, which could only occur through a reform of labour markets.9 An important step in this direction was achieved as a result of the activity of the Korean tripartite commission, composed of representatives of the government, of the Federation of Korean Industries and of the Korean Employers Federation. As a consequence of the pact, several reforms were enforced, such as the right for employers to lay off workers for managerial reasons and the possibility to use agency workers, in return for new forms of labour rights and increases in wages. Flexibility and efficiency became central concepts and the commitment of employees towards their company became looser and more short-term. In response, companies have been forced for the first time to develop systems such as stock options and performance-based pay to motivate and retain their workforce (Park and Yu 2000). With the digital revolution and the setting up of new firms (often of foreign origin)10 offering attractive compensation and interesting career opportunities, large chaebol have been recently facing a new problem of high turnover, particularly in managerial positions and R&D departments (Kim and Yu 2000). The inclusion of industrial customers and suppliers is also very limited. Clearly large firms have worked closely together when the government really wanted them to. Moreover, being highly vertically integrated, chaebol often include most or all companies operating along the value chain. Inter-firm linkages among such companies are centrally coordinated by the controlling family (Kienzel and Shadur 1997) and characterised by a lower rivalry than, for example, companies belonging to Japanese horizontal keiretsu11 (Ghauri and Prasad 1995). Relationships are therefore close and long-term, and orchestrated to maximise the overall value of the group. On the other hand, the relationship of chaebol with the (few) external suppliers has always been rather arm’s length, short-term, hierarchical and limited to very standardised products; when interfirm alliances exist they develop on personal ties (Orrù et al. 1997). These

France and Korea

161

Table 6.1 Characteristics of state-led capitalisms, mid-1980s

Extent of state ownership of industry State ownership/control of banking system Extent of old family capitalism, including large firms, outside state-led networks Extent of stakeholder inclusion

France

Korea

High High High

Low High Low

Low

Low

companies, therefore, cannot be considered as important stakeholders of the innovation process. Small and medium firms were not only kept at arm’s length by the chaebol, they were often ruthlessly exploited by them. In particular, the chaebol habit of issuing promissory notes to suppliers with payment dates one year in the future, weakened them financially (Regnier 1992). We have already seen that the banks, guided by government, preferred to lend to chaebol, until the 1980s. Until the late 1990s, and the election of a President (Kim Dae-Jung) who drew much of his political support from small business, the provision of venture capital was very limited. ‘Most of the self-styled venture capital companies ... are affiliated to chaebol and only make loans’ (de Jonquieres 1998b: 4). Those SMEs that have indeed acquired a strong and profitable position, have done so in niches not noticed by the chaebol and often based on proprietary technology (The Economist 1996). They sell on international markets, not to the chaebol. ‘The country’s failure to develop a strong base of indigenous suppliers and sub-contractors, as Japan has done, means many manufacturing companies are assemblers which rely heavily on imports of critical components and machinery’ (de Jonquieres 1998a: 2). Table 6.1 sums up.

6.4 Corporate governance and technological advantage – what would one expect? Both countries appear to have rather variable industry-wide expertise. The French elite, as we have seen, has had a generalist education and its members have tended to change jobs rather frequently, going from one sector to the other and back and forth between public administration and industry. But where the top managers of a state-owned or favoured firm were from the grande école for their industry, and they were reporting to a ‘polytechnicien’ in a ministry, with a strong scientific background, there would have been no serious deficiency. As énarques (ENA graduates) with non-scientific backgrounds became more numerous and powerful, such pairings could no longer be taken for granted. One would certainly not expect the financial system to have had such competence – the banking system never had the incentive to invest in it, as investments were channelled towards the companies indicated by the government, and guaranteed by it. Only in the 1990s, with the rise of venture capital, was industrial expertise clearly needed in finance; and, as we saw for the UK, to go from needing it to getting it takes time.

162

France and Korea

In Korea, the system adopted in the early years (1960s and 1970s at least) economised on the industrial expertise required by decision-makers: 1 2 3

certain industries were chosen, at various points, for special support; entry had to be authorised, and firms that had performed well in related industries and had whatever appeared to be the necessary size, got authorisation; the best performers were selected on the basis of publicly-known criteria (above all, export sales) for tax and credit support. (Jwa 2004: 3–23; Chang and Park 2004: 24–61)

Much clearly depended on the top management of the chaebol groups involved – all the more so as the government’s grip loosened during the 1980s. It is widely believed that most chaebol were – until the crisis of the late 1990s – highly diversified, which would have impeded the development of industrial competencies by the family owners. This is a misconception. Between 1988 and 1995, the four largest subsidiaries of the top four chaebols generated an average of 79.0 per cent of their sales; the corresponding figures for the rest of the top 30 are above 70 per cent. Moreover, the subsidiaries might well be closely related to one another. In the extreme case, that of Samsung, in which the top four subsidiaries accounted for about 90 per cent of sales, two of them were in electronics (Chang and Park 2004). Commonly, chaebol were vertically integrated, with one subsidiary supplying another. There was thus no reason why the top management of chaebol should not have developed the appropriate industrial expertise, with an able son in charge of a subsidiary reporting to his father, chairman of the group. Much as in France, the financial system never had the incentive to invest in specialised competencies – a matter of concern from the 1980s as the government’s grip on it was loosened. As in France, the development of the venture capital market and the acquisition of shares by institutional investors are a very recent phenomenon. Reconfiguration can hardly have been a French forte, because of the lack of strong venture capital or any other means of creating new strong firms. At best the government had the opportunity of forcing reconfiguration on industries which it was supporting. Downsizing and restructuring was supported by the state during the 1990s and facilitated by the progressive weakening of the unions. The difference in Korea was the vulnerability of the highly-indebted and fastexpanding chaebol to any serious mistake. Of the ten largest chaebol in the 1960s, three had gone bankrupt by 1980 (Chang and Park 2004). For the rest, throughout the period until the late 1990s, The Korean government frequently injected money into ailing large enterprises through state-owned banks . . . however, these financial injections were conditional, with very few exceptions, on the change of ownership and of top management, and were always accompanied by tough terms of financial restructuring. (Chang and Park 2004: 49)

France and Korea

163

For strong established firms, the negative side of reconfiguration appears to have been difficult in Korea: up to the early 1990s, the rigidity of the labour market prevented companies from firing for managerial reasons. Even afterwards, the antagonistic attitude of the workforce made the reorganisation rather difficult and often not effective. However, the positive side, generous support of creative novelty, was possible within the chaebol structure, as we shall see. For France, one can be a little more positive about the availability of risk capital for high-opportunity areas. Ideally, the opportunities would be large enough to get the attention of the elite, in which case the capital would only be made available to favoured large firms. The main doubts there relate to expertise – which we have just reviewed – and to acceptability. In France, the division between the firms owned by the state (at least for a time) and those left in private family hands, is a significant one. Many of the private firms are old. French business history, and business’ collective memory, is full of the bones of enterprising firms that took large risks and were left by the state to fall in the next crisis. The survivors were among those who had been cautious. The figures for gearing in Chapter 3 (Table 3.12b) show that during the ‘thirty golden years’ from 1950 many of them had been induced to borrow heavily by cheap and plentiful bank finance – but the vast bulk of the loans were used, prudently enough, for fixed capital investment to improve their productivity; not for large programmes of product innovation. Such programmes would call, of course, for equity capital, which was neither freely available within the French system nor acceptable to a controlling family. The large programmes of product innovation that did take place were undertaken by firms owned by, or very close to, the state, dependent on state subsidy in one form or another. Would the governing elite know where to spend that money? In Korea, the fusion of state and private capital was more complete, with the chaebol depending heavily on state-directed loans and at the same time on equity from a variety of sources, including small investors via the stock market. The size and diversification of the chaebol groups were (and still are) crucial in making it possible to take large bets on high-opportunity areas. Grouping creates financial synergies which enable the chaebol to mobilise large-scale investment funds effectively in a short time required for investments in facilities, human resources and organizational capability . . . grouping also helps the chaebol firms invest more aggressively in new technologies by enabling them to share risk with their member firms. In addition, grouping stabilises cash flow, which is especially important when many of the industries that the chaebol are engaged in are subject to large swings in demand (for example semiconductors, shipbuilding, automobiles) (Chang and Park 2004: 42) Large risks remain, as those bankruptcies show; but unlike France, few large Korean firms have a long history. The famous post-war stories are of those who

164

France and Korea

gambled – expertly – and won. Moreover a big gambler would, if in temporary difficulty, find the state supportive. In a state-led economy, engagement and thus firm-specific understanding inevitably depend heavily on firm size. For small firms, those who need engagement and understanding are the providers of external finance, who in the absence of a strong venture capital industry were the banks. In both countries these generally ignored small firms, at least until the 1980s. Given the limited role of stock markets, large firms in capital-intensive industries, too, depended heavily on bank finance; but the banks lent even to larger firms generally with state guidance and/or guarantees. In France, what received generous finance were projects that were approved of by the small elite composed of or connected to high officials or ex-officials. As we have seen, these people are few in number, often generalist in education, controlling a number of different sectors and units either at once or in rapid succession: they will not be familiar with the detail of markets and technologies unless the firms or projects are very large in scale. In Korea, as we have seen, the allocation of funds within chaebol groups is as important as the allocation of funds to them. There is every opportunity for engagement and understanding in the relationship between group and subsidiary levels – at least for the larger subsidiaries, the jewels in the family’s crown. In France, the established firms in mature industries under family control – Michelin, for example – would usually have adequate finance, and the family might well serve as an engaged owner. Privatised firms, whether of the late 1980s or subsequent vintages, are another matter. The noyaux durs, core shareholdings, which were key to privatisation until the late 1990s, were designed first and foremost to provide ‘stability’, protecting firms from takeover. The engagement and understanding of the shareholders was a secondary consideration. As explained above, stakeholder inclusion has been generally low in both countries. The main exception, which applies to both countries, is the bringing together of big firms within state-led networks. There are also strong customer–supplier relationships within chaebol. Only recently, following the restructuring operations, have large French firms engaged with their suppliers. As for employees, informal types of inclusion, such as lifetime employment, were in place (particularly in Korea) but not accompanied by forms of delegation of power towards the lower levels of the hierarchy. Employee inclusion, German- or Japanese-style, is not practised, and the use of American types of inclusion, such as shareholding and stock options, is a very recent phenomenon. Finally, management autonomy must have been generally low in Korea, given the family control of the chaebol, and in family-controlled firms in France. In state-controlled firms in France there would presumably have been a considerable degree of management autonomy – given the limited attention span of high officials – and the main constraint upon it would have been the rather diffuse pressures of the elite network. In privatised firms, as the core shareholdings weakened, autonomy must have increased – up to the point where Britishstyle indirect shareholder control began to become effective. What then will France and Korea be good at?

France and Korea

165

Scale seems to be key. Time is also important: the French and Korean states can not only provide large amounts of capital cheaply, they can also be patient in waiting for a return. Certainly the two countries are not likely to excel in sectors where stakeholder spill-overs are high and/or visibility is low, due to the small scale of innovating units. Where the spill-overs are among large firms or vis-à-vis the central state, that is another matter altogether. In general, following the thread of spill-overs, one would not expect Korean or French firms to do well in sectors where the customers are industrial – unless very large or within the group. Selling to the state or to a mass market will be more their forte. Likewise, in fast-changing, radically-innovating sectors, where new firms need to be fostered by engaged venture capitalists with industry-specific expertise, neither France nor Korea could be expected, until very recently, to thrive.

6.5 The high-technology sectors In these sectors we find a striking divergence in specialisation between France and Korea, which is the less surprising because it parallels the other Euro-Asian pairs, Germany and Japan, and (as we shall see in the next chapter) Italy and Taiwan. The long-established European countries are strong in the older sectors, the just-arrived Asian countries in the newer ones. 6.5.1 Aerospace Aerospace, as we argued in Chapter 2, is path-dependent. It is also highly dependent on scale of operation. France was able to spend heavily on its air force and aircraft industry in the late 1940s and 1950s; Korea was not. For a small country like South Korea to develop a strong aircraft industry from scratch would inevitably be difficult. In 1978 and in 1987 two laws were enacted for the promotion of the aircraft industry, but no serious and effective activity was initiated in terms of R&D until the beginning of the 1990s (Eriksson 2005; Cho 2003). In addition, the government policy to keep high levels of competition among the three main aircraft and engine producers provided few opportunities for R&D investment and accumulation of knowledge and skills. In the end the government chose Samsung Space and Air as the prime contractor for the programme under which 108 F-16s were built under licence for the airforce. This decision allowed SSA to improve its technological capabilities, so that in 1992, together with South Korea’s Defence Development Agency, it started the development of the first indigenous jet trainer/light attack aircraft. In 1999, as part of the country’s economic reforms, the aerospace divisions of Samsung, Daewoo and Hyundai were merged into Korean Aerospace Industries Ltd (KAI). The government granted KAI exclusive rights for all government military and aerospace projects and agreed to provide 100 per cent of the development costs for military projects and 50 per cent for commercial products. Drawing on the technological capabilities of the constituting companies and on long-term financing by the government, KAI has

166

France and Korea

Table 6.2 Aerospace: France and Korea France

Korea

Patenting: RTA

1963–1979 1.36

1990–1999 2.70

1963–1979 0.0

1990–1999 0.06

Manufacturing trade balance, percentage of output

1992 +1.4

2001 +1.8

1992 NA

2001 NA

Production specialisation

DTI – 2003 1.83

OECD – 2000 1.21

DTI – 2003 NA

OECD – 2000 0.11

R&D intensity, percentage

DTI – 2004 6.96

OECD – 2000 13.2

DTI – 2004 NA

OECD – 2000 1.2

Notes * DTI: Aerospace and defence ** R&D intensity: DTI mean 4.9 per cent; OECD mean: 10.23 per cent. For summary definitions see Table 4.2. For detailed definitions and sources see Appendix.

achieved impressive results in fixed-wing aircraft, helicopter aircraft and satellites. But it is far from the levels of the most advanced countries in the sector (Cho 2003). The slow progress made, and the stress on technology transfer rather than own innovative effort, are clear from the patenting, production and R&D data in Table 6.2. In France, the activities in this sector have been under government control, through a ministerial directorate, whereas firms, under a variety of ownership, carry out the work (Serfati 2001). In particular, the Ministry of Defence relies on ONERA (French Aeronautics and Space Research Center), for R&D, technology transfer, commercialisation of research and training of scientists. Since the 1960s, the government has provided subsidies to companies both for civil and military purposes (by different means). The aerospace sector has received 46 per cent of military contracts and 72 per cent of civilian contracts (Carpentier and Serfati 1997). Most of the rest has gone to ‘equipment’ – telecommunications and defence electronics – some of which is closely related to aerospace. More recently, with the progressive strengthening of the industry and particularly of the two leading companies Snecma and Thales (now absorbed into the panEuropean firm EADS), the role of the state has gradually declined; but it is still very strong, as shown by the part it has played in the recent convulsions in EADS and Airbus (The Economist 2006 a, b); see below. As we have seen, the size of the typical development project for a large civilian aircraft, or almost any military aircraft, is large enough to suit the vision of the central state. The sort of radical change that would tax the official imagination is rare. The technical sophistication of a new development might seem demanding – but French officials usually have, or used to have, a formidable background in mathematics and physics. The French aerospace industry has thus been well served by its finance and corporate governance system, which

France and Korea

167

provides a patient and large-scale financier (the state) and a close and long-term relationship with an important customer (the state again). The results of this state devotion can be seen in Table 6.2. France is the country that devotes the largest percentage of R&D expenditure to this sector and has among the largest R&D intensities. (The DTI production figures greatly understate France’s weight in the industry because EADS, which has a 30 per cent French shareholding (besides German, British and Spanish stakes) and includes Airbus, is incorporated on the neutral ground of the Netherlands; the omission of EADS also leads to the understating of R&D intensity.) Airbus: thereby hangs a tale. For all the German, British and Spanish involvement in it, Airbus – the project to produce a European rival to Boeing in the production of civilian jet airliners – was more than anything else a French project. The Airbus Industrie consortium was formally set up in 1970 following an agreement between the French state-owned firm Sud-Aviation and Deutsche Airbus – itself a German aerospace consortium consisting of Bölkow, Dornier, Flugzeug-Union Süd, HFB, Messerschmitt, TG Siebelwerke, and VFW. In other words one large strong French firm, on the technological high ground, joined with seven weak German ones, eager to get (back) onto it. (Sud-Aviation was soon to be merged with two other French state-owned firms into Aérospatiale.) The grouping was joined shortly afterwards by CASA of Spain and BAC of Britain. It was the launch of the A320 in 1981 that established Airbus as a major player in the aircraft market – the aircraft had over 400 orders before it first flew. The individual most closely associated with the rise of Airbus was Jean Pierson, whose curriculum vitae is well worth examination. He studied at the appropriate Grande École, the École Nationale Supérieure de l’Aéronautique, from which he graduated in 1963 at the age of 22. In 1968, aged 27, he was made director of Concorde manufacturing. By 1976 he was production director of Aérospatiale and in charge of Airbus production. In 1985 he became chief executive of Airbus Industrie at the age of 44, and kept that position until 1998, by which time Airbus was clearly closing on Boeing. By this time also, it had been decided that Airbus should become a fully-fledged private company. Accordingly there was pressure to privatise Aérospatiale in order to make it a more suitable partner in Airbus for the major German and British shareholders, DaimlerChrysler and BAE Systems. This may have had something to do with the decision to replace Pierson by Noel Forgeard in 1998. Pierson’s successor had a very different curriculum vitae. Just six years younger, Forgeard was a polytechnicien, and followed a classic polytechnicien’s career as a technical adviser in three different ministries before spending 1981–1986 in the state-owned steel firm Usinor, then a year as adviser for industrial affairs to the then prime minister, Jacques Chirac. He was then hired by the private firm Lagardère. Lagardère bears a superficial resemblance to a chaebol, in the breadth of its interests. It was founded by Jean-Luc Lagardère, who died in 2003: an astute entrepreneur who built a business empire with the help of his talent for hiring bright, well-connected civil servants . . . Another useful

168

France and Korea attribute of the group was a media business that included the Europe 1 radio station, France’s only Sunday national paper and Paris-Match. This ensured Mr Lagardère was courted by politicians. (The Economist 2006b: 79)

Lagardère had a defence-aerospace business, Matra Hautes Technologies, which was less than a third of the size of Aérospatiale. Nonetheless, the Matra man Forgeard took over Airbus from the vastly more experienced Pierson. Aérospatiale was merged with Matra in 1998–1999, with Lagardère getting the remarkably high proportion of 31.5 per cent of the merged firm, and management control. ‘The understanding was that Lagardère would always be the principal French private shareholder . . . a noyau dur. The government would reduce its two-thirds share to 48 per cent by selling 17 per cent of the shares to the public’ (The Economist 2006b: 79). Shortly after Aérospatiale Matra was created, it was merged with DaimlerChrysler’s aerospace arm to form EADS, the parent company of Airbus. EADS had and has a two-headed structure, with French and German co-chairmen and co-chief executives. To complicate matters further, there was a ‘longstanding rivalry’ between Forgeard and the first French EADS CEO, Philippe Camus; Camus was supported by Arnaud Lagardère (Jean-Luc’s son and successor), Forgeard by none other than the President of the Republic, Jacques Chirac. Forgeard took Camus’ job in 2005. The Economist sums up the position when Forgeard took over at Airbus in 1998 from, in its words, ‘the legendary Pierson’: ‘its A320 and A330 models were flying off the shelves. Its new super-jumbo, the A380, was already being developed and the company was beginning to catch up with Boeing’. What happened to EADS and Airbus between 1998 and 2006 is as yet far from clear. ‘Airbus veterans are bitter at what “the Lagardère boys”, as they are known within the aircraft-maker, have done to the organisation they built up to take on Boeing’ (The Economist 2006b: 80). In early 2006 it was already known that the A380 programme was running six months late. Mr Forgeard ... sold 162,000 EADS shares and members of his family a further 128,000 last March ... In early April the Lagardère group agreed to sell half its 15% stake in EADS for $2 billion, or the equivalent of C32.60 a share [by November they were down to C21]. It was a week before more delays to the Airbus A380 became known to the board of EADS, according to Mr Forgeard ... Lagardère had been looking to reduce its holding for three years ... . Questioned about the sale, Arnaud Lagardère said: I have the choice of appearing dishonest or incompetent ... I plead the latter ... Investigators are concerned that Mr Forgeard might have been aware [at the time of his share sale] that further delays to the programme. ... would soon be announced. (The Economist 2006b: 80) We have no opinion on what M. Lagardère and M.Forgeard may or may not have known; but we have little doubt that Jean Pierson, in a similar situation,

France and Korea

169

would have been aware of the position, and indeed that those to whom he was reporting in the French state would have been aware too. To put it more generally: we are concerned that the semi-privatisation of at least one key French firm, under the noyau dur system, led to a decrease in the engagement and the industrial expertise of those controlling it. And it appears that this decrease may be connected to the progressive dilution of the industrial expertise of the French elite. Pierson adieu: the polytechniciens and énarques rule. 6.5.2 Pharmaceuticals Pharmaceuticals is of course one of the older high-tech sectors, in which pathdependence is important, as is scale. Korea scarcely has a domestically-owned pharmaceutical industry. To have broken into the pharmaceuticals sector (at least, into its dominant, ‘ethical’, research-intensive part) would have required a major effort and commitment of resources from the Korean government, which very sensibly decided that there were easier pickings to be gained elsewhere. (It has recently been working to build up the research infrastructure on which to build such an industry; but this will take time.) France, on the other hand, is now close behind the leaders. This is a recent development: it had been a follower in the development of the industry (McKelvey and Orsenigo 2001). As we saw in the case of Britain, the State’s regulation of prices in this sector impacts in effect on the provision of finance for innovation, and the incentive to innovate. Until the 1980s, the Cadre de Prix set prices in such a way as to favour the development of incremental innovations and ‘me too’ drugs (Thomas 1994, McKelvey and Orsenigo 2001). Unlike the British arrangement, the price permitted was not related to the firm’s R&D spend. The recent progress in the sector was favoured by ‘a revisited form of the traditional French policy of national champions’ (McKelvey and Orsenigo 2001), whereby the French research Table 6.3 Pharmaceuticals: France and Korea France

Korea

Patenting: RTA

1963–1979 1.71

1990–1999 1.51

1963–1979 1.02

1990–1999 0.24

Manufacturing trade balance, percentage of output

1992 +0.3

2001 +0.4

1992 NA

2001 NA

Production specialisation

DTI – 2003 1.88

OECD – 2000 1.69

DTI – 2003 NA

OECD – 2000 1.01

R&D intensity, percentage

DTI – 2004 15.30

OECD – 2000 NA

DTI – 2004 NA

OECD – 2000 NA

Notes * R&D intensity: DTI mean: 15 per cent. For definitions and sources see Table 4.2 and Appendix.

170

France and Korea

system is put at the disposal of the two major companies in the sector, Aventis and Sanofi-Synthelabo (now merged) which invest – as Table 6.3 shows – very strongly in R&D. The lack of internal obstruction to reconfiguration has been an advantage; the late development of the venture capital industry has been a disadvantage with respect to the development of biotechnology. There has certainly been progress: although decline is suggested by the RTA figures in Table 6.3, the more disaggregated ones in Table A9 show bottom being reached in the 1980s and a steady advance since then, confirmed by the emergence of France as a producer of ‘blockbuster’ medicines in the 1990s (Figure 4.2). 6.5.3 ‘ICT hardware’ – The main electronics sectors ICT hardware includes Office, accounting and computing machinery (OAC); and Radio, TV and communications equipment (RTC). As we have seen, in general terms the electronics sectors have seen successive paradigm shifts, making drastic reconfigurations necessary. Telecommunications, with the exception of mobile telecoms, has shown relative stability and continuity. So, to a lesser extent, have the other elements of the ‘Radio, TV and communications equipment’ category. This, rather than computing, is the sector of major Korean specialisation. It was favoured by the government from the 1960s onwards by measures such as the Electronics Industry Promotion Law of 1969, which encouraged both native and foreign firms. US companies set up several wholly-owned subsidiaries, while Japanese firms signed a number of joint ventures – all in search initially of cheap labour for the production of parts and components such as switches, resistors, condensers and transformers. Motorola, Signetics, Fairchild; Matsushita, Sanyo, Mitsubishi Electrical and NEC were in this way largely responsible for the spectacular expansion in exports during the 1970s (Table 6.4). During the 1980s, the degree of foreign domination diminished as a consequence of the emergence of chaebol, particularly in consumer electronics. Electronics was viewed as an attractive export opportunity both by the family owners of the chaebol and by government agencies. Accordingly, the Japanese firms modified their arrangements from joint ventures into Original Equipment Manufacturing: Samsung produced for Toshiba, Goldstar for NEC and Matsushita, Daewoo for NEC, Korea Trigem for Seiko and Anam Industries for Table 6.4 Foreign share of electronic output and exports (US$ million) in South Korea

1969 1973 1978 (forecast)

Output total

Foreign investors’ share, %

Export total

Foreign investors’ share, %

79 463 2271

42 51 54

42 369 1359

77 69 61

Source: KFIC (1977), as quoted in Castley (1998).

France and Korea

171

Table 6.5 Office, accounting and computing machinery: France and Korea France

Korea

Patenting: RTA 1963–1979 0.87

1990–1999 0.54

1963–1979 1.32

1990–1999 2.10

Manufacturing 1992 trade balance, –0.9 percentage of output

2001 –1.2

1992 NA

2001 NA

Production DTI – 2003 OECD – 2000 DTI – 2003 OECD – 2000 specialisation ITh ITh + E&E ITh ITh + E&E 0.83 0.55 0.59 NA NA 1.69 R&D intensity, percentage

DTI – 2004 ITh 12.23

OECD – 2000 DTI – 2004

ITh + E&E 5.66 2.8

OECD – 2000

ITh ITh + E&E 6.74* 5.21 4.9

Notes * One company. R&D intensity: DTI mean for IT hardware 13.1 per cent; DTI mean for IT hardware + Electronics and electrical equipment: 7.0 per cent; OECD mean: 5.27 per cent.

Matsushita (Hobday 1998). This is the sector where Korea scores best in terms of total R&D expenditure (second only to the US and Japan), proportion of R&D devoted to this sector (by far the largest), and value-added (again second only to the US and Japan) (see Tables 6.5 and 6.6). The subsectors where Korea is the strongest are electronic valves, tubes and other components (semiconductors), followed by TV and radio transmitters (which include Table 6.6 Radio, television and communication equipment: France and Korea France

Korea

Patenting: RTA 1963–1979 1.07

1990–1999 0.83

1963–1979 0.84

1990–1999 2.13

Manufacturing 1992 trade balance, –0.5 percentage of output

2001 +0.1

1992 NA

2001 NA

Production DTI – 2003 OECD – 2000 DTI – 2003 OECD – 2000 specialisation E&E ITh + E&E E&E ITh + E&E 0.74 0.55 0.72 5.4 NA 2.0 R&D intensity, percentage

DTI – 2004 E&E 3.31

OECD – 2000 DTI – 2004

ITh + E&E 5.66 7.1

E&E 5.13

OECD – 2000

ITh + E&E 5.21 3.5

Notes R&D intensity: DTI mean for electronics and electrical equipment: 5.5 per cent; OECD mean: 6.2 per cent.

172

France and Korea

mobile telecommunications). The OECD statistics are certainly strongly influenced by the presence of foreign subsidiaries, particularly of American and Japanese origin (all major companies have production and research and development sites in Korea). During the past decade, Samsung Electronics has progressively become the largest Korean company in the sector, followed by LG, Hyundai and Orion. Samsung is specialised in the production of DRAMs, TFT LCDs and mobile phones (see below). In 2005, its R&D spend was the second largest in the world among ‘electronics and electrical equipment’ companies, after Siemens (DTI Scoreboard 2005). LG Electronics is global leader in the development and manufacture of TFT-LCD panels for televisions, monitors, notebooks and emerging mobile applications (company webpage). Hyundai and Orion too are important players in the international arena, especially in the TFT-LCD panels. To get into these more-or-less high technology areas, Korean firms resorted to aggressive capacity investment to accelerate learning, accepting thin margins or even losses for years to build volume and gain market share, and made deep investments in R&D (Cho et al. 1988). This financial ‘pain’ was borne through the cross-subsidisation that occurred within large chaebol, and through the support of the state, which considered these areas as strategic for the development of the country. But deep pockets are not everything: the money could have been wasted (see France, below). The investments were channelled into a relatively small number of areas in which the large scale of R&D and production was appropriate. Most of the risk was carried by the chaebol and their controlling families, who accordingly gave these operations their best attention: the necessary industrial expertise and firm-specific understanding was developed. In addition, within chaebol, customers and suppliers (for example of electronic components) operated under long-term cooperative strategies. The employees, even if not ‘included’ as much as in Germany or Japan, until at least the end of the 1990s enjoyed life-long employment opportunities. This gave them the long personal time horizons that encouraged them to acquire the competencies and know-how to move on from simple assembly, to OEM,12 ODM, OIM, and OBM (Ernst 1998). Korean success in electronics certainly demonstrates the country’s suitability for high-opportunity areas – not surprising, given the chaebol’s ability to mobilise large amounts of patient capital, and their industrial expertise. We argued however in Chapter 2 that electronics varies a great deal in need for reconfiguration. Can this state-led system cope well with a sub-sector where there is need for drastic reconfiguration? The fast-changing area of mobile telecoms has shown that it can, although the history of this sub-sector in Korea is mainly the history of one subsidiary of one chaebol (now effectively independent), Samsung Electronics. By setting up a complete separate division, the Wireless Development Team, Samsung managed to enter and become successful in a sector that required completely different market strategies (as well as technical competencies) from the business core (Lee and Lee 2004). Success, however, came only 15 years after the division was set up, and on several occasions, due to the persistent losses and failures that characterised the 1980s and early 1990s,

France and Korea

173

the management considered the possibility of disengaging from the mobile phone business. Clearly, only the practice of cross-subsidising allowed Samsung to remain, and go on investing heavily in it. Not only was Samsung’s commitment crucial to mobile telecoms, but was a state-sponsored project that brought together four chaebol (Samsung, Hyundai, LG and SK Telecom) with the state’s Electronics and Telecommunications Research Institute (ETRI) for the development of CDMA technology (a competitor of GSM) in mobile systems, after it was chosen as the communication standard for the country (Kim et al. 2004). This provided a convenient way for the government to subsidise the R&D expenditures for the development of the sector. It also reduced the uncertainty of the manufacturers involved in the supply of equipment and handsets and helped them achieved the level of economies of scale necessary to be competitive (Lee and Han 2002). Samsung Electronics was involved in the production of most products employing the newly developed technology (from handsets to control stations and from exchange stations to registers of subscribers’ location) and a major player in multiple consortia (Lee and Han 2002). Samsung’s, and thus Korea’s, success was greatest in the conspicuous area of handsets: by March 2004 it was second only to Nokia in terms of revenues and profit margins (Lee and Lee 2004). After our accounts of Britain and Germany’s relative failure in electronic hardware, it would be repetitive to write at length about France’s. Again, the difficulty was that France lacked the cheap labour with which to insert itself in the more labour-intensive and stable parts of the electronics value chains; and it lacked the finance and corporate governance capabilities required in the more high-technology and dynamic parts. As may be imagined, this failure was not for lack of trying by the government. With the Plan-Calcul first (1966) and the Filiere Électronique Action Plan later (1982) companies received subsidies and various other forms of support; and several of them were finally nationalised. For a period the government’s actions concentrated around several electronics areas: components with Matra and Thomson, office applications and telecommunication with CGE and computers with Bull, electronic consumer goods with Thomson again and industrial automation with Matra and CGE (Delapierre and Zimmermann 1991 as quoted by Nohara and Verdier). Eventually Bull became the only national champion in the computer sector. Notwithstanding its privileged position in terms of financing, Bull did not reconfigure as quickly as necessary to enter the microcomputer industry, and remained a general producer of mainframe systems and, more recently, an integrator of technologies produced by its associates such as Motorola, Intel, NEC, IBM, and Unix. There were three factors which prevented it from making radical changes: strategically, Bull’s national mission meant that the firm had to maintain a mainframe construction capacity in the national interest; institutionally, frequent government interventions based on political interests – because of

174

France and Korea Bull’s state-owned status – impeded the maintaining of a constant orientation of organizational innovation; cognitively, Bull’s bureaucratic organization, reinforced by the appointment of public-sector technocrats (‘state engineers’) as senior managers, was incapable of grasping the new technological trends. (Nohara and Verdier 2001: 207)

It might seem that the difference between France’s failure with Bull (etc.) and Korea’s success with Samsung (etc.) is more intelligent government policy. Korea did not nationalise its electronics firms, for example. Perhaps, but even more to the point is that Korea was not trying to do anything so difficult as going head-to-head with the Americans in computers. Any private firm would have balked at that. So much for Office, accounting and computing machinery. In Radio, television and communication equipment, France appears to be stronger – less weak. But RTC is heterogeneous, as pointed out before. Electronic consumer goods are a ‘labour-intensive part of the value chain’ as described above – and thus hopeless. Electronic components may not be, but they certainly have been a high opportunity area which grew from small beginnings from the 1960s onwards. As we have argued, that could not have suited either family firms or bureaucrats. That leaves telecommunications. This sector at least, with its large scale and sales to telecoms service providers normally owned by the state, could be strong in France. Telecommunications indeed was among the sectors considered of strategic importance by the state, which has provided it with financial support (Brousseau 2001). This occurred both through direct financing to R&D activities, through the investments of the largest service provider (only recently privatised) and through government procurement. For example, as early as 1916, an R&D group was established within the École Superieure des Postes et des Télégraphes, to study the new technological developments in the field. Later on, in 1945, a new research center, the CNET (Centre Nationale d’Études des Télécommunications) was set up to carry out both research and development activities on telecommunications and exercise technical control over the equipment to be purchased by the administration. Nonetheless, it did not until recently attract the sort of strategic interest that went into aerospace and motor vehicles. Indicative of national indifference, the telephone density (number of telephone for 100 inhabitants) of the French network in the early 1970s, was 11.8 (against 22.8 in the UK and 19.6 in Germany: see Llerena et al. 1997). Until the late 1970s, the technological level of the French telecommunication industry and services lagged behind the other advanced countries. During this period, the industry was dominated by subsidiaries of foreign multinationals. It was only in the following decade that the French companies (Thomson, AOIP, CGE, which were later to become nationalised in order to play the role of the ‘national champion’) started to play a stronger role in technology terms. France Télécom originated in 1990 from the ‘corporatisation’ of the Direction Générale

France and Korea

175

des Télécommunications (DGT), an institutional body that for several decades acted at the interface between the State (particularly the PTT Ministry, of which it was part) and the industry. In 1987, DGT channelled 4.1 per cent of its total revenues to R&D activities (the bulk was absorbed by CNET). In the same year, the percentage of R&D in telecommunications financed by private firms in France was considerably lower than in Italy, Germany and the UK (Llerena et al. 1997). Alcatel is now the leader in the country in the telecommunications sector. It is, however, a solitary actor. Its inclusion in ‘IT hardware’ largely accounts for the respectable French performance there in terms of production specialization and R&D intensity shown in Table 6.6 (its own R&D intensity was 12.7 per cent). 6.5.4 Software and IT services Software is of course useless without hardware. Most of the relevant hardware is computing equipment of one sort or another – although some software is ‘embedded’ in cars, household appliances, audio-visual equipment, and much else. In the early stages of the development of the software industry (let us say, in the 1970s and 1980s) France had a much more developed economy than Korea’s, producing more computers, and using far more. Accordingly, French software got off to a relatively fast start. As reported by Nohara and Verdier (2001), the development of the sector was originally influenced by the need to integrate several systems in areas considered of particular strategic importance, such as defence, aerospace, telecommunications and finance, and which could not be left in the hands of foreign companies, particularly of American origin. Later on, during the 1980s, the extension of application fields and the growing complexity of user needs triggered the development of new companies specialised in IT services, both as spinoffs of large firms and as specialised subsidiaries of electronics companies (CGE, Thompson, France Telecom, CEA, etc.). Since the 1980s a number of high-tech software companies have been established as spin-offs of INRIA (the National Institute of Computer Science). Today, there are more than 60 such companies, producing high-quality software, particularly advanced solutions for very specialised needs. For example CAPS designs software tools and services to speed up systems software development; CETOINE produces images, videos and drawings for textile, furnishings and decoration. Spin-offs of INRIA are financed through I-Source,13 a venture capitalist company founded as a subsidiary of INRIA itself and in cooperation with AXA Private Equity and CDC enterprises (a subsidiary of the public Caisse des Dépôts). The French specialisation has emerged as might have been predicted: without the focused venture capital to pick and back winners in highly risky areas with high competence destruction, France is not strong in packaged software (cf. the US and UK); without the close stakeholder-capitalist contact with private firms that German software firms enjoy, it has no firm to rival SAP in ‘enterprise’ areas like ERP. It is, however, quite strong in middleware (see Nohara and

176

France and Korea

Table 6.7 Software and IT services: France and Korea France

Korea

Patenting: RTA

1963–1979 1.04

1990–1999 0.63

1963–1979 0.0

1990–1999 0.89

Manufacturing trade balance, percentage of output

1992 NA

2001 NA

1992 NA

2001 NA

Production specialisation

DTI – 2003 0.34

OECD – 2000 0.9

DTI – 2003 NA

OECD – 2000 0.43

R&D intensity, percentage

DTI – 2004 19.48

OECD – 2000 NA

DTI – 2004 NA

OECD – 2000 NA

Note * R&D intensity: DTI mean for Software and IT services: 10.7 per cent.

Verdier 2001). Middleware, as the example of Ericsson showed for Sweden in Chapter 5, needs good long-term relationships with a strong customer firm. France, thanks to patient state backing, has several – Alcatel in telecoms, for example. France’s forte is however IT services. As Nohara and Verdier show, this was the area in which the French state succeeded when it was failing in its strenuous efforts to make itself independent of the US in computing. It had to purchase computers from somewhere, and it needed to be shown how to use them – how to develop its IT systems. Even if the computers were foreign, there was no need to depend on foreigners to provide the IT services. That was the origin of firms like Cap Gemini, Sema Group, Bull and Atos (Nohara and Verdier 2001: 205). France’s performance overall is summed up in Table 6.7. In Korea, the software industry started in 1967 with the establishment of the Korea Computer Center (Lee and Lee 1994) but, not surprisingly, it did not flourish until the late 1980s after the promulgation of the Act Protecting Computer Programs and the Act for Promoting Software Development – and even more to the point, the development of a formidable hardware industry. Since that time, and up till now, the growth rate has been remarkable (56.9 per cent per annum between 1985 and 1991, see Lee and Lee 1994; 64.1 per cent between 2000 and 2005, see Korea Information Society Development Institute 2007). The main actors in the country can be divided into three main categories: the incumbent suppliers of hardware components (such as TriGem Computer Inc), the spin-off from large chaebol of their information system function (such as Samsung Data Systems Co Ltd, now Samsung SDS) and new entrants (such as Haansoft, discussed below). Until the early 1990s, the technological level of the products of these companies was rather low, so much so that Lee and Lee (2004) classified as elementary all the product categories of Korean producers (from system software to application software and from artificial intelligence to software production technology). In the past 15 years, however, the technological

France and Korea

177

level has increased considerably, driving the growth of production, sales and number of companies (Korea Information Society Development Institute 2007). In 2001, the software industry represented 8 per cent of the total production value of the IT industry (against 4 per cent in 1997) in Korea, and had 1.15 per cent of the world market. As may be expected, the areas in which the country is most specialised are those where close and long-term relationships with large customers (both the state and large chaebol) give the largest advantage, that is enterprise software and IT services. Indeed system integrator companies (offering integrating services and software such as ERP and other software for Customer Relationship Management, Supply Chain Management, etc.), accounted in 2000 for 46.6 per cent of total software companies and companies in software related services for another 22.5 per cent (Korea Software Industry Association 2001). One of the main exceptions is Haansoft. The company, founded in 1989, is now the domestic leader (with over 70 per cent of the market) in word processors and other personal applications. In 1998, the company was about to go bankrupt and was salvaged by a large number of Korean private investors who, driven by strong nationalism, wanted to prevent acquisition by Microsoft. The government supported it by a generous bulk-purchasing programme (Asiaweek.com 2000).

6.6 The medium-high-technology sectors 6.6.1 Chemicals As we have seen, the chemicals industry (now shorn of pharmaceuticals) can be roughly divided into basic (or commodity) chemicals, and specialty/fine (or ‘effects’) chemicals; the first requiring large scale in production but not very demanding in R&D; the second smaller-scale in production, but often arising from large-scale R&D. It is easy to predict where Korea and France will excel – the first. Basic chemicals processes, like those to make the allied, chemistry-based products, glass, steel and cement, are by nature highly visible. They need a lot of capital to produce, but the providers of the capital can easily see what is being done with their money. Since they are sold as commodities, relationships with customer firms do not need to be close. Since they are highly capital-intensive, and there is really no such thing as a direct production operative, there is no particular need for employee inclusion in general, and no particular difficulty in including the few employees (probably in the engineering function) who count. The chemical industry was one of the ‘strategic’ sectors that the Korean government had decided to develop, through the introduction of large-scale plants supplied by foreign companies on a turnkey basis. In the early 1970s, the government launched the Heavy and Chemical Industry Plan, a long-term plan aimed at a rapid build-up of capacity to manufacture basic intermediate goods and in power generation and transmission (Amsden 1989). As shown in Figure 6.1, the production of chemicals is still a substantial fraction of Korean manufacturing. Basic chemicals is indeed the subsector in which Korea is most highly

178

France and Korea

0.03 0.025 0.02 2410 Basic chemicals 0.015 All other chemicals (2400–2410–2423)

0.01

Italy

Korea

France

Sweden

Japan

Germany

United States

0

United Kingdom

0.005

Figure 6.1 Production in sector X/total production. Year 2000 (source: OECD (2003b) Structural statistics for industry and trade. Database version). Note Sweden and US 1999; Sweden production at factor costs.

specialised. In other chemicals it is about equal with France and Germany. However, it appears from Table 6.8 that the performance of Korea in chemicals is mainly the result of the level of economies of scale that the large chaebol manage to achieve with the support of the state and of banks and not of any important innovative strategy. The French performance is slightly different. In production specialisation in basic chemicals France is third after Korea and the chemicals giant Germany. Table 6.8 Chemicals: France and Korea France

Korea

Patenting: RTA

1963–1979 0.91

1990–1999 1.09

1963–1979 1.34

1990–1999 0.40

Manufacturing trade balance, percentage of output

1992 +0.5

2001 +0.5

1992 NA

2001 NA

Production specialisation

DTI – 2003 0.99

OECD – 2000 1.2

DTI – 2003 0.76

OECD – 2000 1.01

R&D intensity, percentage

DTI – 2004 2.51

OECD – 2000 NA

DTI – 2004 1.95

OECD – 2000 NA

Note ** R&D intensity: DTI mean for chemicals: 3.7 per cent.

France and Korea

179

More surprisingly it is also in the top three for production specialisation in ‘other chemicals’. However the output and patent specialisation figures for French firms in the industry (Table 6.8) are a little below the average. The production specialisation owes much to the strength of the ‘old’ French economy in cosmetics and perfumes. 6.6.2 Machinery Machinery is another sector where it is easy to make the same prediction about both Korea and France: weakness. Indeed, we have already made this prediction above. Most machinery (particularly non-electrical) is a naturally small-scale ‘specialised supplier’ sector, in which innovation in products depends on close relationships with customers, and innovation in processes depends largely on the initiative of skilled production workers. It therefore has low visibility and high spill-overs. In both countries, the presence of family capitalism could have been a point of strength, and as we shall see in the next chapter, employee inclusion is not hard to achieve in small machinery firms. The fatal deficiency is the lack of support downstream, from customers – and from finance. Large French and Korean firms have not been interested in building up close cooperative relationships with small suppliers. The French and Korean state have not, at least until recently, been interested in small firms. The banks that have done their bidding have neglected such firms. There is no strong lower tier of banks specialising in getting close to small and medium enterprises. For the results, see Table 6.9. In Korea, although machinery was included in the five year plan of 1966, and subsequently as a strategic sector (Woo 1991), only a few companies, all within the chaebol system, have developed. Of these, the only company that in 2004 made the DTI scoreboard was Hyundai Heavy Industries, whose R&D intensity Table 6.9 Machinery and equipment not elsewhere classified: France and Korea France

Korea

Patenting: RTA

1963–1979 0.94

1990–1999 1.01

1963–1979 0.48

1990–1999 0.46

Manufacturing trade balance, percentage of output

1992 –0.4

2001 –0.5

1992 NA

2001 NA

Production specialisation

DTI – 2003 NA

OECD – 2000 0.69*

DTI – 2003 1.25

OECD – 2000 0.90*

R&D intensity, percentage

DTI – 2004 NA

OECD – 2000 2.2

DTI – 2004 0.98

OECD – 2000 1.0

Notes * Excludes domestic appliances. ** R&D intensity: DTI mean for Engineering and machinery: 2.5 per cent; OECD mean for Machinery and equipment n.e.c.: 2.15 per cent.

180

France and Korea

was only 1 per cent, among the lowest in the sector. In 2004, Korean production of machine tools (the only subsector for which we have comparable data) represented 5.2 per cent of the worldwide production, accounting for a low, but still positive, level of specialisation in this sector (see Appendix, Table A10). The need of the chaebol for machinery, and their willingness to develop machine-making subsidiaries within the group, at least provided some areas of Korean strength in machinery. Matters were worse in France. None of the French companies made the DTI scoreboard in Engineering and Machinery between 2001 and 2004. In 2004, the global market share of France in the machine tools sector was 1.89 per cent (Cecimo 2005) – in relative terms considerably worse than Korea’s. As explained by Ziegler (1997), machine tools is a sector where the French style of corporate governance did not succeed, mostly due to the high centralisation of power (low inclusion of the employees) and clear cut distinction between the management and the technicians. That was bad enough, but as Ziegler showed, between 1975 and 1985, state intervention made things worse. Precisely at the moment that the machine-tool industry required higher skills and more flexible forms of work organisation in order for companies to position themselves in more quality-oriented and less cost-sensitive markets, the French state attempted to modernise the industry by imposing policies copied from the large firms that competed in mass markets (Ziegler 1997).14 6.6.3 Automotive Until recently, one would have had to describe the motor vehicle industry as difficult, though not hopeless, for France and Korea. As we have seen, it is quite capital-intensive and decidedly ‘scale-intensive’, particularly at the final assembly stage – so it needs large quantities of patient capital, deployed for mostly quite visible purposes. So far so good. However, it requires the coordination of a complex supply chain, in which close cooperation is required not only in production but in development. This is much less favourable. Perhaps worst of all, its scale-intensity is associated with the use of large numbers of manual workers as direct production operatives – a serious challenge given the lack of employee inclusion in France and Korea. Until recently: as we saw in Chapter 5, developments in the sector have moved rather against stakeholder capitalism. With digitalisation, and the rise of CAD-CAM, the initiative of production workers is less valued, and at the same time the relationships among firms in the supply chain can be, in a sense, digitalised: with the instant flow of precise information about design specifications as well as production volumes, less depends on trust and the exchange of more-or-less tacit knowledge. In Korea, the first development of the industry dates back to the early 1960s, progressing from the stage of CKD (Completely Knocked Down) manufacture, to mass production of a single model (the Hyundai Pony), to export of a wide range of models from three big companies – Hyundai Motor, Kia Motor, and Daewoo Motor – in the early and mid-1990s (Chung 1994; Kim 1997). The sector was hard hit, however, in the crisis of 1995–1998. This revealed Korea’s weaknesses,

France and Korea

181

which had persisted in spite of the enormous amount of money that was channelled to the development of this sector. They became particularly clear after the end of the authoritarian control of labour (1987). The introduction of innovative manufacturing techniques that would have helped maintain low production costs and improved quality, was obstructed by strong and antagonistic unions. The only company that appears to have succeeded in undertaking wide-ranging reforms of both its technical and human system was Hyundai Motor Company (Chung 2001). The other companies, Kia in particular, tried during the 1990s to introduce more advanced management and production techniques but failed due to the opposition of the workforce (Lansbury et al. 2002). Likewise, the development of new products could not leverage on the innovativeness of suppliers. In Korea, as in Japan, the automobile sector is based on the extensive use of several layers of subcontracting. However, unlike Japan, subcontractors were not assisted to raise their level of technology. As the large assemblers used their contractual power to squeeze the suppliers’ margins and to delay the payment of bills, they impeded rather than assisted technological upgrading (Chung 1994). The result was that only Hyundai’s motor division survived the crisis, and its aftermath, as an independent firm, Hyundai Motor (separated from the rest of the group). It took over Kia; GM took a majority share of Daewoo. Hyundai Motor remains the leader in the country, accounting in 2005 for 64.2 per cent of Korean car production (company web page). Its contribution to motor vehicle production makes Korea (excluding foreign-owned production) count as moderately specialised in the sector (Table 6.10). It has managed completely to overcome a longstanding problem with quality and has gone on to lead the international field in cars per worker in 2004 (Mackintosh 2006).15 If its R&D intensity is any guide, Hyundai has moved suddenly over to the technological offensive. In the 2001 DTI Scoreboard its spend was too low to register; in the

Table 6.10 Automotive: France and Korea France

Korea

Patenting: RTA

1963–1979 1.28

1990–1999 0.91

1963–1979 1.27

1990–1999 0.69

Manufacturing trade balance, percentage of output

1992 +1.5

2001 +1.3

1992 NA

2001 NA

Production specialisation

DTI – 2003 2.3

OECD – 2000 1.2

DTI – 2003 1.5

OECD – 2000 1.1

R&D intensity, percentage

DTI – 2004 4.31

OECD – 2000 2.4

DTI – 2004 3.65

OECD – 2000 3.3

Notes R&D intensity: DTI mean for Automobiles and parts: 4.3 per cent; OECD mean for motor vehicles etc.: 3.68 per cent.

182

France and Korea

2004 Scoreboard it was the lowest of the firms shown (2.1 per cent); in the 2006 Scoreboard it was 4.0 per cent, just below the sector average of 4.2. The motor vehicle industry (and particularly cars) is the medium-high technology sector in which France performs best. This situation is rather new. The 1980s – high summer for stakeholder capitalism in the industry – was a period of serious crisis for French firms (confirmed by the patenting figures of Patel and Pavitt, 1990). They responded with lay-offs, closing of plants such as Renault’s at Billancourt, and adoption of just-in-time forms of organisation. As we saw above, large customers and government belatedly helped SME suppliers to upgrade. The result was a sharp increase in productivity and quality (Freyssenet 1998). Many foreign companies chose to open subsidiaries in France due to the efficient network of subcontractors of automobile parts (Invest in France Agency 2003). All major car makers now have production facilities in France; foreign manufacturers make up two thirds of total turnover and nearly a quarter of exports (Invest in France Agency 2003). Our DTI figures in Table 6.10 show French firms’ specialisation in the sector is well above average and rising between 1997 and 2003, and the DTI figures for their R&D intensity in 2004 show them just below the Japanese. Renault’s rescue of Nissan between 2003 and 2005 represented an astonishing reversal of expected roles.16 The French motor industry has of course not been completely converted to stakeholder capitalist ways. Production is still highly Tayloristic and the relationship with the employees is not inspired by principles of inclusion and codetermination. The position of suppliers has improved, but they are not fully included either. The French resurgence does help to confirm that technological change in the sector no longer favours stakeholder capitalism to the previous extent. The core source of innovation has tilted towards the design and marketing functions in which France is traditionally strong.

6.7 Conclusion The comparison of France and South Korea shows the strengths and the limitations of our approach. Their finance and corporate governance systems, we found, were until the 1980s very similar in some respects, with a directive (‘dirigiste’) central state exercising strong control or influence over the banking system, of which the main beneficiaries were a rather small number of large firms. Smaller firms had generally poor access to bank and other finance. Neither was a ‘stakeholding’ system: within firms power was exercised very much top-down and employees were excluded; among firms, relationships were only close, in France, where the educational elite bound big firms together, and in Korea within chaebol groups. A key difference was that in South Korea the state avoided direct control and ownership of manufacturing industry (with the single major exception of steel), and left the spearhead role to the empire-building chaebol entrepreneurs. In France, most of the large firms in the higher-technology sectors were at least for a time under state ownership. Most large private firms were old and their survival through the bad times of 1931–1945 suggested a degree of caution. Expert gamblers in Korea, versus bureaucrats and prudent preservers of

France and Korea

183

family fortunes in France – this difference helps to account for the better Korean performance in high-opportunity (and thus high-risk) areas – above all electronics. In other areas where outcomes differ sharply, we see how favourable FCG factors may permit, not enforce success. In aerospace FCG was as favourable in Korea as in France – but history was not, and in such a path-dependent sector that was fatal. In telecommunications, FCG was as favourable in France as in Korea; but government was much less interested, and so France lagged while Korea came up fast. This difference of interest of government can partly be explained by telecommunications’ position within the electronics family, strong in Korea, weak in France. In software too, different outcomes are largely to be explained by the relationship with electronics. There remain wide areas of similarity of performance: shared weakness in most areas of machinery shows that such FCG systems cannot cope with lowvisibility, small-scale, stakeholder-inclusive innovation. Perhaps the most interesting Franco-Korean resemblance is in motor vehicles, in which in the 1980s and 1990s both countries’ firms were forced, as it were through gritted teeth, to copy enough of the Japanese ‘stakeholder state of the art’ to survive, and then found, with digitalisation, that the sector’s technology was changing in their favour, particularly as regards small and medium cars. We must not ignore the great changes that took place in both countries’ systems early enough to have made their mark already on technological performance. In both countries the role of the state has changed greatly in the last 30 years; above all, since the mid-1980s, it has become markedly less interventionist. In France, the withdrawal has been largely a withdrawal from ownership, with a first phase substituting private ‘core shareholders’ for state control, and a second phase which exposed almost all privatised firms to a degree of British-style indirect control. In Korea there was not much to privatise, and the focus was on giving smaller firms more and more equal access to finance of all kinds, and making the chaebol less dependent on debt. The difference in outcome has been striking. While many French managers of large firms clearly appreciate the new disciplines of full exposure to market forces and pressures from institutional investors (Morin 2000) – and enjoy the stock options they have awarded themselves – they have mostly responded à l’anglaise: alongside their shift to a more commercial, less technology-driven approach, they have cut back on R&D; a reduction which has been barely compensated by increases of R&D spending by smaller firms. The consequence has been that France’s business-financed R&D intensity, relative to international averages, has fallen (Table 3.13). The chaebol are accustomed to combining commercial pull with technology push – that was how they broke into international markets – and the change in pressures on them has been much more subtle. They have been obliged to finance themselves in more conventional ways, and to cut down their debts they had to sell off many non-core operations. But their controlling family owners remained generally safe from takeover, and many were able and willing to increase their R&D intensity. To sum up: the Koreans have become more American; the French, heaven help them, more British.

7

Corporate governance, finance, and innovation in Italy and Taiwan

7.1 Introduction Like France and Korea, Italy and Taiwan have at first glance little or nothing in common. They have not influenced one another or been subject to strong common influences. As to politics, Italy emerged from dictatorship some 40 years before Taiwan. As to economics, they were both mostly agrarian economies in the 1950s and in the following decades underwent rapid industrial development. However, as we shall see, this led in very different directions – Italy’s to a specialisation at best on medium-technology products that require high quality design and engineering, Taiwan’s from import substitution, via lowtech manufactures, to become one of the world’s largest producers of (high-tech) computer-related products. It may seem, then, that if they do both belong to the ‘family/state capitalism’ category, as we argued (with reservations) in Chapter 3, then so much the worse for our categories: they explain and predict little. The goals of this chapter are therefore twofold. The first is to look deeper at the similarities and differences in finance and corporate governance. We shall show how the differences widened – largely through Taiwan’s movement towards an American style of shareholder capitalism. The second is to show the (decreasing) effect of the similarities, and the (increasing) effect of the differences, on technological performance and specialisation.

7.2 Italy The Italian economy is dualistic in nature, with a small number of large companies (predominantly in the North West: First Italy) and a large number of small and medium enterprises, which account for an exceptionally large share of employment (Table 3.14). The latter are often organised in industrial districts, particularly in the North East (Third Italy). In both sets, family firms are the dominant form of business. Even in 1997–1998, of 208 Italian publicly-traded companies, 60 per cent were controlled by a family, the largest percentage among European companies in the study (Table 3.8). Pyramidal groups of firms are widely used as an instrument to overcome the undercapitalisation of Italian

Italy and Taiwan

185

firms without giving up control. They were, in 1994, the most widespread form of control (Barca et al. 1994), and there is no evidence of much change since then. The very high share of ‘non-financial holdings’ in the 11 Italian firms shown in Table 3.9 demonstrate family pyramids – and crossholdings of allied families – at work even in the largest firms, some of them recently privatised. The pyramid arrangement means that ‘majority’ shareholders often hold well under half the capital, which gives them less of an interest in the earnings on the shares. This exacerbates the problem of expropriation of minority shareholders by majority shareholders, which is often given as one of the reasons for the underdevelopment of the Italian stock exchange.1 Financial institutions have always played a much more limited role in Italy than in most of the other advanced countries. Banks, insurance companies, pension and investment funds owned in 1993 only 14 per cent of the shares of listed companies, a percentage well below Britain (62 per cent), Japan (42 per cent), America (37 per cent) and Germany (29 per cent) figures (see Table 3.10).2 The underdevelopment of the capital market has forced Italian firms to rely more heavily on bank finance. However, bank–firm relations have been weak in Italy and much closer to the arm’s length type of the US and UK than to a relationship kind of banking (Capra et al. 1994).3 The only exception to this rule has been Mediobanca. This investment bank was established in 1946 with the aim of boosting post-war reconstruction and it has been the most active in relationship banking. From its foundation, it progressively acquired stakes in all the largest Italian industrial and insurance groups (mainly in the Northern regions) and had a strong involvement in their controlling coalitions. On the other hand, since 1987, many Italian groups and several foreign banks have had equity shares and a seat in the governing bodies of Mediobanca. This, therefore, has operated as a sort of clearinghouse and repository for all the interwoven shareholdings in key private enterprises. The managers and large shareholders controlling this immense and articulated network of firms composed the well known ‘salotto buono’ (drawing room), where in a typical Italian way of doing business, strategic alliances were set up and other relevant decisions were taken. Mediobanca has also been active in formulating long-run financial strategies, coordinating financial support and monitoring and favouring mergers and acquisitions (Galli 1995). All major reorganisations in Italian corporate history (for example the merger between Montecatini and Edison and that between Pirelli and Dunlop), and most debt rescheduling, have seen the involvement of this bank. Its activity has been supported by three important commercial banks (Banca Commerciale Italiana, Credito Italiano and Banca di Roma), which have collected large amounts of capital for Mediobanca, selling certificates of deposit through their branch network. In the last few years, however, the role of Mediobanca has progressively faded. ‘In the past, Mediobanca twisted the arms of Italy’s commercial banks to persuade them to finance its shareholder-clients. But Mediobanca and its network are no longer the only sources of capital, so the value of being a friend of the

186

Italy and Taiwan

bank has been much diminished’ (Economist 2000). Although in 1999 it acted for Olivetti’s takeover of Telecom Italia and succeeded in blocking the attempted takeovers by Unicredito Italiano of Banca Commerciale Italiana and by SanPaolo IMI of Banca di Roma, the role of the bank has now become almost irrelevant and other Italian and foreign banks are taking its place. The venture capital market has not played any considerable role in Italian start-up companies, particularly in the high-tech sectors. Until the mid 1990s it barely existed, and in 1996, only 2 per cent of total investments were channelled to high tech companies (Aifi 1997). Even in 1999 Italy trailed all our other European countries in venture capital flow in proportion to GDP (Table 3.11), as it did by a still larger margin in terms of high-tech venture capital (Table 3.15). (South Korea and Japan’s venture flows look worse in Table 3.11 – but they, unlike Italy, have a near-equivalent of venture capital operating within large groups.4) Until the privatisation process, the public sector played a fundamental role in the Italian economy in terms of employment and value added. Before the privatisations of the 1990s,5 public firms accounted for around 15 per cent of nonagricultural employment, for 20 per cent of value added and for almost 25 per cent of fixed investments (OECD 1994). They were particularly widespread in banking, where they made up two thirds of all banks, and in other strategic sectors such as transportation and communication, electricity, natural gas and water, electronics, food, chemicals, and transport equipment. Macroeconomic objectives (i.e. trade balance, inflation and employment) were the avowed driving forces inspiring the management of these firms. Of these, employment was clearly the most important in practice. For example, support to employment was one of the reasons adduced for continuing to finance the loss-making EFIM (the large public conglomerate liquidated in July 1992). However, it was estimated that providing social subsidies to the 37,000 employees of the conglomerate would have been less expensive (OECD 1994). The state’s generosity in this and many other cases was clearly linked to two facts of geography: first, public sector employment was heavily concentrated in the Second Italy, the economically depressed South; second, Southern politicians were extremely powerful in the Christian Democrat party, which dominated all the governments from the late 1940s till the early 1990s. As for innovation, public firms did play a central role in Italy’s R&D expenditure, accounting between 1980 and 1995 for about 20 per cent of total spending. They seem to have contributed considerably to technological innovation, thanks especially to their privileged relationships with public financial sources and their capacity to tolerate long waits for a return (OECD 1994). The general strategy was to raise the technological level in those sectors where they were already heavily involved, particularly in information systems and telecommunications, chemicals, energy, aerospace, new means of transport, new materials and bio-technology. However, it is difficult to judge how far expenditures on R&D and other forms of investment for innovation were made on the basis of economic evaluation, and how far on the basis of political interests; the latter probably dominated.

Italy and Taiwan

187

Apart from public firms, Italy does not have a long tradition of public intervention for innovation. As Italy was a late industrialiser, until the second half of the twentieth century neither private firms nor the state spent much on R&D. The first public policies in favour of innovation were introduced during the 1950s and 1960s. However, they were fragmented and incoherent, with an irrational division of resources (OECD 1994). Moreover, what little was provided was mainly for basic research, with hardly any funds devoted to applied research or to complementary activities such as design and marketing. Even though in the second half of 1960s and during the 1970s the State started to play a more active role in supporting the innovative activities of the companies, the effectiveness of such intervention was very poor and many firms were forced to quit highly innovative activities started in the previous decade. (Examples include the production of computers by Olivetti, the research on nuclear power by Cnen and on laser technology by Cise and the Polytechnic of Milan.) During the 1990s, the role of the public sector in financing R&D activities reached the level of 50 per cent of total spending. Public funding to the private sector has usually been channelled through the Applied Research Fund and the Technological Innovation Fund. These are still in use and grant funds in the form of low interest loans and in some cases risk capital for applied research projects carried out by industrial companies, consortia of such companies, and other industrial research companies. During the 1980s and first half of the 1990s, the funds sustained mostly the oligopolistic core, namely Fiat, Olivetti and IRI. In the last few years, especially since the introduction of a simplified application procedure for SMEs, the funds have been used by a larger number of firms in several sectors of the economy. Public agencies in charge of providing forms of financing for innovation appear to have a reasonably high degree of industrial expertise as they are made up of university professors and experts in the specific fields, and not by simple bureaucrats. However, the slow and lengthy bureaucratic procedures that firms must undergo to obtain public funding prevent the government from effectively taking advantage of this expertise and from playing a critical and significant role in enhancing the innovativeness of firms in the country.6 R&D spending as a percentage of GDP was lower in the 1990s than in the 1980s and remained stagnant for the whole decade. In 2000 it was well below the European average and barely half that of Taiwan (Figure 7.1). The intensity of business spending on R&D (BERD) shown in Table 3.13 compares even less favourably with that of rivals (a figure for Taiwan is not available). Public funds for research have been limited (and ineffectively channelled)7 also within universities and research centres, causing a significant brain drain of Italian researchers towards other countries, particularly the US and the UK (Science 2005). The number of graduates residing abroad, between 1992 and 1999, was twice that of France, three times that of Spain and the UK and four times that of Germany (Becker et al. 2004). Recently, several regions8 have started to develop their own tools to enhance the innovative potential of universities, research centres and firms, by granting

188

Italy and Taiwan

2.50 2.00 1.50

Italy European Union Taiwan

1.00 0.50 0 1981

1985

1991

1995

1996

1997

1998

1999

2000

Figure 7.1 R&D spending as a percentage of GDP: Italy, Taiwan, EU (source: OECD (2003a) and National Statistics of Taiwan (various issues).)

substantial subsidies, opening scientific parks and developing technological transfer offices (see for example the recent Law for Innovation, 11/2003 of Friuli Venezia Giulia, providing financial incentives, tax reductions and other forms of support for innovative firms and universities collaborating with them). These appear to be giving results, as the number of high-tech firms organised in high-tech districts has increased. Famous examples are the Etna Valley around Catania with 1223 firms and 7000 employees and the District of Mirandola (Modena), which with its 292 firms represents the largest concentration in Italy of firms operating in the biomedical and medical precision systems sectors (Di Guardo and Schillaci 2003). In Italy, the stakeholders of innovation enjoy only a moderate degree of inclusion. Employees have the benefit of a high level of protection and can be fired only for giusta causa and giustificato motivo, two reasons which are very difficult to sustain.9 Employees’ representatives, however, have no rights of codetermination. In larger organisations, unions are very powerful and operate to make sure that the interests of the employees are respected – but with a rather antagonistic attitude (Tylecote and Visintin 2002).10 This is, therefore, not real inclusion. Only on rare occasions (for example the restructuring of the public conglomerate IRI), did collaboration take the place of confrontation in the solution of problems of strategic importance, in a manner referred to as the ‘Italian way to participation’ or ‘contractual participation’ (Costa 1997). In small and medium enterprises, the unions are much less powerful and industrial relations are generally based on personal relationships between the owner/entrepreneur and the employees. As the employee–employer relationship in SMEs is usually based on loyalty and trust, employers hardly ever make use of their limited right to fire employees. Entrepreneurs tend to show a sense of social responsibility towards the community they live in. On the other hand, within family businesses (the vast majority of Italian SMEs) strategic decisions are usually taken around the dinner table (Compagno et al. 2003) and there is some sort of glass ceiling that prevents non-family members from reaching the highest levels in the organisation. This is often referred to as one of the main

Italy and Taiwan

189

reasons for the high level of entrepreneurship in Italy. This too, then, is far from the typical German inclusion. One of the most striking characteristics of Italian industry is the importance of close long-term relationships among firms along the value chain. These relationships spread in every direction, horizontally and vertically within groups of firms (see above) and industrial districts.11 Within districts, several hundred firms specialise in one or two stages of the process of industrialisation of a particular product (chairs, glasses, tiles, gold jewellery and so on), which are then assembled and branded by only a few of them (Brusco 1982; Becattini 1979, 1991; Dei Ottati 1994).12 The division of labour among so many firms gives rise to a strong network of close long-term relationships. This is also enforced by a common culture, a similar level of capability and the capacity to transmit and assimilate tacit and non-codified knowledge. There is very little cooperation between rivals, however – competition is too intense for that (Boari and Lipparini 1999), and it has its limits even among firms within a network of trading relationships: Costa (2006) refers to Schopenhauer’s story of the porcupines, which in order to get warmer tried to get closer but then had to move back again because of the quills. In addition to districts, there is in Italy a small number of very large firms surrounded by hundreds of subcontractors. These subcontractors are totally dominated (and often exploited) by the large firms, but usually cannot survive without this type of relationship. Much as in the Korean case, for example, the subcontractors are not usually very innovative and strictly follow the guidelines coming from the large firm. The relationship is often close, long-term and exclusive (for an analysis of the Fiat case, see Camuffo and Volpato 2001). Both the districts and the larger firms are sustained by a second, less visible layer of activity characterised by a much higher level of inclusion. It consists of all those firms that make the machines that are utilised in the production process. These equipment suppliers usually have a close long-term relationship with the user firms. They know their needs, and work together with them for the introduction of new advanced machinery. Thanks to their high capability to absorb new electronics technologies in their products and their advanced technical and design skills, these firms generate a continuous stream of incremental innovations in equipment, and contribute to the flexibility of the users of their machines. The importance of the close long-term relationships of machine suppliers and producers is attested by their geographical localisation. For example, near Valenza Po there is both a cluster of gold jewellery producers and of gold forging machine builders. The same is true for spectacles in Veneto and for tiles in the Modena area. Northern Italy’s long-standing clusters are proof of the value of collaboration. Elena Ferraro of IECO, which makes machines for melting and electroforming gold, underlines the importance of exchanging information with her customers. Of the firm’s sales, 60% are within Italy. Most of those are of customised machines, rather than the off-the-shelf models and complete

190

Italy and Taiwan turnkey factories that IECO sells abroad. The need to keep up with the demands of the more sophisticated Italian goldsmiths has enabled Italian suppliers such as IECO, and nearby Sisma, to dominate their business, supplying about 80% of the total world market for machinery for making gold jewellery. (The Economist 1998b)

There is therefore, an exchange of information that generates what Malerba (1993) called innovative spirals: high requirements of firms draw out the innovativeness of machine builders, whose innovations allow firms to be even more innovative.

7.3 Taiwan In Taiwan, a family usually constitutes the basis for funding a company and developing a business. Family members also become managers as the business grows. Even when the company has gone public, family members have controlling influences on the management of the company. This creates incentives for dominant family shareholders to expropriate minority shareholders. Besides, previous studies indicate large family-controlled Taiwanese companies have a high degree of separation of (ultimate) ownership and (ultimate) control: voting rights exceed cash flow rights via pyramid structures and cross-shareholding. (Yeh et al. 2001: 1) Yeh et al. (2001) go on to argue that family members typically dominate the board of directors, that banks do not play a major role in corporate governance of firms due to restrictions on bank shareholdings in non-financial companies,13 and that the market for corporate control is not active due to the high concentration of ownership in the hands of families. As we saw in Table 3.14, an unusually large proportion of employment is in small and medium enterprises, the natural heartland of family capitalism. So far, so Italian. However, the government has, in recent years, tried to reduce the conflicts of interests between majority and minority shareholders by strengthening the independence and authority of the regulatory agency, by improving the transparency of information disclosures and by increasing the legal liabilities of board of directors and independent auditors.14 And our figures for the late 1990s (Tables 3.8 and 3.9) show that in one way or another ‘widely-held’ firms have become a much more important part of the corporate landscape in Taiwan than in Italy. Privatised firms seem to have become widely-held, rather unlike Italy. ‘Ventured’ firms may have gone in the same direction, though not so far. The state, as in Italy, is the second most important actor in corporate governance in Taiwan. It has been far more efficient and effective than Italy’s, however, in three areas: public firms, direct financing of R&D activities

Italy and Taiwan

191

and mechanisms of technology transfer, and financial support to innovative enterprises.15 Taiwan has had a sizable state-owned enterprise sector since the end of the Japanese occupation in 1945. The major industries and processing plants were then in government hands. Among these there were firms in the food, wine and tobacco industries, transportation, telecommunications (telephone, telegraph and postal service) and banking enterprises. During the initial processes of industrialisation the state entered also a number of strategic sectors that required large investments, such as chemicals (fertilisers in particular) and electrical power generation. During the 1970s, following the two oil shocks, the public sector widened to include petrochemicals (China Petroleum Corporation and China Petrochemicals Development Corporation), shipbuilding and steel. Between 1952 and 1995, the share of state owned enterprises in GDP accounted for an average of 15.1 per cent (with a peak of 17.8 per cent in 1969 and a low of 10.8 per cent in 1995). In 1996, seven years after the privatisation process began, there were still four public enterprises out of the five largest companies in the country and ten out of the first 50. Much as in Italy, through state-owned enterprises the government controlled strategic materials, assisted the industrial upgrading and development of the country, and supported the implementation of counter-cyclical and supply-side management policies. Unlike Italy, these companies managed also to perform rather positively over the decades, contributing to public sector revenues (McBeath 1997). Public companies were not directly active in the high-tech sectors, but they represented important customers for companies operating in upstream industries, particularly plastics, basic metals, synthetic fibres and advanced electronics. Another input to innovation is represented by competent human resources, particularly in the science and technology areas. The Taiwanese government has fostered the development of the engineering departments of Taiwan’s universities, bringing the number of engineers graduating each year from a few thousand in the early 1980s to over 50,000, over a quarter of all graduates in the mid 1990s. Through the activity of the National Science Council (NSC) and of the Council of Labour Affairs it has strongly encouraged the upgrading of researchers within universities, research centres and firms. The Ministry of Education has given the best students and researchers scholarships to foreign research institutes and universities (with the obligation to come back to Taiwan for a number of years) with the aim of increasing the scientific knowledge base and acquiring innovative technologies from overseas. By 2002, the number of researchers per thousand total employment was 6.8 (against 2.8 in Italy) (OECD 2004). A very important role in the transformation of the country from an agriculturebased model to an industrial one was played by the Industrial Technology Research Institute – ITRI. This non-profit R&D organisation was founded in 1973 by the Ministry of Economic Affairs to attend to the technological needs of Taiwan’s industrial development, engaging in applied research and technical services. It serves also as an unofficial arm of the government’s industrial policies in Taiwan. By 2001 it had 6000 employees. Other research institutes have also played a role in technology transfer (Wade 1990; Tsai and Wang 2002).

192

Italy and Taiwan

Another crucial development was the setting up of the Hsinchu Science Park.16 Since its foundation in 1980, the park has seen tremendous growth. In 2006 it counted over 100,000 employees subdivided between integrated circuits (60 per cent), computer and peripherals (13 per cent), telecoms (6 per cent), opto-electronics (19 per cent), precision machinery and materials and biotechnology (2 per cent). The majority of Taiwan’s best-performing firms in hightech industry originated from this park (for example Taiwan Semiconductor Manufacturing Company and United Microelectronics Corporation). Firms operating in the park enjoy fiscal and other advantages – capital injections by public agencies such as the Scientific & Industrial Development Fund and the Development Fund of the Executive Yuan, incentives to undertake R&D expenditures, and training courses for their employees (Chang and Hsu 2001). More general government policies have also played important roles in the financing of innovation. The approach of Taiwan’s government has been much less interventionist than South Korea’s, which as we have seen selected specific large firms for support, as did Italy’s (The Economist 1998a). It has recognised the major role of small and medium enterprises in the Taiwanese economy, and their difficulty in getting resources for R&D activities. Large percentages of public subsidies were reserved for SMEs (Hsu and Chang 2001); through the Statute for Industrial Upgrading and Promotion of 1991, tax incentives were granted to encourage companies to undertake R&D, automation, personnel training and other functional activities (Tsai and Wang 2002). The government played a similar role in encouraging the development of venture capital, first by devoting large sums of money from the Development Funds of the Executive Yuan as seed funds of new ventures (Hung 2003) and second, by persuading Hambrecht & Quist, one of the largest investment banks in Silicon Valley, to set up a subsidiary in Taiwan. In 1993, the cumulative total existing venture capital investment in Taiwan relative to GDP was 0.22 per cent, against 0.17 per cent in Italy; by 2000, it was further ahead, with 1.29 per cent, against 0.53 per cent in Italy (Allen and Song 2003). Most was invested in high tech sectors (in 2000 65 per cent), unlike Italy, as we have seen. We saw in Chapter 3 (Table 3.11) that, as of 1999, Taiwan ranked sixth among our countries for venture capital flow/GDP, and it has continued to improve. In 2004, in its World Competitiveness Yearbook, the International Institute for Management Development ranked Taiwan fourth in the world and second in Asia for venture capital investment, with a total number of 241 venture capital enterprises. In addition to a developing VC market, Taiwanese companies have had reasonable access to bank financing. As in Italy, banks have not played any significant role in the corporate governance of firms. However, one category of them, ‘medium business banks’, together with investment and trust companies,17 have been among the major providers of mid-term funds for most small and medium high-technology companies (often with loan guarantees by the government). The improving access of firms to finance and subsidies for innovation caused the relative importance of direct government spending on R&D to decline from

Italy and Taiwan

193

more than 50 per cent, on average, during the 1980s, to less than 40 per cent after 1997. A key role in Taiwan’s remarkable economic development has been played by cooperation among small and medium enterprises, which typically come together in networks of ‘multiple, volatile and short term links’ (Ernst 2000: 228). The necessary trust arises traditionally from family ties or kinship or peer group relations. Today, ties among companies in the high-tech sectors are based largely on networks of professionals graduated from a small group of universities (particularly Chiao Tung and Tsing Hua) who use these relationships as the central source of information and problem solving, but connections within Hsinchu Science Park also play a role (Harrison 1991). In the mid-1980s such networks helped Taiwanese SMEs to become subcontractors of foreign transnational corporations (mainly of American and Japanese origin) which had opened subsidiaries in the country in search of lower labour costs. Small and highly-specialised, they offered the degree of flexibility required in high-tech sectors (particularly electronics, see Section 7.4.1). Taiwan’s networks include a very balanced combination of local and global links that prevents the lock-in problems occurring in some other industrial districts. The local networks are able to change flexibly because global links create a lot of alternative channels for marketing information, technology exchange, and collaboration, customer-supplier production relationships, and investment opportunities. (Jou and Chen 2001: 86)18 The first arrangements were of the OEM (Original Equipment Manufacturing) type and involved the production of simple parts and components on the basis of detailed blueprints and with the technical assistance of the customer. During the 1990s, after a sufficient accumulation of knowledge and expertise, the arrangements turned into ODM and for some of them, like ACER and Mitac, also to OBM (Ernst 2000). (D is Design; B is Brand.)19 The relationships with foreign companies played a central role in the development of the electronics industry in Taiwan, both by exposing Taiwanese workers and managers to new organisational techniques and, most of all, by transferring technological competencies. The latter was made possible by the high level of absorptive capacity of Taiwanese companies20 and thanks to the political and economic framework orchestrated by the government. There are also networks that involve large companies. These take the form of loose networks of SMEs, mostly cross-sectoral, with a large company at the core that exercises financial control. In fact, financial resources are often channelled to SMEs, not directly by banks but indirectly through these large companies. The government has been instrumental in adding to the number of these networks, through its Center-Satellite Programme of 1984 (Numazaki 1986; Kuo 1998). Under this programme a large company is given financial and technical assistance and manpower training to build and maintain a network of satellite firms. This financial controlling role is a key difference from otherwise similar

194

Italy and Taiwan

cases in Italian districts, such as in the spectacles district in the Veneto region, where a large firm coordinates the activity of a myriad of craftsman firms specialised in a small number of activities, while focusing on the design, commercial and marketing functions. The closest resemblance is with the Japanese vertical keiretsu – the relationship of the large firm with small firms is more cooperative and closer than that of a Korean chaebol with small suppliers. The picture of cooperation among firms that emerges is at least as close as among Italian firms, but with a greater degree of flexibility (Guerrieri and Pietrobelli 2004). There is no equivalent of the ‘salotto buono’, which produces essentially conservative links among large private firms in Italy. The greater flexibility of Taiwanese networks owes something to the freedom of Taiwanese managers in their dealings with employees. As we pointed out in Chapter 3, the most obvious difference between Taiwanese and Italian firms is that the former are broadly free to hire and fire. Moreover, unions have never had a strong influence on the corporate governance of firms, even large ones. Before 1986, the Taiwanese labour relations system was authoritarian, and unions were state-controlled or employer-sponsored. During the 1970s and 1980s, union membership was between 15 per cent and 20 per cent, well below Italy’s (Buchanan and Nicholls 2003).21 After 1986, with the process of democratisation of the country, the ban on strikes was lifted and independent unionism grew considerably (the Labour Union Law still forbids the organisation of unions to persons employed in administrative or educational agencies and in munitions industries). Nevertheless, industrial action, on the part of organised labour (even independent unions) is still not aimed at gaining voice in the new political system or even within workplaces. Instead of trying to obtain a right to organise outside the old corporatist system, struggles have been mainly aimed at obtaining increases in end-of the year bonuses. Only recently a lively debate has flourished around the topic of introducing forms of industrial democracy (following German codetermination) within companies. Some labour organisations have also tried to obtain the legalisation of workers’ participation rights in enterprises but the government is still considering this, given the strong opposition of the entrepreneurs and conservative scholars and the general institutional environment, which does not appear to support the development of forms of codetermination (Han and Chiu 2000).22 There appears to be much the same limited informal inclusion in small and medium family businesses as in Italy. As in Italy, in family SMEs, non-family employees have little influence over decisions and cannot aspire to a career based on merit, which results in very low organisational commitment and a high turnover rate (Chen et al. 2003). In the high-tech sectors too, employees do not tend to identify with the company but to follow the highest pay level. The wide use of stock options here since the beginning of the 1990s has not cured the problem. ‘As companies started making profits and went public, stock options became attractive to employees – so much so that many employees make job-changing decisions based on the stock options and use them to negotiate a better financial package’ (Chang and Hsu 2001: 290). At the same time, some SME employers,

Italy and Taiwan

195

Table 7.1 Characteristics of family/state capitalisms

Extent of state ownership of industry, to 1990s State ownership/control of banking system Availability of funds for innovation, large firms Availability of funds for innovation, SMEs Ditto, high-tech SMEs Extent of family capitalism, including large firms, outside state sector Extent of employee inclusion Extent of employment protection Cooperative relationships among firms with trading relationships?

Taiwan

Italy

High Medium Fair Fair Good by late 1990s High; falling since 1980s Low Low Yes, including large-small and high-tech small

High Medium Fair Poor Remaining poor Very high and stable Low High Generally no except industrial districts and large-large

particularly in the engineering sectors, apply a paternalistic type of management deriving from the application of Confucian values. In these companies, as in Italy, employers and employees develop personal ties and employees show loyalty and commitment towards the organization (Chen 1995). Table 7.1 sums up.

7.4 Corporate governance and technological advantage, what would one expect? In both countries, the level of engagement of shareholders is generally high. Even when control is indirect and exercised through a chain of equity shares or cross shareholdings, at the end of the chain there is usually a family (for example the Agnellis) exercising influence. This usually guarantees engagement and firmspecific understanding on the part of controlling shareholders – with the possible exception of old firms where the family may have lost interest, and large ones which may have diversified too far. Low-visibility investments may still be inhibited if the providers of finance are not engaged, which is as we have seen generally the case in Italy, also in Taiwan outside favoured high-tech sectors. Both Italy and Taiwan present varying patterns of stakeholder inclusion. This is often good with suppliers and customers: there is effective coordination based either on personal ties (including family ties in both countries, various connections in industrial districts, and networks of professionals in Taiwan) or equity shares. In Taiwan, such ties appear to be more flexible and changeable (particularly within groups of firms). Small and medium firms in both countries frequently achieve a reasonable degree of (informal) employee inclusion. Larger firms in Taiwan have better opportunities for employee inclusion, if they choose to take them, due to the weakness of the union movement, which in Italy is both strong and confrontational, and (perhaps) to Confucian culture.

196

Italy and Taiwan

It is in the classic requirements for high-tech industry that the two countries have diverged increasingly. In Italy, in sectors and at times when competence destruction has dominated and new high-technology firms were needed for reconfiguration, expert risk finance has been conspicuous by its absence; but not in Taiwan. The rigidity of the labour market and the strong and confrontational unions have further obstructed reconfiguration in Italy. Taiwan, probably through learning from systems like Silicon Valley, has a much more flexible and varied labour market, particularly in the sectors of more recent industrialisation. Likewise, in the wider range of sectors and sub-sectors where there was high opportunity, external capital, both from venture capitalists and banks, has been much more freely available – increasingly so – in Taiwan. So has support of various kinds from government. While in both countries the attachment to family control has made large infusions of external capital less acceptable, this has been balanced by the more favourable terms of availability in Taiwan: less control is lost for a given infusion, particularly where government help is concerned. The Italian firms that have not faced any serious shortage of capital – those in the public sector – have not had the benefit of shareholder engagement. In both countries, management autonomy is rather low in private business, since families keep tight control, particularly in Italy. The upshot is that Italy should be specialised, other things being equal, in sectors and sub-sectors characterised by low visibility and moderate spill-overs, so long as they do not require large scale (which would bring out the worst in relations with employees, and strain the governance and growth potential of family business). So should Taiwan, with a decreasing scale constraint. High opportunity or need for reconfiguration can be expected to put a sector out of Italy’s reach, but not, for at least the last 20 years, out of Taiwan’s.

7.5 The high-technology sectors 7.5.1 Aerospace As we have seen, aerospace is a relatively large-scale industry, both in terms of scale of production and size of project. Italian and Taiwanese firms are generally too small and undercapitalised to play a central role in the world competitive arena. Only two groups of companies, one in each country, have a good performance in this sector – one only recently privatised (Finmeccanica) and one public (AIDC).23 In Taiwan, the industry operates on a centre-satellite basis with a number of small and medium enterprises working as subcontractors for AIDC (and for foreign companies) and concentrating on manufacturing and assembly operations (ITIS 2003). AIDC is the only company with strong technological capabilities. Owing to the progressive cost-driven strategy of the large aerospace companies in the US and Europe, Taiwanese SMEs are facing strong competition from low labour cost countries and in order to succeed need to climb the ‘value ladder’.

Italy and Taiwan

197

The scale of finance required has been a deterrent – which the government has recently tried to overcome by offering subsidised loans. What it has not been able to do is to help through public purchasing, for it buys relatively little in this area compared with countries with a large absolute size of military spending on domestic production (ITIS 2003). The situation in Italy is very similar. Its aerospace industry too operates as a subcontractor for foreign companies (particularly American). Only the two largest companies (Alenia Spazio and Avio), the first specialising in satellite components and the second in aero-engine modules and components, have developed high technology standards. The two companies invest respectively 20.7 per cent and 12 per cent of their turnover in R&D activities, high intensities compared with the DTI industry mean of 4.6 per cent. As might have been guessed from these figures, they are both state-owned, part of the Finmeccanica Group, or rather they were till 2004, when Alenia Spazio became part of a joint venture of Finmeccanica with Alcatel (Alcatel Alenia Space, of which Alcatel controls 67 per cent of the shares), and the American private equity group Carlyle acquired 70 per cent of Avio (company websites). In Italy too the industry takes the centre-satellite form with a large number of small and medium enterprises working more or less exclusively for the two large companies. Thus, Avio relies on a network of 400 subcontractors that employ over 3000 people in the Turin area (Il Giornale 2006). The small and medium enterprises are mainly manufacturers and assemblers and do not have their own R&D capabilities. Table 7.2 gives the usual performance review for Italy (unfortunately few comparable data are available for Taiwan) and confirms its weakness in spite of the R&D effort (which in absolute terms is small). The one discordant figure, for DTI production specialisation, flatters Italian aerospace. The DTI database only relates to large firms. In a country with few large firms in Table 7.2 Aerospace: Italy and Taiwan Italy Patenting: RTA

1963–1979 0.31

Taiwan 1990–1999 0.32

1963–1979 –

1990–1999 0.33

Manufacturing trade 1992 balance, percentage 0.0 of output

2001 −0.3

1992 NA

2001 NA

Production specialisation

DTI – 2003 1.50

OECD – 2000 0.44

DTI – 2003 NA

OECD – 2000 NA

R&D intensity, percentage

DTI – 2004 19.31

OECD – 2000 13.7

DTI – 2004 NA

OECD – 2000 NA

Notes DTI: Aerospace and defence. R&D intensity: DTI mean: 4.9 per cent; OECD mean: 10.23 per cent. For definitions and sources, see Table 4.2 and Appendix. The absolute numbers of patents for Taiwan in 1963–1979 are too small for the data to be worth using.

198

Italy and Taiwan

its most dynamic industries, a sector like this one dominated by large firms seems larger than it is. 7.5.2 Pharmaceuticals As expected, neither of the two countries has a strong pharmaceutical sector. No Italian pharmaceutical company was included in the 2003 DTI scoreboard (Table 7.3). The fact that the patenting and OECD production data show a specialisation in pharma owes almost everything to foreign multinationals. In this sector, foreign subsidiaries dominate and most of the R&D appears to be theirs. As for Taiwan, the (rather lonely) patent data in Table 7.3 show no specialisation in this sector. However, the situation has been changing recently thanks to Taiwan’s strength in venture capital and increasing public investments in biotechnology (Il Sole 24 Ore 2005). Between 1997 and 2001, 132 new biotech companies were established, 21 per cent of them focused on biopharmaceuticals (ITIS Project Development Centre for Biotechnologies 2002). Taiwan, like other Asian countries, has a long tradition in the production of natural botanical compounds which, for their greater chemical diversity than synthetic molecules, are progressively becoming ideal ingredients of high-throughput screening and as a source for the design of combinatorial libraries (see Chapter 2). 7.5.3 ‘ICT hardware’ – the main electronics sectors This sector refers to Office, accounting and computing machinery (OAC); Radio, TV and communications equipment (RTC). The electronics sectors are the ones where Taiwan and Italy present the most striking differences, the former being among the leaders and the latter performing rather poorly. As explained above, this is largely due to their high opportunity. Table 7.3 Pharmaceuticals: Italy and Taiwan Italy

Taiwan

Patenting: RTA

1963–1979 1.48

1990–1999 1.54

1963–1979 –

1990–1999 0.13

Manufacturing trade balance, percentage of output

1992 −0.5

2001 −0.3

1992 NA

2001 NA

Production specialisation

DTI – 2003 NA

OECD – 2000 1.27

DTI – 2003 NA

OECD – 2000 NA

R&D intensity, percentage

DTI – 2004 NA

OECD – 2000 NA

DTI – 2004 NA

OECD – 2000 NA

Nsotes * R&D intensity: DTI mean: 15 per cent. The absolute numbers of patents for Taiwan in 1963–1979 are too small for the data to be worth using.

Italy and Taiwan

199

Further, the frequent paradigm shifts in these sectors (particularly office, accounting and computing machinery) have imposed frequent and radical reconfigurations, which Italy was unable to cope with – but Taiwan increasingly could. In Taiwan, we can identify two main ICT clusters, for semiconductors and PCs (Luo et al. 2003; see also Hobday 1995a,b; Guerrieri and Pietrobelli 2004). The semiconductor cluster developed in the 1960s, following the activity of a number of multinationals, which started packaging and testing operations in the country. In the early 1980s, after ITRI signed a technology transfer arrangement with RCA (US), a number of companies spun off from the institute, such as United Microelectronics Corporation and TSMC, progressively specialising in high-tech design and generation of photomasks, wafer fabrication, assembly and final testing. The vertical disintegration that characterises the production in this sub-sector encouraged the setting up of numerous companies that focused on the development and exploitation of specialised market niches, such as parts of consumer products (telephones and microcontrollers) or chipsets for PCs and various peripherals. More recently, the more high-tech companies moved on to the production of DRAMs, communication and multimedia chips. In the electronic components market, which is overall dominated by Japan and the US, Taiwan with its hundreds of component makers has achieved a very strong position. Taiwanese firms have even improved their position in the capitalintensive mass production of precision components (for example CRT picture tubes for computer monitors and display devices for laptop computers). Flatpanel displays, originally developed for notebooks and desktop PCs, are now progressively being employed in the production of LCD-TVs, displays for cell-phones and digital cameras. Taiwan entered this sub-sector at the end of the 1990s, when Japanese firms, in order to limit the expansion of Korea in the market, licensed the latest technologies to Acer and other local companies (Mathews 2004). Taiwan already had well-developed ‘absorbtive capacity’ derived from several years of attempts to enter the market. The licenses allowed it to overcome the high barriers to entry and to become one of the three market leaders (ITIS 2002). The PC cluster is composed of large firms operating as OEM and ODM (such as Mitac and Acer, which have also developed marketing, distribution and service capabilities), and of thousands of SMEs – parts producers, assemblers and sub-assemblers, likewise producers of simple parts in the plastics, metal working, chemicals and electronic sectors (Luo et al. 2004). Taiwan is now the world’s largest supplier of notebook PCs, computer monitors, motherboards, switching power suppliers, mouse devices, keyboards, scanners and a variety of add-on cards (see Table 7.4). In 2003, nearly 70 per cent of desktop PCs worldwide were either made in Taiwan or contained a motherboard made by a Taiwanese company (Hu 2004). As shown in Tables 7.5 and 7.6, Taiwan presents a strong performance in both these sectors: the revealed technological advantage is very high in radio,

200

Italy and Taiwan

TV and communications equipment (which includes the semiconductor cluster), and the production specialisation in IT hardware (which also includes semiconductors) is the highest among our countries. The OAC sector has too high a need for reconfiguration, as well as too high opportunity, for Italian firms to be competitive in the market. Notwithstanding the early developments in Olivetti24 and isolated stories of success such as that of Eurotech25 in Friuli Venezia Giulia, Italy is now very weak in this industry. No Italian firm is included in the 2003 DTI scoreboard for IT Hardware,26 and the average R&D intensity (2.5 per cent) is the second lowest (see Statistical Appendix). The performance in Radio, TV and communications equipment – at the very least a high opportunity sector – appears to be equally bad: no Italian firm is Table 7.4 Taiwan’s world market share in electronic products (2003) Product

World market share (%)

DVD-R Motherboard IC Manufacturing LCD Monitor Notebook PC DVD player IC packaging

78 77 75 58 54 42 35

Source: MIC (2004) as quoted by Hu (2004).

Table 7.5 Office, accounting and computing machinery: Italy and Taiwan Italy

Taiwan

Patenting: RTA

1963–1979 0.68

1990–1999 0.55

1963–1979 –

1990–1999 0.67

Manufacturing trade balance, percentage of output

1992 −0.8

2001 −1.3

1992 NA

2001 NA

Production specialisation

DTI – 2003

OECD – 2000 DTI – 2003

R&D intensity, percentage

ITh NA

ITh + E&E NA 0.26

DTI – 2004

ITh ITh + E&E 5.69 4.03 NA

OECD – 2000 DTI – 2004

ITh ITh + E&E 13.79* NA 2.5

OECD – 2000

OECD – 2000

ITh ITh + E&E 4.10 2.56 NA

Notes * One firm. R&D intensity: DTI mean for IT hardware 13.1 per cent; DTI mean for IT hardware + Electronics and electrical equipment: 7 per cent; OECD mean: 5.27 per cent. The absolute number of patents for Taiwan in 1963–1979 is too small for the data to be worth using.

Italy and Taiwan

201

Table 7.6 Radio, television and communications equipment: Italy and Taiwan Italy

Taiwan

Patenting: RTA

1963–1979 0.59

1990–1999 0.57

1963–1979 –

1990–1999 1.93

Manufacturing trade balance, percentage of output

1992 −1.3

2001 −1.2

1992 NA

2001 NA

DTI – 2003

OECD – 2000

DTI – 2003

OECD – 2000

Production specialisation R&D intensity, percentage

E&E ITh + E&E NA NA 0.56

E&E ITh + E&E 2.14 4.03 NA

DTI – 2004

DTI – 2004

OECD – 2000

E&E ITh + E&E NA NA 9.1

OECD – 2000

E&E ITh + E&E 1.66 2.56 NA

Notes * R&D intensity: DTI mean for electronic and electrical equipment: 5.5 per cent; OECD mean: 6.65 per cent. The absolute number of patents for Taiwan in 1963–1979 is too small for the data to be worth using.

included in the DTI scoreboard for electronic and electrical equipment, the patenting performance is very poor and the manufacturing trade balance is negative. 7.5.4 Software and IT services Software is not a sector of specialisation for either Taiwan or Italy (see Table 7.7). In Taiwan there would seem to be favourable finance and corporate governance conditions for package software and middleware, given the strength of venture capital. The flexibility of the labour market should be helpful too. But good venture capital is everywhere sector-specific, and in Taiwan it has developed where the government wanted it to: software was not among the sectors considered strategic by the government and did not receive any subsidy or other forms of support. Moreover, software is a sector that has only recently become internationalised in production terms. Therefore, unlike other high-tech sectors, in software Taiwan could not gain from technology transfers from large multinationals. The result is that the sector is still in its infancy, concentrating on the local market and with very low quality standards (Lin 2001). ‘Procedures used by the local software industries aren’t sound, production systems adopted are defective, resulting in extremely low production and poor quality of the products’ (Lin 2001: 64). The Italian software industry too is weak. Given the difficulties of coping with reconfiguration the package and middleware sub-sectors are virtually non-existent. The only sub-sector that can take advantage of the inter-firm relationships that exist – and which does not suffer much from competence-destruction – is enterprise software. Accordingly, the industry, such as it is, consists mainly of small and medium enterprises specialising in enterprise software for SMEs or for

202

Italy and Taiwan

Table 7.7 Software and IT services: Italy and Taiwan Italy

Taiwan

Patenting: RTA

1963–1979 1.03

1990–1999 0.38

1963–1979 –

1990–1999 0.55

Manufacturing trade balance, percentage of output

1992 NA

2001 NA

1992 NA

2001 NA

Production specialisation

DTI – 2003 NA

OECD – 2000 0.98

DTI – 2003 NA

OECD – 2000 NA

R&D intensity, percentage

DTI – 2004 NA

OECD – 2000 NA

DTI – 2004 NA

OECD – 2000 NA

Notes * R&D intensity: DTI mean for Software and IT services: 10.7. The absolute number of patents for Taiwan in 1963–1979 is too small for the data to be worth using.

specific niches that the large software houses like SAP do not cover (Compagno et al. 2004).

7.6 The medium-high-technology sectors 7.6.1 Chemicals In Taiwan, the chemicals industry contributes over 10 per cent of the total output of the country. The sector, dominated by the CPC, and recently privatised, was initially developed to support the local textiles, rubber and plastics industries, becoming progressively stronger in petrochemicals (ITIS 2002). Recently, with the strengthening of the IT sector, Taiwan’s material and fine chemical industry has been focusing on semiconductors, panel display materials, printed circuit boards, nanotechnology materials and other high value-added products, and is expected to play an ever-growing role. In the 1950s and 1960s Italy held world leadership positions in chemicals, particularly in organic chemicals, but in the following decades it underwent a progressive decline (Bussolati et al. 1995). Only in the polypropylene sector does it (with Montedison) still maintain a leadership position. The large scale of production and R&D in the industry are clearly a problem for the Italian private sector. In speciality and fine chemicals, where the relatively high inclusion of customers could have been a source of competitive advantage, Italy, incapable of coping with the moderately high level of opportunity, has always adopted a follower strategy (Bussolati et al. 1995). The Italian performance in the sector revealed in Table 7.8 is not uniformly poor. Although the manufacturing trade balance is highly negative, the product specialisation is higher than 1. In the context, we can only assume that this is because Italy is strong in chemical-using industries, such as textiles – no credit

Italy and Taiwan

203

to the chemicals producers. At the same time, while no Italian company was included in the DTI scoreboard and the R&D intensity is among the lowest, the patent data suggests a degree of specialisation in the sector. This has to be seen in context, however. In absolute terms, in 1990–1999 there were fewer chemicals patents taken out from Italy (a country of nearly 60 million people) than from Switzerland (with barely five million) and barely one-seventh of the German total. The specialisation is relative, reflecting Italy’s even worse performance in most of the high-patenting sectors. 7.6.2 Machinery As expected, both Taiwan and Italy show a specialisation in the machinery industries. In particular, Machinery and equipment not elsewhere classified is the only industry in Italy in the two top categories (high-tech and medium-hightech) that presents a positive manufacturing trade balance and a positive performance in terms of patents. At the same time, however, the performance in terms of R&D intensity is rather poor. This fact can be easily explained by referring to a sub-sector in which Italy is definitely very strong, machine tools and robots – of which one of the authors has made a special study (Visintin 2001). In this area Italy ranks third in the world (after Japan and Germany) in terms of production, with a world market share of 10.4 per cent (Cecimo 2005). However, here as in the other machinery sectors, Italy has a very low R&D intensity (Visintin 2001). This apparent contradiction can be explained if one considers that in machine tools (much as in the other machinery sectors), innovations are incremental and based on long-term and close relationships with customers and suppliers and on the activity of employees with knowledge accumulated over the years on the shop floor. Formal research and development does not – or need not – play an important role in fostering the degree of innovativeness of machine tool firms. Table 7.8 Chemicals: Italy and Taiwan Italy

Taiwan

Patenting: RTA

1963–1979 1.37

1990–1999 1.44

1963–1979 –

1990–1999 0.48

Manufacturing trade balance, percentage of output

1992 −3.3

2001 −2.8

1992 NA

2001 NA

Production specialisation

DTI – 2003 NA

OECD – 2000 1.1

DTI – 2003 NA

OECD NA

R&D intensity, percentage

DTI – 2004 NA

OECD – 2000 1.4

DTI – 2004 NA

OECD – 2000 NA

Note * R&D intensity: DTI mean: 3.7.

204

Italy and Taiwan

With very few exceptions, the machine tool producers do not carry on formal R&D activities. In Italy, in particular, the industry is based on 450 firms, none of them large enough to make the DTI Scoreboard (Table 7.9). They have a small average size (67 employees – against 195 in Germany) and rather low sales (76.5 per cent of firms have a turnover of less than C12.5 million) (UCIMU 2005) which makes it rather difficult to carry out structured forms of R&D activities, especially considering the cyclical character of the sector.27 Such companies are mostly family businesses, with a strong concentration of ownership and control28 which gives a high level of firm-specific understanding. In addition, they operate on the basis of a district-like set of operative mechanisms, namely networks of close and long-term ties with customers and suppliers. Finally, as argued above, the labour relations in Italian SMEs are rather paternalistic and collaborative and based on something like lifetime employment, which must be a good incentive for employees to participate actively in the innovation process. The only question is: will this last? In other words, how long before R&D becomes central to innovation also in this sector? In the mid-1980s, Fransman (1986) had already argued that the days had gone when machine tool designers could rely on on-the-job experience for success. His arguments were probably premature, but they could become pertinent rather soon. As expected, Taiwan too is rather strong in the machinery sectors (Sonobe et al. 2003). We have the usual data problems in demonstrating this. Table A9 in the Statistical Appendix shows that, like Italy only more so, Taiwan is highly specialised in machine tools. Clearly it has the same advantages as Italy in machinery in general; but our patenting and production figures are relative ones, and therefore as it excels more and more in high-technology sectors where Italy cannot compete, one would expect Taiwan’s specialisation in machinery to decline. There is some confirmation of this from the RTA figures for machinery Table 7.9 Machinery and equipment not elsewhere classified: Italy and Taiwan Italy

Taiwan

Patenting: RTA

1963–1979 0.82

1990–1999 1.37

1963–1979 –

1990–1999 0.63

Manufacturing trade balance, percentage of output

1992 +5.7

2001 +5.5

1992 NA

2001 NA

Production specialisation

DTI – 2003 NA

OECD – 2000 2.00*

DTI – 2003 NA

OECD NA

R&D intensity, percentage

DTI – 2004 NA

OECD – 2000 0.4

DTI – 2004 NA

OECD – 2000 NA

Notes * Excludes domestic appliances R&D intensity: DTI mean for Engineering and machinery: 2.5 per cent; OECD mean.: 2.15 per cent.

Italy and Taiwan

205

n.e.c. in Table A10 of the Statistical Appendix: Taiwan’s fall from 0.89 in the early 1990s to 0.59 in the late 1990s, while Italy’s rise ever further, from 1.28 to 1.48. 7.6.3 Automotive Taiwan is totally insignificant in the market for cars and trucks. In automobiles it holds nineteenth place in world production after Turkey and Thailand (ITIS 2002). The small size of the Taiwanese market and the scale-intensive nature of the industry provide an ample explanation. The industry, dominated by four listed companies (largely owned by foreign multinationals),29 is focused on the local market of which it controls 86 per cent (ITIS 2002), only with the help of substantial tariffs. Entry into the WTO and the consequent reduction of trade barriers may well wipe car assembly in Taiwan out altogether. However, ‘motor vehicles’ includes motor cycles and motor scooters, which in the 1980s made up over 11 per cent of Taiwanese exports, and still over 9 per cent in the 1990s (James and Movshuk 2003). This was clearly a convenient niche for small-scale, well-networked Taiwanese enterprises to get into, but it is rather low-value and therefore not likely to remain an area of specialisation. This is indeed the impression made by the disaggregated RTA data (Statistical Appendix Table A10), which show Taiwanese patenting specialisation in motor vehicles falling from 1.23 in the early 1990s to 0.89 in the second half of the decade. In the days before free trade the relatively large size of Italy’s home market was an advantage for its motor vehicles firms. Nonetheless, a sector like this whose scale-intensity (with numerous manual workers) poses difficult challenges of employee inclusion, could not be expected to remain a sector of specialisation for Italy in the main areas of cars and trucks. Nor has it, as Table 7.10 shows. The story of the motor vehicles industry in Italy (apart from twowheelers) is mainly the story of Fiat, one of the few Italian companies that make the Fortune 500. The company, founded by Gianni Agnelli in 1899, faced over the twentieth century successive periods of success (particularly thanks to the restrictive import regime of the 1970s and 1980s) and downturns (always overcome with the support of public funding). However, neither the industry in general nor Fiat in particular has come close to achieving the necessary employee inclusion. Fiat has been typical of large Italian firms in the confrontational nature of relations with employees, who are organised in competing unions. Apart from a number of participation and consultation committees of the early 1990s, set up with the aim of obtaining the active participation needed to effectively launch the integrated and automated system of production process, they have always been rather antagonistic. Even in those production sites where participation has been strongly encouraged, there has been resistance: Team-work and employee involvement policies are opposed especially by older workers. While mostly younger workers are convinced by the

206

Italy and Taiwan

Table 7.10 Automotive: Italy and Taiwan Italy

Taiwan

Patenting: RTA

1963–1979 0.91

1990–1999 0.99

1963–1979 –

1990–1999 0.92

Manufacturing trade balance, percentage of output

1992 −3.3

2001 −2.9

1992 NA

2001 NA

Production specialisation

DTI – 2003 3.2*

OECD – 2000 0.6

DTI – 2003 NA

IDB* 0.46

R&D intensity, percentage

DTI – 2004 3.52

OECD – 2000 2.4

DTI – 2004 3.47

OECD – 2000 NA

Notes R&D intensity: DTI mean for Automobiles and parts: 4.3 per cent; OECD mean for motor vehicles: 3.68 per cent. * As argued for aerospace, where an Italian industry is dominated by large firms the DTI figure overstates specialisation. ** Industrial Development Bureau: transport equipment.

Integrated Factory model and act to implement it, older workers generally consider it not applicable, and adapt or conform to the new guidelines with opportunistic and passive behaviour. For example, they are often reluctant to stand out even for a simple suggestion, notwithstanding the reward offered. (Camuffo and Volpato 1998: 65) There is nothing inevitable in Italy about exclusion of suppliers. But only in the 1990s did Fiat decide to introduce JIT practices – well after its French rivals, with state leadership, had changed course. Until then the degree of vertical integration was higher in Italy than in Germany and Japan and the relationship with suppliers was based on competitive bids and short-term contracts (Camuffo and Volpato 1998). A feature of Italian corporate governance that should have worked in Fiat’s favour was shareholder engagement: the Agnellis, after all, were controlling shareholders and top managers. But there are two classic hazards of Italian family capitalism which struck the Agnellis: they ran out of young blood, and were not able or willing to take a back seat (as the Quandts did in BMW) and hand over to a corps of professional managers; and they were not prepared to match their rivals’ massive spending on R&D, since family eggs could not all be put in one basket, and one must not draw too heavily on external finance. By the end of the 1990s the firm was clearly in severe crisis, and even now, after a ‘professional’ takeover, remains threatened. The recent transformations that have reduced the perfect match between stakeholding capitalism and the automobile sector, could in principle improve the relative position of Italy in this area. But it was too late for another state-funded

Italy and Taiwan

207

rescue. Public opinion and government were and are disinclined to intervene expensively, nor would European and WTO rules allow them to.30

7.7 Conclusion We have seen that the deep similarities between Taiwan and Italy – revolving around a preference for small organisations and a very limited capacity for stakeholder inclusion – did not prevent a widening divergence in specialisation. There were some important institutional differences throughout, notably the difference in union strength and legal constraints on labour market behaviour. But the institutional differences widened, particularly as regards venture capital. The key was the ability of Taiwanese institutions, led by the Taiwanese state, to learn, particularly from the Americans and the Japanese. There may be a particular plasticity and creativity in modern Chinese institutions, to judge from the huge changes in mainland China (see the next chapter). But Taiwan’s most obvious advantage was its coherence. The Third Italy, very similar in size and institutions to Taiwan, shared a state with the less-dynamic North-west and the stagnant South. The third China, as Taiwan might be called, controlled its own fate. The Third Italy did not.

8

Corporate governance, finance, and technological development in mainland China

8.1 The new China: state and family capitalism, separate and together The People’s Republic of China is a special case among our ‘team of 11’ for at least three reasons. First, it is a developing economy, still much poorer than any of the others. Second, from 1949 to 1979 it was not a capitalist country of any kind at all (and it may still be tactless to describe it as such; but our definition of capitalism is no doubt not the same as the Chinese Communist Party’s). Third, it is much larger in population than all the others we have discussed, put together. China’s size has a number of important implications, not all of them obvious. One is that the Chinese state has multiple levels, and the lower levels necessarily enjoy considerable freedom of action, because the country cannot be run any other way. This helps to accentuate regional differences, and it means also that when we talk about state ownership and state control, this may mean that management is responsible – directly or ultimately – to senior officials in Beijing, or to the council or party secretary of a small village; or any of the half-dozen rungs of the administrative ladder between. Naturally, the level on the ladder makes a difference. In the early period of reform after 1979, it was a convenient first step to allow the lowest two levels, which are translated as townships and villages, to set up and run firms which operated freely, outside the state planning system.1 Since then, ‘state-owned enterprises’, in the conventional definition, have been those reporting to and owned by the upper three or four rungs, the rest being included in the term ‘township and village enterprises’. In fact each level behaves differently from the next, and so we prefer to refer to state ownership in all cases. After the ‘township and village enterprises’ had led the way back towards the free market, reform proceeded in a number of steps. The restrictions on the formation and operation of ordinary private firms were progressively loosened, and parallel to that, state-owned enterprises were exposed more and more to market forces, and given more and more freedom to respond to them. For at least a decade it has been possible to differentiate ‘state ownership’ on two dimensions: the level of the state, as explained above, and the proportion of state ownership, from 100 per cent to a minority – to zero. The state became

Mainland China

209

increasingly willing to sell, and the smaller the firm the larger the stake it would sell – with most of the smallest firms going entirely private. By 2004 a plurality of non-farm employment was in pure private firms, and the rest well spread among the other categories. As we write, the Chinese Communist Party (CCP) is in the process of making peace with the entrepreneurs, with them now being admissible into Party membership. Such a reconciliation would be historic, and not only from the CCP’s point of view. For many centuries the Chinese merchant, or entrepreneur, class suffered from its low status and insecurity vis-à-vis imperial officials. In that context, the third quarter of the twentieth century was just a particularly difficult chapter in an always difficult relationship. More normal service was resumed in the fourth quarter. For the entrepreneur, relations with officials must always present much more threat than opportunity. The threat could with luck be neutralised by the careful cultivation of guanxi – contacts – among them. For the manager of a stateowned enterprise (SOE), the situation was quite different (and the larger and higher the state stake, the more different it was). In principle there has always been a thorough system of monitoring management in state-owned enterprises. Under the command economy there were what are now called in retrospect the ‘old three organisations’ (laosanhui) of the Party Committee, the Workers Congress, and the Trade Union. Now there are the ‘new three organisations’ (xinsanhui) of the shareholders’ general meeting, board of directors, and board of auditors, with the workers represented on the board of directors. In practice, the only important fact is that the top manager is an official, and not a very senior one. If he2 does well – in the eyes of his superiors – his normal expectation and reward will be promotion out of industrial management into a more senior official job.3 Doing well, particularly in the early days of the reforms, might not necessarily involve making profit – it might for example mean maintaining employment; still, as the reforms progressed, profits mattered more and more. But the financial performance was being observed, so to say, from a long way up. The SOE manager’s situation became more and more similar to that of a British manager subject to the remotest form of indirect control: the relevant officials looked at the figures for profit, investment etc. without any real understanding of what lay behind them. They were highly disengaged, and accordingly they could only appreciate what was highly visible.

8.2 The financial handicaps of the private sector The private sector in China’s early economic reform was defined as a supplement to the state sector: filling up the gap of employment, goods and services which had been neglected by the state sector and stimulating the latter to greater efficiency through competition (Tsang 1994). Initially individual-owned businesses (getihu) were allowed but with a maximum of eight employees; in 1988 this limitation was removed. Private enterprise is defined as assets owned by

210

Mainland China

individuals with more than eight employees in pursuing profit-oriented business (siying qiye). Private businesses remained restricted mainly to service and lowtech, labour intensive industries such as retailing, catering, wholesaling, transportation, and construction (Tsang 1994). In late 1997, the fifteenth Party Congress announced that the private economy was an important component of the socialist market economy and could take any of the classical forms: sole ownership, partnership or limited liability. Private business was encouraged to take over small and medium-sized SOEs, to invest in the infrastructure field, to engage in import and export business and to get access to bank loans. Still, the Chinese government has held back from wholehearted support of private business – so far it has merely reduced the restrictions on it (Liu 2002). It is not only a matter of ideology; it is a matter of the state and the Communist party looking after their own. Licenses are needed for the state for various purposes. State-owned firms can get licences from the state much more easily, not simply because of their formal status, but above all because their managers are, as officials, and Communist party members, embedded in the necessary network of contacts – guanxi wang. Collective, township or village-owned enterprises could get support from associated local governments, but the guanxi wang that comes with it is inevitably on a limited scale. The most clear-cut and enduring problem for the private sector, however, is that it finds it extremely difficult to raise funds. For most private firms the starting finance came from either personal saving or interpersonal lending (friends or relatives). Beyond that, they had to tap the informal financial system, which is called the curb market (Tsai 2002). Tsai found that ‘informal finance has accounted for at least one quarter of all financial transactions in China, and up to three-quarters of private finance’. Much of these transactions were illegal or semi-legal. Attitudes towards these informal financial systems vary from region to region, according to the attitude to private business generally. Hinterlands and western areas once dominated by heavy industries with a higher proportion of SOEs, have usually given no more than passive support to the private sector. Coastal areas, including the south east, which once lagged behind, have provided better institutional circumstances for the development of the non-stateowned economy (Wong 1991). And who was the formal system lending to? State-owned banks dominate the Chinese financial system and, as of 2000, held more than 60 per cent of the country’s banking assets (Saussure et al. 2001) – much more than that, ten years previously. They prefer to lend to (central) state-owned firms, and among the rest they show particular aversion to private enterprise. Even at the end of 2001, the private sector received less than 1 per cent of all loans granted by the state banking system (Tsai 2002). Once the reform process was under way, the central state was unable or unwilling to support loss-making SOEs any more – or rather, to do so directly. The load of subsidies for SOEs was transferred to the banking system. Instead of being based on the principles of commercial credit, a large proportion of bank loans were lent to weak credit quality SOEs under government policy (Wu 2001).

Mainland China

211

Outside the state banking system many shareholding commercial banks and city or regional private banks have recently appeared in the financial system, many of them set up with financial and other support from local and regional government. Even these, however, appear to discriminate against the private sector: the new banks respond to guanxi wang like everybody else. Perversely, it may be economically rational to do so. Private firms are more likely to be hit by bureaucratic actions or inactions beyond their control, and if they are damaged by market misfortune or sheer mismanagement there will be no one to help them. They are thus worse risks. So most of the new banks prefer to lend money to those large private firms with good credit, or provide loans only against collateral (Liu 2002; Langlois 2001). As another actor in the Chinese financial system, the Chinese stock market (mainland) has developed very quickly since it was established in 1992. But it is hardly used by the private sector as a channel to raise funds. The state decides the quotas of listing and selects the firms that may list on the stock market (Langlois 2001). If a private firm wants to be listed in the stock market, one pragmatic way is to buy an already listed enterprise, which not only incurs high cost but is also subject to regulations (Bruton and Ahlstrom 2003). Venture capital financing on a limited scale has been taking place in China in recent years. Statistics from the Ministry of Science and Technology indicate that by the end of 1999, China had 92 venture capital companies with 7.2 billion yuan (US$870 million) of funds (People’s Daily 2002). Eighty-nine per cent of the venture capital companies chose to invest in high-tech projects (People’s Daily 2000). More than 80 per cent of the venture capital funds in China were provided by the government, with the remaining less than 20 per cent from foreign and private investors (Lo 2000). Inadequate legislation coupled with the unreliable accounting system prevents venture funds from flowing into start-up private firms. Instead, firms seeking funds are required to show at least three years of financial accounts. More important than that, to evaluate the firm, a venture investor needs in particular to know the sort of guanxi which are possessed by the firm and by its managers as individuals: as we have seen, these contacts constitute valuable assets in Chinese business (Bruton and Ahlstrom 2003).

8.3 How the governance flaws of state-owned firms affect managerial behaviour Our framework for analysing the effects of corporate governance on technological change was adapted for Chinese conditions by Tylecote and Cai (2004), and Cai and Tylecote (2005). So far in this book we have been concerned mainly with how the strength of these challenges varies according to sector. Now we need to consider also how it varies between developed and developing countries. Visibility turns out to be a central problem. The process of catching-up – of mastering increasingly advanced products and processes and at the same time gaining increasing self-reliance in each successive advance – demands a complex array of small investments of time and money in organisational

212

Mainland China

learning and adaptation of (often) second-hand equipment. Hobday (1995a) gives a detailed and insightful account of the Korean firm Anam’s rise to world dominance of the chip packaging industry. (It should be noted that Anam was not a chaebol, had therefore poor access to finance, and so was working, as the saying goes, on a shoestring.) The quotations below are from Hobday (1991: 75–77); the italics are ours. From 1968–1980, Anam’s technological development ‘could be called learning the art of assembly’, ‘often, the early assembly equipment was depreciated equipment shipped on boats from America’. The second phase, roughly from 1980–1985, was ‘learning process engineering skills’. ‘To gain the skills to meet the growing new demands, Anam invested heavily in engineering training and worked jointly with several of its largest [American] customers’. In 1984 it set up the Engineering R&D Department (ERD), whose main function was ‘to organize engineering support for manufacturing within the factory’. Phase 3, from 1985–1988, Hobday describes as ‘the switch to locally initiated learning’. ‘The ERD purchased new production equipment and installed and adapted it as needed. Company engineers became competent in modifying and operating a wide array of complex packaging equipment. Productivity gains were made through many minor improvements to equipment’. ‘By the late 1980s . . . . Anam had internalized both incremental process capabilities and significant design skills’ – there were incremental improvements in products too. Phase 4, ‘towards product innovation capabilities’, began around 1988. Only at this stage did Anam begin to spend substantially on R&D – although still little by the standards of the industry. By 1993 – the time of the research – it was clearly on its way. The Anam case illustrates a number of points rather well. First, technological catch-up takes time. There was nothing much to show for Anam’s efforts for more than a decade. (Clearly it could be quicker with a chaebol’s access to finance – but still, as we saw in Chapter 6, not very quick.) Second, the key investments in learning required more effort than money – and the money was spent in a rather low-visibility way. We can see that the typical Chinese state-owned enterprise would have avoided Anam’s strategy like the plague. Happily (as it would have seemed to SOE managers at the time) there were alternatives available. Unlike Anam, they had access to large amounts of money from state-owned banks. For SOEs, bank loans are or used to be very cheap – in the early 1990s, typically 1 per cent interest from a state-owned bank (Oi 1995); in early 2004 interest rates were 4–7 per cent on loans, but as little as 2 per cent on discounted bills (www.bank-of-china.com). They could spend this almost free financial capital on buying, from foreign sources, discrete packages of equipment and technology. This would leave them still dependent on external sources for the next ‘upgrading’, since they were not really acquiring technological competence; but by that time the manager responsible would have moved on and up, if the supervising officials – lacking firm-specific understanding – were impressed by the shiny new products and processes. (We enlarge on this below.) We now turn to spill-overs. Anam worked closely with its customers, as Hobday emphasised, and depended heavily on these relationships. In its case the

Mainland China

213

customers were American. The many Japanese Anams, on the other hand, depended rather on relationships with domestic customers – which, as we have seen, tended to be close and constructive. In China, far larger and considerably less open than Korea, one would have looked for much the same. The obstacle, for the SOE, is once again the governance situation. The main beneficial spillover from technological change is to employees: product innovation in particular will improve their prospects of keeping their jobs. We have seen that employee inclusion can spur technological change. Where management take account of employees’ interests, they will make more effort to develop new products, particularly in mature industries where job losses are otherwise likely. If employees reciprocate they will put their energy into the development of those products. One might expect this to be the case in Chinese SOEs, given their overstaffing and traditional commitment to their employees – particularly in the depressed areas in the North East and the inland provinces where there are few if any alternative job prospects. But it is always difficult and risky to develop a new product. More predictable alternatives are feasible. Such firms normally have a soft budget constraint: that is, they can get away with making losses. The bureaucrats to whom the manager is responsible – who will certainly be involved in manager selection and may interfere in operational decisions – will be subject to pressures to maintain short-term employment. They will see to it that local branches of state-owned banks provide new ‘loans’ to cover operating losses; or some of the money may be used for real investment capital, but with a view to diversification into technologically undemanding areas in which by selling at a loss (if necessary) the firm will get a toehold in the market and thus keep some workers employed. At the other end of the technological scale are the SOEs that have been created from well-financed and well-connected academies and research institutes. These cannot be described as lacking in technological competence – far from it (see the Datang case described in Cai and Tylecote, 2005). But what they often have in common with the loss-making low-technology SOE is a soft budget constraint: they may get finance and land (and maybe other resources) at below market rates and even then they are not under heavy pressure to make a profit (they are likely to have excellent guanxi with very senior officials). What they typically fail to do, in consequence, is not to develop technological competence, but to commercialise it effectively. Here we can relate the defects of Chinese state corporate governance to the two other ‘challenges’, opportunity and reconfiguration. High opportunity requires industrial expertise: the controllers might understand the technology but they are hardly likely to understand the market. Likewise, organisational reconfiguration will be required in hightechnology areas (by Chinese standards) in order to exploit the new market opportunities – but the state will not exert the required pressure for higher valueadded, or make the creation of new firms easy. Private firms in China are at the opposite end of the corporate governance scale from SOEs. They have fully-engaged shareholders with a good understanding of the firm, since the CEO is usually the majority, often sole,

214

Mainland China

shareholder. There is no sort of stakeholder inclusion except the most moral and personal of obligations towards long-serving employees. Those in charge have every incentive to improve processes and develop new products as fast as possible, since this is the way to profit and wealth. The problem, then, is not corporate governance, but finance – they have, as shown above, poor access to finance as to some other resources. It can be seen that even the private firm’s spending is distorted by its position vis-à-vis the authorities. This is not only because it finds finance hard to get, but because it needs to spend a proportion of its hard-earned revenues (and senior managers’ time) on cultivating the right connections. Even more problematic is the effect of the pattern of SOE investment described above. If SOEs invest in low and medium-technology sectors, which already have spare capacity, simply in order to get orders and thus employment regardless of price, they drive down the sales and profitability of private firms operating in those sectors. Yet (lacking external finance) it is only through the reinvestment of profit earned in lower-technology sectors (or like Anam, lower-technology operations in hightech sectors) that privately owned firms can develop the competences – and acquire the equipment, and make the promotional expenditures – required to establish themselves further up the ‘value ladder’. No profit: no climb. We can now sum up the conclusions as to the advantages and disadvantages of different forms of ownership, in Table 8.1. We have seen that private firms are disadvantaged in terms of high vulnerability to arbitrary adverse actions by officials and poor access to resources, particularly capital. Their scope for generating capital out of their profits is reduced by competition from state-owned rivals selling at a loss. Majority state-owned enterprises are clearly very much Table 8.1 Advantages and disadvantages of types of ownership in mainland China Majority (central) state ownership

Political Very low vulnerability Access to Easy finance and licences Bureaucratic High intervention Technology High base Market Low responsiveness

Majority collective, township and village ownership

Minority state-owned combined with private ownership

Minority collective (township/ village) combined with private ownership

Private ownership

Low

Very low

Low

High

Easy but on Easy limited scale

Easy but on Difficult limited scale

Quite high

Low

Low

Very low

Low

High

Low

Low

Medium

High

High

High

Mainland China

215

better off in these respects. On the other hand they have to pay a price in terms of bureaucratic meddling, which constrains their actions and diverts their energies. Moreover their ‘soft budget constraint’ and management’s lack of a strong equity interest in the business, means that they care less about profitability and are thus unlikely to have much sensitivity to what the market will pay for. Private businesses on the other hand are free from bureaucratic meddling in their internal affairs, and are likely to be highly responsive to market demands. Majority SOEs and private firms are thus at opposite ends of the Chinese scale. The collective/township/village firms lie between SOEs and private firms, from the point of view of both access to finance and corporate governance. In fact, precisely where they lie depends on which precise category of ownership they come into. Enterprises owned by relatively low levels of the state hierarchy can be treated as similar to majority SOEs – but they may have some vulnerability to adverse actions by officials at a higher level than their owners, and likewise their access to resources will not be so good. On the other hand, the more enlightened and entrepreneurial local governments may recognise what they have to gain from profitable local businesses, and adjust the pressures on them accordingly.

8.4 How finance and corporate governance undermined Chinese technological development When Deng Hsiao-Ping started the great economic reform programme in 1978–1979 he inherited the advantages and disadvantages of Maoist autarchy. The main advantage was that China had enterprises producing across a very wide range of products. Almost everything China consumed, it made itself, and with technologies with which it was (by now) thoroughly familiar, having broken with their main source, the Soviet Union, 20 years earlier. As Gu (1999) showed, it had made a quite exceptional effort to put itself in this situation. Its R&D expenditure leapt from 0.6 per cent of national income in 1957 (before the break with the USSR) to 1.6 per cent in 1959, and averaged about that level thereafter. This was a rate of expenditure more typical of a developed than of an extremely poor country.4 The main disadvantage was that those technologies were dreadfully out of date. Deng was an old man in a hurry. China needed modern technology. Developed countries had it, and it must be transferred from them – quickly. The most obvious way of doing that was foreign direct investment (FDI); and there should be no difficulty in attracting FDI, given the size of the Chinese market, and the cheapness of Chinese labour. It was duly attracted – in huge quantities, in the 1990s. FDI was admitted into China with what seemed like a prudent restriction: the enterprises set up in China would be joint ventures, 51 per cent owned by domestic state-owned enterprises. One could not allow key positions in the Chinese economy to fall into foreign hands. In the long run, however, it would be necessary to build up Chinese firms in medium and even high-technology industry, which were able to compete

216

Mainland China

independently with the strongest foreign rivals. Happily, East Asia had one state, Japan, which had succeeded in doing just that, and others, notably South Korea, which were in the process of doing so. The main lesson the Chinese policymakers drew from the Japanese zaibatsu and the Korean chaebol was that it was necessary to be selective: a ‘national team’ of about 120 large state-owned enterprises was chosen, mostly in two batches, in 1991 and 1997 respectively, to be given every possible help and encouragement. In addition to the general tariff and non-tariff protection Chinese firms got from foreign competition, the ‘national team’ would get preference with regard to licences, finance, and the formation of joint ventures with foreign firms. Nolan (2001) tells the story of how the ‘national team’ almost all failed. It is a story of incoherent policy, and of deep divisions among officials with responsibility for economic and industrial policy. It can be taken as an object lesson of the difficulties in getting officials with experience of running a command economy, to learn new tricks; and of the difficulty of getting coherence in policy in such a huge and far-flung state apparatus. Nolan, and Lu in his studies of the motor and DVD industries (Lu and Feng 2004; Lu 2005), show how the ‘insider’ firms of the ‘national team’ were in many industries defeated by ‘outsider’ firms which had been (at best) ignored by the national policymakers. These ‘outsider’ firms (like Lenovo, TCL, (Ningbo) Bird and Huawei) survived, and in the end in some cases flourished, by setting out to please the customer – their only hope – and facing up to competition and market forces. So in their time had Matsushita, Honda and Sony – equally outsiders in the Japanese context. In that sense the success of the outsiders was an old story, and the moral drawn might simply be that the Chinese authorities should not have tried to pick winners, and should have just left it to market forces to decide which Chinese firms emerged to challenge the world in higher-tech industry. Yet that is not the only conclusion which can be drawn from the Japanese and South Korean experience, in which many favoured firms did do extremely well. The Korean chaebol firms Samsung in electronics and Hyundai in motor vehicles are examples of just that; while POSCO in steel, until a few years ago 100 per cent state-owned, shows how even the Korean state acting directly as entrepreneur could succeed brilliantly. What went wrong in the ‘insider’ firms? It was something more than incoherent policy and featherbedding. It was, as we can now see, as much as anything a failure of corporate governance. Grand strategy may have demanded that they become independently competitive in world markets for medium and high technology products – but that was ten, 15, maybe even 20 years ahead. What did it pay their top managers to do in the present? Success for them – as officials – would mean promotion into a senior post in a ministry, perhaps five years after taking up their top management post. They would get that if they made a good impression on their superiors – busy people, themselves being frequently promoted and rotated. They were expected to deliver technological progress, but how would that be measured? If they were really well funded, and

Mainland China

217

had perhaps inherited a former academic research institute (see below), they could spend heavily on their own R&D – that could be measured as an input. As to the outputs, the most visible – literally as well as in our own special sense – would be new equipment in their factories, and new products in their warehouses. Both of those could be achieved by a foreign joint venture, or alternatively by buying a package of technology – perhaps even a turnkey plant – from a foreign supplier. Of course (one could explain, if pressed) this was only a stop-gap measure, while one’s own engineers and technologists were mastering the technology and working to introduce the firm’s own improved versions. The beauty of this procedure was that it was very likely to be profitable: selling at high prices on a protected local market, and using very cheap loans to buy technology packages, it was quite hard to fail. The fact that the firm was technologically dependent and would thus in another few years have to resort to another ‘fix’ of outside technology, if it could get it, was a problem for the next top manager.

8.5 The evidence Unfortunately we do not have data for the ‘insider’ firms as a separate group, but we can look at Chinese SOEs in general. Let us first consider their spending on R&D. Since the command economy period, there has been a fall in Chinese R&D expenditures as a proportion of GDP. In 2000, China’s total R&D spend was estimated at US$10.77 billion – just 1 per cent of GDP (Economic Daily 21 March 2002). This is still quite high compared with most developing countries. What is perhaps more disappointing is the low level of industry-funded R&D, which is generally accepted to be more effective than R&D financed by government. In 1996, industry-funded R&D represented 0.2 per cent of GDP in China, compared with 2.1 per cent in Japan, 2.2 per cent in South Korea, and 1.7 per cent in the US (Dahlman and Aubert 2001). This is clear evidence that SOEs – which represent the bulk of large firms and thus should contribute the bulk of R&D spending – are averse to R&D. (Not surprisingly, the sort of R&D to which they are least averse is ‘experimental development’ – the type nearest the market, as opposed to basic and applied research: in 1999 only about 5 per cent of R&D expenditure was spent on basic research compared with more than 22 per cent on applied research and 73 per cent on experimental development. Again, however, this focus should not be criticised, in a country at China’s stage of development; it is the low level of firms’ spending that is of concern.) A further significant and disturbing statistic is the proportion of firms’ R&D that is performed externally: nearly a quarter, as Guan (2000) shows. This is mostly done by research institutes, which in the days of the command economy, up to 1979, had primary responsibility for industrial research, in classic Soviet style. From 1979 the economic reform encouraged the research institutes, like firms, to find non-government funding by gradually reducing government support. They therefore shifted away from basic and even applied research towards development paid for by firms. This suited SOE managers who did not

218

Mainland China

want to undertake a long-term commitment to their own R&D effort – and would find payment to research institutes suitably visible (Liu and White 2000). The ‘short-termist’ alternative to developing competence through R&D and other internal investments of time and effort, as we have seen, is to seek embodied and codified technology – hardware and licences (Gao and Fu 1996). If innovation expenditure is broken down by class of innovative activity, the costs of acquisition for embodied technology, such as machines and production equipment, account for about 58 per cent of the total innovation expenditures, compared with 17 per cent internal R&D, 5 per cent external R&D, 3 per cent marketing of new product, 2 per cent training cost and 15 per cent engineering and manufacturing start-up (Guan 2000).

8.6 The outsiders: why their corporate governance works and why there are not more of them The successful ‘outsider’ firms all seem to have one thing in common: they are not majority-owned by the central government. A few are private firms, like Huawei in telecoms. Huawei fought over many years to overcome its lack of connections and access to finance: at first indeed its policy of reverse engineering and gradual development of its own capability could be seen as a cheap alternative to the technology packages it could not afford. More common are minority-state-owned firms like TCL and (Ningbo) Bird where the original state owner was a city or town in one of the go-ahead regions, and where the managers were allowed to build up a large shareholding (Cai and Tylecote 2005). Another source of dynamic ‘outsider’ firms has been the research institutes. As mentioned above, R&D had been, under the command economy, conducted not within enterprises but separately, in government-funded ‘research institutes’ – an extremely broad term which extended from the Chinese Academy of Sciences to locally-affiliated units. Thus, the machinery R&D system had 199 institutes at the central ministry level, and 493 institutes that were responsible to some lower level of government. In general, much of what the institutes did was not strictly R&D, but ‘downstream’ from there towards production: as of 1985 about half of what the centrally-affiliated ones did was in ‘experimental development’ or ‘design and production engineering’, and the locally-affiliated ones tended to be even further ‘downstream’ (Gu 1999). This ‘disconnection of science and technology from production’ (in the words of the then Prime Minister Zhao Zhiyang in 1985, cited by Gu 2003: 8) could not be allowed to continue. It was decided that most of the institutes would have their central funding scaled down and thus be gradually obliged to ‘earn their living’ in the market place – either by selling their services to firms, by joining enterprises or enterprise groups. What the government appears not to have anticipated was a third alternative which institute staff chose on their own initiative: setting up ‘spin-off enterprises’. These soon received official sanction as ‘New Technology Enterprises’, and by the end of the 1980s institutes had the option to go the whole way and turn themselves into profit-making firms. In 1999 it was

Mainland China

219

decided to find out what this extremely creative reconfiguration had led to, and oblige institutes to clarify what they now were. By 2001 some 1200 had reregistered themselves accordingly – more than half as firms. But that was only a tiny fraction of the creation of firms – by 2000 more than 20,000 New Technology Enterprises (NTEs) had been set up, with an annual turnover in that year of RMB920.9 billion (cf. the domestic R&D expenditure of RMB89.6 billion) and exports of US$13.81 billion (cf. import of capital goods the previous year of $69.45 billion and FDI in 2000 of $40.72 billion). The computer firm Lenovo, a spin-off from the Chinese Academy of Sciences, is probably the best-known. The Chinese central government has repented: it has recognised the successful ‘outsider’ firms, whatever their origins, as worthy of its assistance. Firms such as Huawei and Lenovo now bask in the sun of official approval and can raise large amounts of money, cheaply. It has also recognised the value of the minority state-owned firms. Their top managers are not officials, and they will usually have substantial personal shareholdings in the firm, often built up over a long period – since they are shareholders and not officials, they tend to stay. The state has an interest in the firm, in both senses, and the relevant officials will have influence – they may be on the board of directors – but they cannot give the top management instructions. In return for that influence, the firm has abundant access to capital and official cooperation of all kinds. It is a good bargain, and such firms have been identified as some of the most dynamic in the Chinese FCGS (Cai and Tylecote 2005). The New Technology Enterprises’ corporate governance, and connections, are similar. Even together, the NTEs and the minority state-owned firms make up only a small part of the economy. The minority state-owned firms’ number could, of course, be quickly expanded, and the Chinese government finds this idea attractive. In November 2003 the decision, announced by Li Rongrong, chairman of the cabinet’s state-owned assets and supervision and administration commission (SASAC), was taken to proceed to an ‘“acceleration and intensification” of the process of selling state enterprise assets to foreign and private companies over the next two years’ (Kynge 2003). This would involve the complete privatisation of a proportion of the medium SOEs, and the partial privatisation of some of the largest: At the moment, 196 of China’s largest and most strategic state companies are managed by SASAC, but Mr Li indicated for the first time that even these companies could be at least partly privatised, especially if they did not perform well over the next two years. The state council (cabinet) has instructed SASAC to oversee the emergence of 30 to 50 internationally competitive state enterprises, which would also constitute the leaders in their industry sector, Mr Li said. Those companies that did not meet this goal within two years would be restructured . . . Beijing remains committed to retaining control of many state companies but is open to the idea of its shareholding falling below 51 per cent, Mr Li said. (Kynge 2003: 11)

220

Mainland China

Unfortunately the plans were intensely controversial, politically: while ‘selling the family silver’ to foreigners would offend nationalist feeling, selling a large stake in state-owned firms to their managers would offend those who thought that such managers had been able to enrich themselves far too much already. Much less has been sold than planned, and at the time of writing the programme is suspended (Li 2005).

8.7 The outcomes: strengths and weaknesses of Chinese businesses There are scale-intensive industries where a very large protected home market, and access to very large amounts of cheap long-term capital, will make possible the creation of large, profitable, and reasonably efficient state-owned firms. This explains the three big Chinese oil and gas companies, Petrochina, Sinopec and CNOOC, now investing across the world; Baosteel, China’s largest steel producer5; Chalco, its largest aluminium producer; China Minmetals, its biggest base metals company. There are, likewise, labour-intensive low-technology industries in which it is easy for new private entrepreneurs to set up, and where with a huge pool of cheap and disciplined labour, plus a decent trading infrastructure, agglomerations of Chinese producers now dominate world markets. Surely there must be more to show for Chinese industrial policy than that, nearly thirty years after the reform programme started? Some of the ‘outsiders’, with belated government help, are taking on the world: Huawei, which in 2004 gained 40 per cent of its over $5 billion revenues outside China; Haier, which has overseas revenues of over $1 billion from its home appliances; Lenovo, which bought IBM’s PC division in 2005; TCL, which made itself the largest TV maker in the world by buying Thomson of France’s TV division in 2004; Wanxiang, a motor components manufacturer started by a farmer’s son as a bicycle repair shop which by 2004 had $2 billion annual sales.6 There is no sign, however, of real technological dynamism. Mahmood and Singh (2003) show that patenting is a reasonable indicator of overall technological capability in developing, as well as in developed, countries. The remarkable Taiwanese drive up-market, for example, is mirrored by its patenting performance: from 176 US patents in 1975–1979 through 1772 in 1985–1989 to 12,366 in 1995–1999 (their Table 2). In the same period mainland China – some 40 times larger in population – went from 2, through 129, to (only) 332 US patents. Equally striking is the difference in patterns that Mahmood and Singh find at sectoral level (their Tables 7 and 9). In 1980–1984 the five top sectors in Taiwan, in revealed technological advantage (RTA: relative patent share) were: • • • • •

Motorcycles, bicycles and parts Other manufactured products Fabricated metal products Electric household appliances Electric miscellaneous apparatus and supplies

Mainland China

221

and in 1995–1999: • • • • •

Motorcycles, bicycles and parts Electric miscellaneous apparatus and supplies Other manufactured products Fabricated metal products Electronics, radio, television, communication.

This, as we have seen in Chapter 7, is not a bad reflection of Taiwan’s areas of specialisation so far as production and trade are concerned. Contrast mainland China, whose five top sectors in RTA terms in 1995–1999 were: • • • • •

Miscellaneous chemical products Basic industrial chemicals Ship/boat building and repairing Agricultural chemicals Drugs and medicine.

Where is the mainland Chinese export drive in any of these areas? Exports by Chinese firms are overwhelmingly in the labour-intensive, low-technology areas like textiles and clothing. Mainland China as a location is doing very well as an exporter in some high technology sectors – electronics, notably. But the Made in China label on finished goods conceals the fact that most of the machinery with which they were made, and their key components, were imported – mostly from elsewhere in East Asia. China has in fact maintained a large trade deficit in electronic goods, components, and machinery, taken together.7 And most of its socalled high-technology manufacturing in this sector is under foreign ownership or at least control. The best that can be said for mainland Chinese firms’ performance in the medium- and high-technology industries is that it has not collapsed as the economy was exposed to foreign competition – in contrast, for example, to Argentina and Brazil. Thus, at the end of the 1990s Chinese machinery firms held 60–70 per cent of the home market (Shi and Yong 2000) – an achievement mostly to the credit of the NTEs (Gu 1999, 2003). If the state-owned firms failed China, what is there now to show for the release of entrepreneurial energies after 1978 into the TVEs and the private sector? In some of the coastal provinces, particularly in the centre and the south, there has been in quantitative terms an enormous growth of private firms and TVEs. There are industrial districts, large and small, concentrating for example on socks, on chairs – and on software (Van Dijk and Wang, 2005). But Gu (2003) firmly denies many of these agglomerations of businesses the name of clusters – because clusters should have some kind of dynamic coherence, with cooperation as well as competition among their member firms. She pins the blame on the lack of ‘purposeful effort to establish sufficient supporting institutions and coordinative mechanisms . . . which the reform policies have so far not addressed seriously’ (Gu 2003: 16). This is a

222

Mainland China

fair criticism – we have already mentioned the lack of supportive financial institutions – but recall also Porter’s conditions for successful clustering, which as we pointed out in Chapter 1, largely resolve to the financial and corporate governance system. Gu (2003:14) sums up: ‘China as a whole has not moved to the stage of being able to create distinctively specialised competitiveness in the international market beyond labour-intensive manufactures’. Should it have done? Looking at its average income – still well below ‘middle-income’ status in 2005 – one might say there will be time for that when it is richer. On the other hand it has a highly unequal distribution of income, and there are some 100 million people in the rich coastal regions, particularly the areas around Beijing, Shanghai and Hong Kong, whose average incomes (and standards of education) are higher now than, for example, those of South Korea’s 40 million people around 1990 when Samsung, LG and Hyundai were already making an international impact. Worse than that: at the end of 2005, China completed its entry into the World Trade Organisation. The restrictive trade and foreign investment policies, and other government intervention, on which South Korea and (to a lesser extent) Taiwan built their industrial rise, are now forsworn by the Chinese government. What it failed to build before, in large measure through the flaws in its finance and corporate governance system, will be harder to build in future. That system will need to be excellent, to give Chinese higher-tech firms a chance.

9

Looking forward Current trends, future prospects, and modest proposals

9.1 Introduction: shareholder capitalism triumphant? Economic success, or the appearance of it, bathes all a nation’s institutions in a rosy glow. In the 1980s it was unfashionable to criticise any feature of the German and Japanese economies, least of all their corporate governance and finance. All the institutions of the US and UK economies were exposed to stringent criticism. Now the glow is on them. The American and (to a lesser extent) British economies are seen as models of dynamism – a dynamism arising from the pervasive effects of unobstructed market forces, including those of the markets for capital and for corporate control. Through them, shareholders rule – ‘outsider’ shareholders without any commitment to the status quo, demanding profit and pushing aside conservative resistance to the innovation needed to produce it. Corporate governance rules which protect such shareholders from misbehaviour by managers or controlling ‘insiders’ help to ensure an abundance of capital to fuel enterprise. Or so we are told. The wheel of intellectual fashion has turned too far. Many factors affect economic growth, and the fact that Germany and Japan have grown rather slowly since 1990 need not necessarily discredit their ‘stakeholder capitalism’. The unification of Germany, and with it the attachment to Western Germany of a large economically-depressed region, was an unfavourable shock for which stakeholder capitalism cannot be blamed. The Japanese bubble of the late 1980s and the long-drawn-out deflationary crisis that followed it, may indeed have arisen partly from, and contributed to, certain faults of the financial system – particularly of the banks. Nonetheless, it does not discredit the basic model(s) of Japanese corporate governance, in which (as we have pointed out) the banks have played a less important role than often supposed. Likewise, if over-consumption by American and British households has produced consumer booms, and foreigners have been prepared to finance the huge trade deficits partly resulting from them – may not that, more than their finance and corporate governance, explain why the American and British economies have grown slightly faster than others? As we have seen, the enthusiasm for US finance and corporate governance is mistaken on two counts. First, the US system has not been, overall, particularly

224

Looking forward

successful. It has excelled only in those few ‘spearhead’ areas dominated by venture capital: software, ICT hardware, and biotechnology (and we are still waiting for biotechnology to make profits comparable to IT, in pharmaceuticals and elsewhere). In most of the other sectors we have looked at, US performance has been weak: and since our sectors account for most of the exports of developed countries, this is another reason for the huge trade deficit. Its ‘big pharma’ firms (like those of other countries) are mostly in crisis, with their drug pipelines drying up. Its big motor firms are on the verge of final defeat by (mostly) Japanese and German competition. It is under-specialised in machinery and chemicals, and its continuing strength in aerospace is rather obviously linked to the huge flow of funds from Department of Defense contracts. (The effect of its finance and corporate governance system is more apparent in civilian aerospace, where it appears to have been responsible, for example, for the decline of Pratt and Whitney.) Second, the US finance and corporate governance system that is offered as a model to the rest of the world by (for example) LaPorta et al. (1997, 1998, 1999, 2000), scarcely exists. Instead of the stereotype of uniformly widely-held large corporations in which the market for corporate control, and the laws relating to corporate governance, protect the interests of outside shareholders, the US has a divided economy. On the one hand, many even of the largest firms are directly controlled by insider shareholders – founding entrepreneurs, their families, venture capitalists, other private equity – a rather old-fashioned arrangement that generally appears to work well. (As well it might, since it tends to produce engagement, which is needed to cope with low visibility; and most venture capitalists for good measure have industrial expertise, crucial in the face of high opportunity and need for reconfiguration.) On the other hand, the firms that are widely held are run by managers who are mostly marvellously well-defended against the indignities of outsider shareholder pressure, direct or via the threat of take-over. This management autonomy gives them the freedom, which some of them use, to spend heavily on innovation. At the same time it leaves them free, in the name of shareholder value, to take all kinds of short-termist actions to increase profits – with a view to raising share prices, which will raise the value of their stock options and cheapen acquisitions. Whether these manoeuvres succeed or fail, the managers can enrich themselves at shareholders’ expense. In the month in which this book was finished, Bob Nardelli left Home Depot after six years as chief executive and chairman, six years in which Home Depot’s share price fell slightly, while that of its chief rival tripled. In the view of the Wall Street Journal, ‘as thanks for this whopping underperformance, directors have showered him with a $210 million pay-off package’. Shareholders, who had been unable to get rid of him earlier, were unable to prevent this pay-off, and unable to prevent him being succeeded by his ‘right-hand man’.1 It is a relief to turn to Britain, more precisely to the City of London, where the rules of corporate governance are generally respected and the market for corporate control operates freely, with no protection against hostile takeover

Looking forward

225

available. In a British Home Depot case, shareholders would have been able to get rid of the CEO earlier, could and would have prevented such a large pay and pay-off package, could and would have imposed their choice of successor. Here, the outsider-dominated system imagined by LaPorta et al. for America, really exists. The relief is brief, however: the system doesn’t work. More precisely, it works reasonably well to prevent shareholders’ money being wasted, except on acquisitions, which waste a great deal. Unfortunately it also works quite well to prevent their money being spent on innovation. With the exception of pharmaceuticals and those aerospace firms protected by golden shares, listed British firms have, as we have seen, for 30 years consistently and increasingly underspent their international rivals on R&D and the other elements of innovation. As a result, the British presence in most technologically-demanding sectors has shrivelled. It would be unfair to say that failure in Britain proves that an outsiderdominated system cannot work. We have been told by British managers that British institutional investors were deficient both in engagement and industrial expertise – deficient by comparison with at least some of the American investors with whom they came in contact (and it was American investors who were helping to defend high spending in British pharma). British traditions were largely to blame for the difference – but the British change their traditions when it suits them. Others may take care to avoid catching this particular ‘English disease’. We return to this issue later. The failings of ‘shareholder capitalism’, in both its American and British guises, are the more surprising when we see how the tide has been running in its favour. The metaphor is a little weak: we have two tides in mind, and the United States has had a good measure of control of both of them. Globalisation – of production and of finance – is very convenient to the shareholder-capitalist firm. It is free to produce where its managers and/or shareholders please, and thus to increase its profits by switching operations to lower-wage locations. It can likewise raise capital where it pleases, taking advantage of favourable capital market conditions, and even changing the mix of nationalities of its shareholders; indeed it may reincorporate in another country, as Rupert Murdoch’s News Corporation recently did, from Australia to Delaware. As we saw in Chapter 2, the increasing strength of intellectual property rights – beginning in the United States, and spreading largely through US pressure2 – should make it easier for firms, and through them shareholders, to appropriate the fruits of innovation. That was always relatively easy in pharmaceuticals and chemicals, and during the 1990s something – probably digitalisation – seems to have made patenting (etc.) more effective in information and communication technology, and related sectors. A firm’s portfolio of patents, like its brands, can now be valued by industry analysts on behalf of investors. Yet there are abiding features of technological change that do not change even at the bidding of the United States government and the World Trade Organisation. Patents are poor indicators of technological advantage for individual firms,

226

Looking forward

and remain generally poor protectors of it: for small firms against larger ones, for process technology generally, and for many products facing ‘inventing around’. Predators now find it easier to identify patents to invent around. Secrecy remains at least as important – and keeping a secret requires loyalty from employees, and perhaps other stakeholders. Moreover, making a technological advance in the first place requires commitment from employees and perhaps other stakeholders. In our terms, stakeholder spill-overs require stakeholder inclusion. But have stakeholder spill-overs been diminishing as technological revolution destroys competencies and thus reduces the value of relationships with those who have them? This is a complex issue which we shall discuss in Section 9.3. In Section 9.4 we examine current trends in corporate governance, and show that the ‘outsiders’ are not having things all their own way. We conclude in Section 9.5 with our own proposals for change. But first, in the next section, we review what we found in Chapters 5–8 about the nature and performance of the systems competing with shareholder capitalism.

9.2 The performance of the competing systems We naturally begin with the stakeholder capitalists. We saw in Chapter 1 that Germany conformed to expectations, and Japan did not. That is, in the hightechnology sectors Germany was generally weak (in ICT hardware, and most of software) or weakening (pharmaceuticals). Only in enterprise software and aerospace was it, respectively, strong and getting stronger. This fitted the picture of a system unable to cope well with high opportunity and scarcely able to cope at all with high competence destruction and need for reconfiguration. Such limitations have not been serious handicaps in the medium-technology sectors, and so it was not at all surprising that Germany excelled in chemicals, non-electrical machinery, and motor vehicles – sectors which by contrast make high demands for stakeholder inclusion and engagement. Japan, though predictably weak in pharma and aerospace, and predictably strong in machinery and motor vehicles, defied expectations by excelling in ICT hardware. We found that the difference in ICT hardware was partly explained by Japan, unlike Germany, having low wages at the right time, but the rest of the explanation revolved around finance and corporate governance. Germany’s family firms, heavily dependent on bank loans, had nowhere near as much risk finance available and acceptable to them as Japanese firms belonging to manager-controlled groups, which could draw both on stock market funding and on cheap loans which could be treated as equity. Moreover the inter-firm links which were strong in Germany were mainly within sectors – in Japan they were inter-sectoral, an advantage in fastchanging sectors in which diverse technologies needed to be brought together. Our third ‘stakeholder capitalist country’, Sweden, used to conform quite well to type: it has long been strong in non-electrical machinery and motor vehicles, for example. However, it has become stronger in pharmaceuticals while Germany and Japan were becoming weaker there – and that seemed to be largely through excellence in biotechnology; and it has become very strong in

Looking forward

227

telecommunications (and in related software – ‘middleware’) just as that was being shaken by the advent of the mobile/cellphone. Such a split technological personality is just what might have been expected of a stakeholder capitalism that had moved a long way towards shareholder capitalism – which is precisely what Sweden has done, with a variety of indicators signalling ability to cope with reconfiguration. The ‘state-led’ countries’ finance and corporate governance likewise changed far enough, early enough, for the effect on their technological performance and specialisation to have become apparent. France and Korea’s split economies, with large firms being favoured by the state and not treating either employees or small suppliers as stakeholders, had long focused on areas requiring large-scale investments with slow pay-offs. In some such areas, like base chemicals, they were both successful. In non-electrical machinery, where small-scale activities with inclusion are the norm, they were both inevitably unsuccessful. In motor vehicles they both struggled to cope with the ‘stakeholder state of the art’ emanating from Japan, and both began to gain ground right at the end of our period in those parts of the sector where inclusion was clearly less valuable than before. There has long been one striking difference between them – in ICT hardware, where France is weak, Korea strong. Of course, a point made above relating to Germany and Japan applies also to this pair: Korea had low wages at the right time (and in the right place). However the other contrast applies too: the chaebol were willing and able to raise and spend very large amounts of risk finance, while their French counterparts – controlled by families and/or bureaucrats – were not. The difference between France and Korea only widened as they shifted towards shareholder capitalism, because they shifted towards different models: France towards the British, Korea towards the American. The effect was quite clear in software, and brutally apparent in R&D intensity, which stagnated in France and rose rapidly in Korea. The family/state capitalist trio varied the most in speed of change. Italy changed little – and in clearly the wrong direction. From family-and-state capitalism it moved towards plain family capitalism – with privatised firms falling under family control. The apotheosis of an obsolete model was the state power held, as prime minister, by Silvio Berlusconi, the owner of the largest family-capitalist firm in Italy – power held for more than five years with little done to sweep away the state-imposed constraints on private enterprise. (Less surprisingly, the previous centre-left government had done little either.) The dynamic part of the economy has always been the small and medium enterprises, whose limited access to finance means that the only one of our sectors in which they (and Italy) can flourish was the small-scale area of non-electrical machinery, in which engagement and inclusion count for much. The other areas of Italian specialisation are lower-tech: and there, Italy is now like a rabbit in the headlights of China. China has, on the face of it, changed the most of all our countries, since 1980. But the greatest change is that of the mix of state-owned and privately-owned firms, with the latter now dominant in terms of employment but not in terms of technological capability. What changed very little, until the last five years or so,

228

Looking forward

were the two great faults of the Chinese system: the governance of the state firms and the finance of the private ones. Changes there have come so late, and the governance changes are so incomplete, that it remains to be seen whether Chinese firms can establish themselves on the high ground in strength to be compared with the Korean and Taiwanese firms there – allowing for the size of the country. Taiwan, finally, is the poster child – over the last 50 years the fastest growing of all our countries in income per head. Initially similar to Italy in its dependence on family-owned small and medium enterprises, its finance and governance system has changed a great deal. In its early and vigorous government-led development of venture capital, it moved in the US direction. In the growth of banks specialising in lending to SMEs, and of large-firm small-firm links (also government-led), it became more stakeholder-capitalist. It had been strong in engagement, from the beginning. It became increasingly strong in inclusion (of stakeholder firms, if not employees in large firms), and in expert risk capital for high opportunity and reconfiguration. In consequence it resembled Italy in its strength in non-electrical machinery, but unlike Italy it was able to jump on the ICT hardware bandwagon. Like Korea, of course, it had low wages at the right time in the right place to follow Japan; like Korea its expert risk capital allowed it to go rapidly up-market in ICT. Unlike Korea, the expert risk capital went into SMEs more than large firms. Taiwan’s has been a virtuoso performance of evolving dynamism. We called it the Third China. Wistfully, the people of the Third Italy could say: if we had been free to make our own way, we might have done that too.

9.3 Corporate governance and stakeholder inclusion in a time of technological revolution 9.3.1 ICT and the need for reconfiguration As we pointed out in Chapter 1, the whole world economy is being profoundly affected by the diffusion of the ICT technological paradigm – which amounts to a technological revolution. The new paradigm’s implications for corporate governance are far-reaching. (We have already seen that improvements in communications within ICT are helping to drive globalisation, and thus to favour shareholder capitalism.) It is changing relationships among firms, and the boundaries between them. As we saw in Chapter 2, most of the main US computer firms – Compaq, Hewlett-Packard, Apple, IBM – no longer manufacture: they contract this out to specialist manufacturers like Flextronics. One reason that this is thinkable for them is that the advances of CAD-CAM make the output of the development and design process fully codifiable and thus highly communicable between firms. It is a great advantage for a firm to be ready to reconfigure itself radically to take advantage of such changes. We argued in Chapter 3 that reconfiguration was a strong point of shareholder-capitalist systems. A firm that is partly controlled by those who would

Looking forward

229

be ‘reconfigured’ out of a job, will naturally be less inclined to do this than one in which a small group of top managers takes decisions and is accountable only to shareholders. The restrictions on shedding employees which are typical in state-led and state/family systems will also inhibit reconfiguration. Again, suppliers as well as employees are affected. Thus, once the received wisdom was ‘lean manufacturing’ (including Just In Time production methods), which required close relationships with long-standing suppliers and customers. This fitted very well with stakeholder governance models like Japan’s (and to a lesser extent the German model) in which such relationships were strengthened by shareholdings – reciprocal between big firms, and one-way between big firms and their smaller suppliers. Now as fashionable (in the higher-technology areas) is ‘agile manufacturing’ in which partners can be quickly changed. Significantly, lean manufacturing originated in Japan, agile manufacturing in the US (Kidd 1994). The argument in Chapter 2, however, was that radical reconfiguration was needed most in (some) high-technology sectors. The implication of general revolution is general reconfiguration. The diffusion of ICT brings with it entirely generic elements in the process of technological change and organisational learning. Improvement in processes is no longer so much a matter of proceeding along a trajectory specific to the sector, as a struggle to incorporate ICT-based modes of manufacturing (or service provision), design/development and coordination – with the goal of becoming a full ‘e-business’. There is no firm that does not need to be radically reorganised and restructured to take advantage of the enormous potential of the ICT revolution. Is this a further advantage for shareholder capitalism? We believe it is not so simple, because shareholderdriven reconfiguration is top-down; and we shall argue that a different sort of reconfiguration is required. 9.3.2 The structural changes needed Let us take a little time to consider what sort of revolution is going on. We can identify three structural changes that are clichés of e-business, although that does not make them easy to realise: 1

2

Much flatter organisations, in which much information can flow quickly and easily between bottom and top without mediation by a complex hierarchy of middle management. (It must be stressed that middle managers do many things that ICT systems could not do as well: organisational capabilities and memories may be lost through over-enthusiastic ‘de-layering’ (McGreevy 2000). Nonetheless, these can be conserved and augmented without having as many middle managers or having them operating in the same way.) Much closer and quicker connections among functions, such as sales, production, R&D, purchasing; meanwhile each of them sheds much routine employment, as brains and paper-pushing are replaced by bytes.

230 3

Looking forward Much closer and quicker connections with the firm’s suppliers and customers. This allows much more to be bought in rather than made or done inhouse, and thus facilitates globalisation: a simple component may be outsourced to China, say, while back-office jobs move to India. Some of the employment that is lost upstream in this way, can be won back downstream by expanding what is provided to industrial customers. Thus, GE’s aeroengine division no longer defines its product as engines, but as propulsion services: it seeks to take responsibility for maintaining and repairing engines for its customers as well as making them. (ICT systems are key here, since they can be used to keep the supplier informed in real time about stocks of components, and even linked to machines in such a way that a fault diagnosis travels instantly to ‘base’. Indeed, instructions for repair may travel back instantly – as with Alstom’s trains operated by Virgin in the UK (Davies 2004.) As Davies shows, some firms have already moved to the ultimate stage of being (upstream) pure systems integrators, not manufacturing anything, while downstream they take over many responsibilities for the operation of the systems they have integrated.

How do these three clichés of change suit the alternative types of corporate governance? If they are to be put into practice, rather radical reconfiguration will be required, and this suggests that they may be more effectively pushed through by shareholder capitalism. On the other hand, each of them makes heavy demands on the employees who remain – demands not only on their competence but on their trustworthiness. Thus, shop-floor or front-line employees have fewer supervisors, and must thus take more responsibility for their actions – which may indeed include direct contact with customers or suppliers, where that previously passed through Sales or Purchasing. Competence (if not too rapidly redefined) and trustworthiness may be more a characteristic of stakeholder capitalism. Likewise, the connections with the suppliers and customers need to be underpinned by trust and an understanding of their situation and requirements; again, this is stakeholder stuff. Where competence and trust are lacking, the firm will be deterred from such exploitation of ICT’s potential. Instead, the emphasis may be on the scope for tightening control and cutting the lower echelons of the workforce. Tightening control and shedding staff is indeed what a generation of managers in shareholder capitalist countries and firms has seen as the main benefit of ICT: the arrival of the internet and its intranet/EDI precursors led them to extend the area over which the control could be tightened, and to look for their staffshedding to outsourcing as well as to simple replacement by hardware and software. Stakeholder capitalist firms (to judge by studies in Germany) have been naturally less inclined to go in this direction – or rather, in all these directions. They have often preferred to add ICT skills to their shop-floor workers’ existing portfolio of skills than to dispense with them. On the other hand ICT systems like ERP (enterprise resource planning) are an excellent way of tightening control, and it is hardly an accident that the leader in the field, SAP, is

Looking forward

231

a German firm that must have benefited greatly from working with German lead customers. There is a fourth transformation, another horizontal one, which is not even a cliché: 4

ICT makes possible much closer and quicker connections between different divisions (by product or geography) within the firm.

This is now becoming, belatedly, a key issue. The division, sub-division and sub-sub-division of firms into profit centres has been one of the most important trends in shareholder capitalism over the last 30 years. If a unit within an organisation can be defined as a profit centre, its performance can be measured in financial terms. Targets and budgets can be set, and the treatment – and pay – of those in charge can be determined by performance relative to them. They can be given more autonomy in operational matters, on the assumption that the financial control systems provide suitable constraints and motivations. And any difficulties in getting inter-functional coordination – between say R&D, production and marketing – will be diminished by the smaller size of the unit within which it is to take place. The more a firm is subdivided in such a way, the more it is necessary, but the more it is difficult, for knowledge to pass between profit centres. The everyday operations of the firm are little affected: the problem lies mostly with organisational learning. Suppose a motor vehicle firm has three plants, which are profit centres: two car assembly plants, and the engine plant. The engine plant supplies both the others, and therefore has regular contact with them, which may be made somewhat more tense by the fact that the profits of all are affected by the transfer price of the engines. Nonetheless, this vertical relationship is likely to be close – as it might indeed be if an outside firm supplied the engines. What is problematic is the horizontal relationship between the two car plants. Their normal operations probably require little or no contact, but their capabilities are likely to have much in common, and they need therefore to be regularly ‘exchanging notes’. However, the control structure to which they are subjected gives them no incentive to do so – quite the contrary, since their relationship is likely to be rivalrous. The one with the higher profit will probably be praised and left in peace; the poorer performer will attract adverse attention from top management. It is an old complaint against Anglo-American capitalism that its structures, going right to the top, discourage constructive relationships among profit centres. In Core Competence of the Corporation, Prahalad and Hamel (1990) described the SBU (Strategic Business Unit) approach as having such an effect, and as being normal, though not universal, among large US and British firms. The research of one of us on corporate governance and innovation in British firms has found a consistent pattern of complaints among middle managers that the financial controls and pressures to which they were subjected had discouraged them not only from making appropriate investments, but from maintaining suitably close relationships with other profit centres, and with other firms. He

232

Looking forward

has called this distortion sectionalism (Demirag et al. 1994).3 There is nothing peculiarly British about this cause and effect relationship: anecdotal evidence from Mercedes Benz indicates that when Jurgen Schrempp (as DaimlerChrysler chief executive) in the late 1990s sharply increased the emphasis on divisional financial performance within Daimler Benz, it had precisely the same effect. It may well be possible to avoid sectionalism without rolling back the trend of divisionalisation into profit centres. The devil is in the rigidity and in-built short-termism of conventional financial controls, above all the annual budget. There is now a strong school among academic management accountants (Hope and Fraser 2003) arguing that it is necessary to go Beyond Budgeting (the name of the school) to a more long-term and flexible system of financial controls and performance targets, precisely so as to lift the short-termist and sectionalist pressures the budget induces. The Beyond Budgeting control systems continue to monitor the performance of profit centres, but by doing so longer-term they remove or reduce the inhibition of cooperation, because the pay-offs to it are longer-term. If A helps B, B will no doubt help A – but not tomorrow.4 While the main academic thrust of Beyond Budgeting appears to be in Britain – the British know the enemy best – the examples of creative change in the right direction appear to be mostly in Scandinavia, notably Borealis (Denmark) and Svenska Handelsbanken (Sweden). The difficulty for a typical British shareholder-capitalist firm in going Beyond Budgeting is that the conventional budget fits rather neatly with the arms’ length relationship between institutional shareholders and management. The former effectively say to the latter, ‘don’t bemuse us with too much information, focus on telling us what profits and dividends we can expect (preferably steadily rising ones) and then make sure you deliver them next year’. The budget then delivers. Beyond Budgeting goes much more with the grain of a corporate governance style in which the shareholder has a longterm commitment. 9.3.3 Lower-level initiative in the ICT revolution There is another way of assessing the changes which ICT and, above all, the internet make possible: how far do they involve the initiative of middle and lower level employees? Connections between functions, and between suppliers and customers, may be routinised and tightly controlled by rules, and alternatively they may be directly determined by senior management, as with a major joint project. They may, on the other hand, be initiated and carried on by more junior employees, if they have, or exercise, enough discretion. So may contacts among divisions, and indeed this is particularly likely since those at either end will more often have worked together. Even among firms, the flow of useful information is largely on an informal basis, relying on personal relationships within which favours are done and returned (Hippel 1987; Assimakopoulos and Macdonald 2001). The internet, as academics know from personal experience, allows such networks to be operated (though not built up) with less cost in time and effort. At the same time the growing complexity of technology, and markets, makes it

Looking forward

233

necessary for a firm to have more such networks. Junior employees will resist even the monitoring by senior management of such learning links, still more their control over them. If they broadly share the objectives, or at least the interests, of their firm, they will exercise their discretion in such learning links in the interests of the firm. It is only through alignment of objectives and perceived interests that such anarchic learning can realise its great potential. The role of relatively junior employees is equally important in the vital matter of changes in ICT systems. So far, these changes have been generally driven in a top-down manner. A key role has been played by IT consultants and software providers. Clearly the main internal player in ICT-driven change is the IT department, with its specialist staff. They, with luck, will understand what systems are available and how they work. What they will not know is how, in detail, the firm works, let alone how it will work during the lifetime of the system to be installed. IT disaster after disaster is caused by that system being specified, initially at least, by people who do not really understand how the firm works, or how IT works, or both. A major change will probably involve three parties: senior IT staff; IT consultants; and senior management. Surely senior management provide the understanding of the firm’s operations and future requirements? In a large and diverse firm we have our doubts. They can only provide it usefully, at all events, if they have a good general understanding of I(C)T and its potential for the firm; otherwise the interaction is a dialogue of the deaf. But most senior managers are well over 40 years old. How many people over 40 (apart from IT specialists) have a good general understanding of what ICT is about? This is young country, then. The changes need to be driven by groups of young middle managers in a range of functions (including IT), who both have a ‘gut’ understanding of ICT and how it affects organisations, and are close to its detailed applications. In what sort of corporate governance system will they have the opportunity to get together (taking time away from the tyranny of targets) for such purposes, and then have real power or at least influence? No doubt in new firms supported by venture capital: for there such people are in charge. But in established firms? There is no existing system which comes close. We need innovation. 9.3.4 Visibility and engagement in the new paradigm We saw in Chapter 1 that the finance and control of innovation was bedevilled by the difficulties of measuring and valuing both investment in innovation, and the technological capability that resulted from it. This arose essentially from the invisibility of much of the process of innovation, and the intangibility of much of technological capability. Much technology is of course embodied in equipment, whose value to the firm can be calculated – at cost minus depreciation – on the assumption that the firm’s employees know how to use it. But the trend to an increasing share of intangible assets has been clear for decades (Tylecote 1999). The difficulty of valuing assets must have been accentuated by the fact that IT systems make up an increasing fraction of the cost of equipment – since

234

Looking forward

the value of an IT system, as we have just seen, depends almost entirely on how effectively it is used. Accountants are losing their grip, then, on the valuation of the assets of firms, in technologically-demanding sectors at least. They should not imagine that knowledge-managers or patent-valuers can give them much help. Nor are there any technical solutions to the problem of measuring inputs to innovation and learning. Let firms, by all means, publish their spending on R&D, and training, in addition to that on fixed capital – but that will give only a hazy view of the effort that is going in, let alone the results that will come out. There can be no substitute for engagement: engagement of expert shareholders with top managers, engagement (in big firms) of top managers with lower managers. But the engagement must be mutual: those below must wish to give a full picture of the situation as they understand it. Thus, it is difficult to separate engagement from inclusion.

9.4 Current trends in governance 9.4.1 The stakeholder capitalists stand their ground Outsider-dominated shareholder capitalism is, to all appearances, carrying all before it. The OECD, and one country after another, have formulated principles and codes of corporate governance that put management’s responsibility to shareholders – all shareholders – first, and indeed rarely mention any other stakeholder. Many ‘insiders’ have departed. In our countries taken together, the state owns a fraction of the industrial assets it held 25 years ago. Many families have done as families always have done: lost interest, sold out. Where banks have held extensive networks of shareholdings, they have been selling them – even in Germany, once the law was changed (in 2002) to allow this without penal taxation (The Economist 2002). Crossholdings among large firms have been progressively unwound, in France, in Germany, in Japan, as their managers focused more on using their capital to advance their core businesses, and less (in a globalising world) on maintaining networks of domestic relationships. And everywhere the quintessential outsider investors, pension funds and mutual funds and asset managers acting for them, mostly American and British, have been advancing into the spaces vacated. They have used their new share stakes to demand attention to shareholder value – to be increased by selling off noncore businesses, by producing in and sourcing from low-wage locations, by tightening financial controls, by insisting on clear evidence of market demand before heavy spending on product development. Yet in fact the ‘outsiders’ have gained rather little in the most important economies. As we have seen, the outsider shareholders of American firms are largely impotent – and, remarkably, the legislative response to scandals such as Enron, the Sarbanes-Oxley Act of 2001, did nothing to change this: it focused on the CEO and CFO’s obligation to tell shareholders the truth, not their power to force any change in response. Foreigners have begun to notice the difference between what American institutional investors demand abroad, and what they

Looking forward

235

get at home. As Plender (2006a) regretfully points out, only Britain and Australia play the game by the rules. If ‘shark repellents’ – defences against hostile takeover – are acceptable to the Americans, they are acceptable to the rest, including the Germans and Japanese. In 2001, the German and Swedish governments succeeded in blocking a British-backed European Union directive proposed by the European Commission which would have outlawed them (Ehrentreich and Schmidt 2002). A move by European managements to protect themselves has in fact been on the cards since a European Union takeover directive that set out to ban shark repellents ended up being heavily watered down chiefly by the German and Swedish governments. Whether member states adopt provisions banning poison pills is now optional. Some countries such as France have seized the opportunity provided by the directive to permit new antitakeover devices . . . In Japan, a wider dash for toxicity is taking place across the quoted corporate sector as long-standing cross-shareholdings run down and foreign shareholdings increase . . . . What we are now seeing, then, is an incipient process of convergence on the high-toxicity US system. (Plender, 2006a: 19) And managers across the world, particularly in the stakeholder capitalist countries, have learned from their American colleagues how to mobilise the power of a potentially-crucial insider ally – their employees. Not that the relationship with employees can now be easy. As luck would have it, the main stakeholder economies are now on the edge of some extremely steep labour cost gradients – Germany is next to Poland and the Czech Republic, with labour costs perhaps a fifth of German levels; likewise the Nordic countries vis-à-vis the Baltic economies. Japan is very close to China, where wages are no more than a tenth of its levels. Jobs are accordingly being exported rapidly from Germany and the Nordic countries to their eastern neighbours, and from Japan to China.5 Small and medium firms may face relatively little tension in such circumstances – being relatively specialised by product and process, they may be at, or quickly move to, technological ‘high ground’ suitable to be located in the most high-wage, high-technology economy; or else they are likely to go under altogether. A large firm is, by contrast, much more likely to see salvation – or higher profits – in a relocation of large parts of its operations in the lower-wage neighbour. Focus on core competencies creates conflicts with employees over the definition of core business units and the strategies of growth by diversification used to stabilize employment. Divestment from non-core units raises issues of finding good buyers who honor existing employment agreements. Ending the cross-subsidization of business units and establishing equityoriented performance targets create conflicts over performance criteria,

236

Looking forward profitability hurdles, time horizons and disciplining poor performance. Greater independence of business units may weaken solidarity among employees who are more directly exposed to market risks and rewards. Performance-oriented pay raises issues of balancing individual and group incentives, defining performance criteria and the risks of contingent pay. Managerial stock options provoke controversy over income inequality and short-termism. (Jackson 2002: 285)

A suitable lubricant is however to hand, one tried and tested in the United States: employee shareholding. If employees are shareholders they have an incentive to set their interests in future profit against their natural aversion to the developments Jackson lists. There is another attraction of employee shareholding which in the new situation is even more valuable to management: as we have seen in the United States, it can provide a new bloc of ‘stable shareholders’ who might be used, or persuaded, to protect existing management against outside shareholders and hostile takeover bids. By 2000, ESOPs (Employee Stock Ownership Programs) covered 96 per cent of listed companies in Japan and an average of 49.7 per cent of their employees – although, being mostly very new, they made up, at that point, only about 1 per cent of the total stock market value (Jackson 2002: 291). The need was less in Germany, because many large firms were under secure family control. At the same point, 57 per cent of the largest 100 corporations had ESOPs (Jackson 2002). ‘Following the Mannesmann takeover, worker representatives at other widely held companies such as Siemens attempted to organize the voting rights of employee-owned shares into blocks’ (Jackson 2002: 291).6 Another insider, meanwhile, is changing rather than ending its relationship with management – banks. Capital markets can provide capital more cheaply than bank loans; so German and Japanese (big) banks have moved from providing loans to underwriting debt, and both have emphasised the maintenance of their relationships with firms as main banks (Vogel 2003). At a lower level, indeed, the change is rather small: ‘Small firms and the regional and cooperative banks seek to uphold more traditional relations’ (Jackson 2002: 300). Thus reorganised, the more traditional German and Japanese managers are standing their ground: We see in the shareholder value theory an opposition to cultural and social engagement . . . We know the markets are easy to excite for cleaning portfolios and divesting, since these effects can be easily calculated. Investments, restructuring and long-term research and development are harder to calculate and are not popular among powerful new investors . . . For this reason, I recommend calm and long-term thinking as well as more resolve against capital-market actors who wish to force their rules of the game onto the company. (Nikolaus Schweikart, board chairman of Altana, quoted by Jackson 2002: 295–296)

Looking forward

237

It is notable that Schweikart starts off with a reference to ‘cultural and social engagement’: this is the essence of stakeholder capitalism set against ‘shareholder value’. However he goes on to use arguments with which an American venture capitalist, or controlling family, would be comfortable: long-term shareholder value may be more effectively achieved by resisting demands for shortterm increases in profit. If one cannot trust the ‘markets’ to put a realistic value on investment and R&D, one should not align the managers’ incentives too closely with the views of the markets. So German and Japanese firms have not been quick to adopt managerial stock options. Approximately 10 per cent of listed firms in Japan had such schemes as of 2000 (Jackson 2002: 293). German firms can only award stock options with supervisory board agreement – which (given the strength of employee representatives on the board) means they are tightly controlled. To sum up: ‘A more constructive approach involves labour helping to constrain management within the context of international capital markets by reining in temptations to please capital markets by short-term measures’. (Jackson 2002: 302). And indeed capital markets were less pleased in Japan and Germany than (for example) in France, which as we have seen has moved a long way towards shareholder capitalism. While the foreign share of the French equity market rose from 17.4 per cent to 36.1 per cent between 1990 and 2000, that of the German market rose only from 22.7 per cent to 23.6 per cent in the same period. Market capitalization as a percentage of GDP, similar in France and Germany in 1980 (8 and 9 respectively), was nearly twice as high (110 against 62) in France in 2004. That in Japan, 36 in 1980, had only risen to 74 in 2003 (Goyer 2006). 9.4.2 Private equity: ‘the morphing of the barbarians’ While stakeholder capitalism was reorganising its defences and conceding little of its essential character, an extraordinary transformation was taking place within the heart of shareholder capitalism. We saw in Chapter 3 that private equity – the purchase of large blocks of shares in unlisted companies – came in two main forms, venture capital, whose role we have discussed extensively, and the rest, put into established (even mature) businesses, typically to facilitate management buy-outs. In its early days, in the 1980s, private equity was associated with the maximisation of shareholder value in a harsh, short-termist way: a buy-out, ‘leveraged’ with a lot of high-yielding debt (‘junk bonds’), would be followed by disposals of assets and the merciless ‘sweating’ of those that remained, as the managers struggled to bring down the debt and raise the value of their shares. A famous case, the $25 billion buy-out of RJR Nabisco by Kohlberg Kravis Roberts in 1988, was immortalised in Barbarians at the Gate by Bryan Burrough and John Helyar. The skills of the manager of a private equity firm were those of the deal-maker: spot a firm that, if broken up into pieces that were later sold or refloated on the stock market, would be worth a good deal more than it could be bought for; and then do the necessary deals. These things, private equity firms still do. But they have expanded enormously,

238

Looking forward

fuelled by cheap debt and equity. They can set their sights on ever-bigger targets. ‘Over the years . . . the barbarians have morphed . . . . Today they count among their number many talented operational managers’ (London, 2006: 10). Others agree: ‘The top 25 per cent of private equity firms outperform the relevant stock market index over time . . . by some distance and . . . the same group of firms manages to do so persistently’. They do not do this primarily through their deal-making skills; there are only so many deals to be done: The source of their success is the governance model they apply . . . . Top private equity firms are much more committed [than investors in listed firms] to effective oversight of their investments . . . . They have longer time horizons than the quarterly earnings treadmill of public markets. But they tend quickly to bring in new management where needed (including the chief executive) . . . They also commit much time to influencing the effectiveness of the board and researching their view on the direction the company should take, using their block vote to speed up decision-making.7 This assertion of ownership is the crucial difference between theirs and ordinary corporate governance . . . . Some might argue that governance has been greatly improved in public markets . . . But the overwhelming effort has been directed not at governance that creates value, but at compliance – ensuring no codes are breached . . . There are no signs that the challenge posed by private equity firms to the public equity model is about to ease. (Beroutsos and Kehoe 2006: 15; italics added) In February 2006 Henry Kravis, still in joint control of Kohlberg Kravis Roberts, visited Germany to present the new face of buy-out equity (The Economist 2006b). He presented it as supporting innovation, R&D and long-term investment generally – not without evidence in support (BVCA 2006). Simon London is concerned for the future, now that private equity firms have become large and bureaucratic, and are working together to control large companies through ‘club deals’, rather than acting as sole proprietors of smaller ones. Beroutsos and Kehoe (who are directors of McKinsey, respectively in New York and London) point out, likewise, that private equity has serious flaws. It still sometimes makes ‘giddy use of financial leverage’; its managers are hugely well rewarded; their governance skills will be stretched by the increasing size of the firms they control; the remaining 75 per cent of firms are not so good as the 25 per cent they describe. Private equity’s advantage, they insist, arises from the worse flaws of ‘outsider’ shareholder capitalism. In this respect, these paladins of shareholder capitalism are as one with Nikolaus Schweikart.

9.5 A prescription for ‘hybrid’ corporate governance We have seen that the typical, or stereotypical, ‘shareholder capitalist’ firm is better able than the typical ‘stakeholder capitalist’ firm to cope with the opportunities and threats of globalisation. However, both types, and the others,

Looking forward

239

appear to be thoroughly ill-equipped to exploit the potential of the new ICT ‘paradigm’. In this section we sketch a hybrid form of corporate governance that offers much better prospects. It seems reasonable, by this stage, to take it as given that shareholders will dominate (which is not to say that codetermination need be dismantled). But who will the shareholders be, in the larger firms? In the slower-changing sectors major suppliers or customers may sensibly have substantial stakes, and so, even more, may families. For the rest, banks, and government at some level, may cling on here and there, but their day is gone. The ‘new institutional shareholders’ – pension funds and mutual funds, and the (less new) insurance companies – are rapidly growing in size of total assets, and it is generally accepted that pension funds should be allowed to invest a substantial proportion of their assets in equities, as the US and UK pension funds have long done. So they will dominate the equity landscape. There is no reason why major new institutional shareholders should not engage. They may be able to do so effectively without a non-executive director, and without compromising their freedom to trade by becoming privy to the firm’s secrets – as the Capital Group did as a shareholder in AstraZeneca (Ramirez and Tylecote 2004). Such a position, somewhere between ‘armslength’ and ‘insider’, allows a shareholder decently to hold stakes in more than one firm in the sector, and thus more effectively to build industry-wide expertise, which it can use to guide management. Both engagement and the building of industrial expertise cost time, that is, money. This can only be justified by the holding of substantial stakes in each firm with which the investor engages, or (in total) in each sector in which it builds expertise. To simplify slightly, that gives two plausible postures, the choice between them depending on the size of firm. •

•

In a big firm, an adequately large stake in absolute terms can be built with a relatively small proportionate holding – a holding small enough for the stake to be liquid. The investor is then free to ‘exit’ if ‘voice’ does not give satisfactory results. Influence can be secured even with a stake of (say) 5 per cent if other shareholdings are dispersed. Moreover a shareholder coalition can be put together, either with other major investors who have also engaged and come to the same view, or with a number of smaller investors who simply respect the engaged investor’s reputation and are accordingly willing to support its position. (There have been some recent examples of the latter type of coalition around the UK investor Hermes, when it bought into under-performing firms with the intention of forcing changes in management and strategy – see Steele 2005.) In a small firm (by stock market standards) an adequate stake means a large fraction of the firm’s shares. That means liquidity must be sacrificed. Exit is therefore obstructed, if not entirely impossible, and so voice must be made to work. The simplest way to achieve that is to get a non-executive seat on the board. (If that makes the investor an insider, restricting its freedom to

240

Looking forward trade, so what? It has lost that freedom anyway, in practice.) New institutional investors already engage in this way indirectly through private equity investments in unlisted firms.

We can label these two investor postures as Outsider Engagement with Liquidity, and Insider Engagement without Liquidity. So far, British investors have not regarded either of these postures as permanent ones: the engagement is, so to say, episodic. The Hermes style of buying into under-performing firms gives the prospect of a substantial one-off capital gain once other investors conclude that a turnaround has been achieved (or is on the way). Private equity investments have traditionally been made with a view to a subsequent stock market flotation (or sale of the firm), within a period of perhaps five years. There is no reason why episodic engagement should not evolve into permanent engagement. It is a question of the availability of funds and the attractiveness of alternative disengaged postures. If disengagement does not pay, investors will engage. We come back to this below. There is, or there should be, another category of shareholder that can naturally be expected to engage with management and possess industry-wide expertise: employees. We have to distinguish two possibilities here. Employees may hold shares (or share options) purely as individuals. They can then scarcely play any role in corporate governance, except perhaps by their decisions if the firm is faced with a hostile takeover bid. (If they only have share options they have no role even then.) What individual shares and/or share options do is to increase the employee’s commitment to the firm, which delivers most of the key advantages of the stakeholder firm as discussed above – without the disadvantages. If employees have a collective holding, as with ESOPs in the United States, they may also wield power. Such power is unlikely to be wielded with the same conservative bias as codetermination, since the employee as shareholder cares about profits. It is difficult to see much difference between the engaged new institutional shareholder and the shareholding employee in the objectives they would prefer for the firm, except in the more mature industries where the preservation of jobs might be preferred by the employee at the cost of some reduction in profit. Even this, if it increases the employees’ commitment to the firm, might be seen as a way to maximise long-term profits. It is the emphasis on long-term profit that sets both employees and engaged institutional shareholders apart from the disengaged kind. One route to longterm profit is, as we saw in Section 9.3, radical restructuring to exploit the possibilities of ICT. A friend of one of the authors served recently as a non-executive director of a listed British firm. Having much expertise in e-business, he had been invited onto the board by the top management because they thought he might give useful advice on their moves in an e-business direction. He decided that it would be useful to inform himself first by talking to middle managers who had some understanding of such matters. The top management found this behaviour subversive – short-circuiting the chain of command. They might well

Looking forward

241

have feared the sort of too-well-informed criticisms that Ross Perot offered General Motors’ top management in the 1980s, when as non-executive director he had the effrontery to talk to GM dealers about the quality of the cars they were selling. So, like Perot, the over-intrusive non-exec was soon asked to leave the board. In the dispensation that we have in mind, such a non-executive director could have been brought onto, and kept on, the board by engaged institutional shareholders and/or employee shareholders. The moral for the insider systems, then, is clear. Do not hurry to get rid of the old insiders: not at least until you have found new insiders, or at least new major shareholders who will engage actively with management. Finding or creating them is the challenge. Private equity firms, domestic or foreign, are one new form of engaged shareholder, and as likely to be part of the solution as to be the dangerous predator they have been painted by some in Germany. The venture capital part of private equity can play a particularly positive role. The state can very usefully complement this role, by providing loans (as in the USA) or ‘sleeping equity’ (as more recently in France and Germany) to firms which have already attracted private venture capital. But the major source of new capital and new engagement, with industry-wide and cross-sectoral expertise, must be new institutional shareholders buying into listed firms. As pension funds and mutual funds expand everywhere, their potential contribution grows. There are two dangers. The first is that they will seek profit through the older of the two ‘disengagement’ strategies: active management through trading. In its traditional form, this no longer works in the UK and US markets because they are dominated by expert professionals. If you are to make money by buying shares which are going to go up, and selling shares which are going to go down, you need other investors who are stupid or ill-informed enough to sell to you and buy from you, and lose money as a result. In Britain they would be called mugs; in America, suckers. Mugs and suckers are now in short supply. The best hope for British and American asset managers – and the greatest threat to their future usefulness – is a flood of new foreign institutional investors who behave, until they learn better, like mugs/suckers. Meanwhile, a new form of active management, what could be called hyper-active management, has taken up the search for profit by trading: the hedge fund. Hedge funds can sell shares short (i.e. sell what they do not hold, on forward markets) as well as buy and sell them in the traditional way. They are a new and powerful constituency with an interest in creating runs (speculative sharp declines) in firms’ shares, which further increase pressures on management (Woolley 2004). Institutional investors must be discouraged from the zero-sum game implied by either form of active management, by tax incentives for holding shares long term. If active management through trading does not pay, there are two alternatives. The cheap and easy one is passive management, or index-tracking: buying every share in the stock market index in proportions decided simply by the firm’s market capitalisation. The only judgement required is in the decision as to how much to put into bonds, how much into shares, what proportion of shares to buy in the UK, the US, etc. No one investor will ever have enough of any firm’s

242 Looking forward shares to make engagement pay, individually; but a number might band together, to do so. Still, passive investors cannot beat the market. The only option left, the only way to beat the market, is then engagement. In other words, when you can no longer make money by guessing which share will go up, you are forced to do what it takes to make your shares go up. The second danger is crony capitalism, Wall Street-style. There are some familiar scenarios. The pension fund of Firm X, managed internally by people appointed by X’s CEO, is putting the management of Firm Y under pressure. Firm Y’s CEO rings up X’s CEO and asks him, please take your tanks off my lawn – appealing to friendship or fellow-feeling or suggesting that the roles may be reversed before long. Or perhaps Asset Management House A at some level is using its voting power to put pressure on the managers of Firm Y. A is part of a diversified financial firm which has a stock-broking and an investment banking arm. Word comes from Y: leave us in peace or forget about any future business from us. Here is a case where some heavy-handed Sarbanes–Oxley-style treatment may be in order. The duty of pension fund trustees is to look after the interests of the pensioners, present and future. Anyone trying to divert them from their duty should face jail. Indeed engagement should be part of their legal duty – exercising the responsibilities of ownership either individually (if their fund is large enough) or through some kind of association. If they delegate responsibility to an asset management house they would have the duty to make sure that it is engaging appropriately – and/or it should have that obligation automatically. If experience suggests that this simply will not happen where asset management houses have conflicting interests, de-merger should be forced. Another challenge is to mobilise the corporate governance potential of employee shareholders, in countries without legislation for codetermination. The employee sword should be made double-edged. Employee shareholders should have an association – one share, one vote, for all employees below a certain level of management – which elects non-executive directors, the number being in proportion to their total shareholding. The association would likewise decide whether to vote to accept a takeover bid. One could imagine a middle manager who was highly critical of senior management, getting elected to a non-executive directorship and accordingly resigning his or her post, to become a permanent thorn in a conservative management’s side, with an unending flow of critical information coming in from the grassroots. (Perhaps something similar could be done in universities?) Let us conclude by putting our proposals in perspective. They are not mere counsels of perfection in a system, or systems, already performing more than adequately. True, in the leading developed countries, to say nothing of China and India, the growth of productivity – that is, labour productivity – has continued, accelerated somewhat over the last decade or two. But so it should, in the middle of the ICT revolution. Our competing boats in the international race have the mother of all following winds behind them: how can one fail to make labour more productive with all the opportunities of ICT? We must improve the finance

Looking forward

243

and governance of our technological progress. As we pointed out in the Preface, investment in innovation generates demand, and current ‘locomotives’ providing demand in the world economy – over-consumption in the US and Britain, the industrialisation of China – may soon stop or slow down. There is another reason for concern. Before long (in our judgement) the main innovative task, the main route to profit, will not be the familiar leisurely saving of labour but the hurried saving of energy, in the face of climate change. ICT offers marvellous possibilities for this too, but as the whole fleet alters course into the wind, we shall need fine steering.

Statistical appendix

Notes on definitions and sources of measures used In Tables A1 to A9, and A11, definitions and sources are as follows: Patents. Revealed technological advantage (RTA) is calculated as: country’s share of world patents (US Patent Office) of a good divided by its share of total world (USPO) patents. Source: data were downloaded from www.nber.org/ patent and organised in the following: USPO 3-digit classes and 2-digit subcategories: • • • • • • • • •

Pharmaceuticals: 424, 514, 435, 800. Aircraft (excluding engines): 244. Office, accounting and computing machinery: 22 (excluding 341, 380, 382, 395 and 700–707), 23, 24. Radio, television and communication equipment: 21 and 46. Software: 341, 380, 382, 395, 700, 706, 707.1 Chemicals: 12, 13, 14 ,15.2 Machinery and equipment n.e.c.: 52, except for 163.3 Electrical machinery and apparatus n.e.c.: 41, 42, 45. Motor vehicles: 53 and 180.4 The country refers to the country of the first inventor. For a comprehensive explanation of the database see Hall et al. (2001).

Manufacturing trade balance. The ‘contribution to the trade balance’ is the difference between the actual and the theoretical balance:

( X i − Mi ) − ( X − M ) balance and ( X − M (2001a).

(X + M ) i

i

(X + M )

(X + M )

) ( Xi + Mi)

where ( X i − Mi ) − is the observed industry is the theoretical trade balance. Source: OECD

Statistical appendix

245

Production specialization. This is calculated as follows: For column 1 of each country, as a country’s share of world (entire DTI scoreboard) sales of a good divided by its share of total world (entire DTI scoreboard) sales (source: DTI R&D Scoreboard: www.innovation.gov.uk/rd_scoreboard/). For column 2 of each country, as a country’s share of our countries’ (excluding Taiwan and China) production of a good divided by its share of total (our countries) production (source: OECD (2004a): STAN, Structural analysis online database). R&D intensity. This is calculated from R&D expenditure over sales. Sources: DTI R&D Scoreboard: www.innovation.gov.uk/rd_scoreboard/; OECD (2004a): STAN, Structural analysis online database. Weight on production: Production in sector X/total production of the country. Source: OECD (2004a) STAN, Structural analysis online database. Data are for 2000, except for Sweden, for which they are for 1999. US data are at factor cost.

Switzerland

Germany

Japan

2001 −0.2

1992 −1.0

Note *Aerospace and defence.

0.006

0.007

NA

0.004

1992 −0.3

France

South Korea

1992 2001 +1.4 +1.8

1992 NA

0.004

Italy

Taiwan

1992 2001 0.0 −0.3

1992 2001 NA NA

0.001

NA

OECD DTI OECD DTI OECD 2000 2004 2000 2004 2000 1.2 19.31 13.7 NA NA

OECD DTI OECD DTI OECD 2000 2003 2000 2003 2000 0.11 1.50 0.44 NA NA

2001 NA

0.020

OECD DTI OECD DTI 2000 2004 2000 2004 11.7 6.96 13.2 NA

OECD DTI OECD DTI 2000 2003 2000 2003 0.45 1.83 1.21 NA

2001 −0.2

0.001

OECD DTI 2000 2004 8.3 4.52

OECD DTI 2000 2003 0.15 0.79

2001 −0.4

0.011

OECD DTI 2000 2004 16.7 NA

1992 −0.5

R&D intensity, DTI OECD DTI OECD DTI OECD DTI percentage 2004 2000 2004 2000 2004 2000 2004 2.95 10.3 8.35 6.7 NA NA NA

1992 2001 −0.4 −0.4

OECD DTI 2000 2003 0.64 NA

1992 2001 +1.6 +1.1

Production DTI OECD DTI OECD DTI OECD DTI specialisation 2003 1999 2003 2000 2003 2000 2003 1.85 1.80 2.41 1.98 NA NA NA

Weight on production, 2000

Sweden

1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1.11 1.35 1.69 1.69 0.22 0.30 0.73 1.08 0.13 0.10 1.38 0.56 1.36 2.70 0.0 0.06 0.31 0.32 – 0.33

Manufacturing 1992 2001 trade balance,+4.2 +2.6 percentage of output

Patenting: RTA

United States United Kingdom

Table A1 Synthesis of data for Aerospace*

Switzerland

Germany

Japan

Sweden

France

South Korea

Italy

Taiwan

1992 2001 +0.2 +0.8

1992 +0.3

2001 +0.4

1992 −0.9

2001 −0.7

1992 +1.0

2001 +1.6

1992 2001 +0.3 +0.4

1992 NA

2001 NA

1992 2001 −0.5 −0.3

1992 2001 NA NA

0.006

0.006

Note *DTI: Pharmaceuticals and biotechnologies.

Weight on production, 2000

NA

0.006

0.006

0.012

0.012

0.004

0.008

NA

R&D intensity, DTI – OECD DTI – OECD DTI – OECD DTI – OECD DTI – OECD DTI – OECD DTI OECD DTI – OECD DTI – OECD DTI – OECD percentage 2004 – 2000 2004 – 2000 2004 – 2000 2004 – 2000 2004 – 2000 2004 – 2000 2004 – 2000 2004 – 2000 2004 – 2000 2004 – 2000 15.82 NA 15.29 NA 16.20 NA 14.92 NA 11.00 NA NA NA 15.30 NA NA NA 10.34 NA NA NA

Production DTI – OECD DTI − OECD DTI − OECD DTI − OECD DTI − OECD DTI – OECD DTI – OECD DTI − OECD DTI – OECD DTI − OECD specialisation 2003 − 1999 2003 − 2000 2003 − 2000 2003 − 2000 2003 − 2000 2003 − 2000 2003 − 2000 2003 − 2000 2003 − 2000 2003 − 2000 2.31 1.13 2.89 1.06 9.68 NA 0.67 0.74 0.67 0.80 NA 1.35 1.88 1.69 NA 1.01 NA 1.27 NA NA

1992 2001 +0.8 +0.3

1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 0.85 1.13 1.22 1.87 1.98 1.49 1.13 0.92 1.38 0.49 1.29 1.16 1.71 2.70 1.02 0.24 1.48 1.54 0.45 0.13

Manufacturing 1992 2001 trade balance,+0.3 +0.2 percentage of output

Patenting: RTA

United States United Kingdom

Table A2 Synthesis of data for Pharmaceuticals*

Weight on production, 2000

0.006

R&D intensity, DTI – 2004 percentage ITh ITh+EE 9.76 9.03

8.2

OECD – 1999

1.08

OECD – 2000

Production DTI – 2003 specialisation ITh ITh+EE 2.31 0.89

1990– 1999 1.07

2001 −0.1

1.09

1963–1979

Manufacturing 1992 trade balance, −0.3 percentage of output

Patenting: RTA

United States

ITh+EE 0.08

0.007

ITh ITh+EE 15.94 8.96

DTI – 2004

ITh 0.05

DTI – 2003

1992 −0.5

0.76

1963–1979

United Kingdom

0.8

OECD – 2000

1.16

OECD – 2000

2001 0.0

1990– 1999 0.56

ITh+EE 0.64

ITh 8.01

NA

ITh+EE 4.30

DTI – 2004

ITh 0.03

DTI – 2003

1992 −1.8

0.24

1963–1979

Switzerland

Table A3 Synthesis of data for Office, accounting, and computing machinery*

NA

OECD – 2000

NA

OECD – 2000

2001 −1.9

1990– 1999 0.14

ITh+EE 0.59

0.004

ITh ITh+EE 16.94 7.53

DTI – 2004

ITh 0.10

DTI – 2003

1992 −1.4

0.51

1963–1979

Germany

5.8

OECD – 2000

0.48

OECD – 2000

2001 −1.9

1990– 1999 0.24

ITh+EE 2.18

ITh 5.10

0.011

ITh+EE 5.71

DTI – 2004

ITh 2.34

DTI – 2003

1992 +2.3

1.51

1963–1979

Japan

10.6

OECD – 2000

1.24

OECD – 2000

2001 −0.8

1990– 1999 1.34

0.001

6.6

OECD – 2000

ITh+EE 0.55

0.004

ITh ITh+EE 12.23 5.66

DTI – 2003

ITh 0.83

DTI – 2003

1992 −0.9

0.87

1963–1979

France

2.8

OECD – 2000

OECD – 2000

2001 −1.2

1990– 1999 0.54

ITh+EE NA

0.020

ITh ITh+EE 6.74** 5.21

DTI – 2003

ITh 0.59

DTI – 2003

1992 NA

1.32

1963–1979

South Korea

4.9

OECD – 2000

NA

OECD – 2000

2001 NA

1990– 1999 2.10

ITh+EE NA

0.001

ITh ITh+EE 13.79**–

DTI – 2003

ITh NA

DTI – 2003

1992 −0.8

0.68

1963–1979

Italy

2.5

OECD – 2000

0.26

OECD – 2000

2001 −1.3

1990– 1999 0.55

Notes * DTI categories (poor correspondence to OECD categories): ITh  ‘IT hardware’; EE  Electronic and electrical equipment. ** One firm.

Weight on production, 2000

R&D intensity, DTI – 2003 percentage ITh ITh+EE 16.79 NA

0.14

OECD – 2000

Production DTI – 2003 specialisation ITh ITh+EE 2.13 –

1990– 1999 0.31

2001 −2.0

0.47

1963–1979

Manufacturing 1992 trade balance, −1.7 percentage of output

Patenting: RTA

Sweden

ITh+EE 4.03

ITh 4.10

NA

ITh+EE 2.56

DTI – 2003

ITh 5.69

DTI – 2003

1992 NA

0.0

1963–1979

Taiwan

NA

OECD – 2000

NA

OECD – 2000

2001 NA

1990– 1999 0.67

Weight on production, 2000

0.018

R&D intensity, DTI – 2003 percentage E&E ITh+EE 4.59 9.03

6.9

OECD – 2000

0.86

OECD – 2000

Production DTI – 2003 specialisation E&E ITh+EE 0.21 0.93

1990– 1999 0.97

2001 +1.1

1.06

1963–1979

Manufacturing 1992 trade balance, −1.4 percentage of output

Patenting: RTA

United States

0.017

E&E ITh+EE 4.49 8.96

DTI – 2003

E&E ITh+EE 0.11 0.08

DTI – 2003

1992 −0.3

0.91

1963–1979

United Kingdom

4.5

OECD – 2000

0.72

OECD – 2000

2001 +1.4

1990– 1999 0.85

0.050

E&E ITh+EE 3.91 4.30

DTI – 2003

E&E ITh+EE 1.33 0.64

DTI – 2003

1992 −0.8

0.32

1963–1979

Switzerland

Table A4 Synthesis of data for Radio, television and communication equipment*

NA

OECD – 2000

0.14

OECD – 2000

2001 −1.0

1990– 1999 0.43

0.026

E&E ITh+EE 6.65 7.53

DTI – 2003

E&E ITh+EE 1.1 0.59

DTI – 2003

1992 −0.7

0.64

1963–1979

Germany

ITh+EE 2.18

0.018

ITh+EE 5.71

DTI – 2003

E&E 2.1

DTI – 2003

1992 +4.6

1.17

1963–1979

E&E 11.53** 6.23

OECD – 2000

0.40

OECD – 2000

2001 −1.2

1990– 1999 0.47

Japan

57.66**

OECD – 2000

1.42

OECD – 2000

2001 +1.9

1990– 1999 1.20

0.010

0.022

E&E ITh+EE 3.31 5.66

DTI – 2004

ITh+EE&E 0.74 0.55

DTI – 2003

1992 −0.5

1.07

1963–1979

France

7.1

OECD – 2000

0.72

OECD – 2000

2001 +0.1

1990– 1999 0.83

0.039

E&E ITh+EE 5.13 5.21

DTI – 2004

E&E ITh+EE 5.4 NA

DTI – 2003

1992 NA

0.84

1963–1979

South Korea

NA

OECD – 2000

2.0

OECD – 2000

2001 NA

1990– 1999 2.13

0.019

E&E ITh+EE NA NA

DTI – 2004

E&E ITh+EE NA NA

DTI – 2003

1992 −1.3

0.59

1963–1979

Italy

9.1

OECD – 2000

0.56

OECD – 2000

2001 −1.2

1990– 1999 0.57

ITh+EE 4.03

E&E 1.66

NA

ITh+EE 2.56

DTI – 2004

E&E 2.14

DTI – 2003

1992 NA

1.12

1963–1979

Taiwan

Notes * DTI categories (poor correspondence to OECD categories): ITh  ‘IT hardware’; EE  Electronic and electrical equipment. ** R&D includes other classes.

Weight on production, 2000

OECD – 1999

R&D intensity, DTI – 2004 percentage E&E ITh+EE NA NA

0.8

OECD – 2000 E&E 1.49

Production DTI – 2003 specialisation E&E ITh+EE NA NA

1990– 1999 1.34

2001 +0.8

0.89

1963–1979

Manufacturing 1992 trade balance, +0.4 percentage of output

Patenting: RTA

Sweden

NA

OECD – 2000

NA

OECD – 2000

2001 NA

1990– 1999 1.93

Switzerland

Germany

Japan

1992 2001 NA NA

1992 2001 NA NA

1992 NA

1992 NA

OECD DTI 2000 2003 NA 0.18

2001 NA

0.021

0.014

NA

Note *OECD: Computer and related activities. DTI: Software and IT services.

0.015

1992 NA

France

South Korea

1992 2001 NA NA

1992 NA

OECD DTI OECD DTI 2000 2003 2000 2003 1.33 0.34 0.9 NA

2001 NA

0.022

0.012

Italy

Taiwan

1992 2001 NA NA

1992 2001 NA NA

0.011

NA

OECD DTI OECD DTI OECD 2000 2004 2000 2004 2000 NA NA NA NA NA

OECD DTI OECD DTI OECD 2000 2003 2000 2003 2000 0.43 NA 0.98 NA NA

2001 NA

0.009

OECD DTI OECD DTI OECD DTI 2000 2004 2000 2004 2000 2004 NA 14.53 NA 19.48 NA NA

OECD DTI 2000 2003 0.71 0.18

2001 NA

0.011

R&D intensity, DTI OECD DTI OECD DTI OECD DTI OECD DTI percentage 2004 2000 2004 2000 2004 2000 2004 2000 2004 10.76 NA 7.36 NA NA NA 12.01 NA 4.26

Production DTI OECD DTI OECD DTI OECD DTI specialisation 2003 1999 2003 2000 2003 2000 2003 4.49 1.43 0.70 1.94 NA 1.21 0.43

Weight on production, 2000

Sweden

1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1.09 1.12 1.00 0.72 0.68 0.37 0.43 0.30 1.09 1.21 0.72 0.58 1.04 0.63 0.0 0.90 1.03 0.38 3.40 0.55

Manufacturing 1992 2001 trade balance, NA NA percentage of output

Patenting: RTA

United States United Kingdom

Table A5 Synthesis of data for Software and IT services*

Switzerland

Germany

Japan

2001 0.0

1992 −0.3

Note *Industrial Development Bureau.

0.018

0.017

NA

0.026

1992 −2.0

France

South Korea

1992 2001 +0.5 +0.5

1992 NA

0.022

Italy

Taiwan

1992 2001 −3.3 −2.8

1992 2001 NA NA

0.019

NA

OECD DTI OECD DTI OECD 2000 2004 2000 2004 2000 NA NA 1.4 NA NA

OECD DTI OECD DTI IDB* 2000 2003 2000 2003 1.01 NA 1.1 NA NA

2001 NA

0.039

OECD DTI OECD DTI 2000 2004 2000 2004 NA 2.51 NA 1.95

OECD DTI OECD DTI 2000 2003 2000 2003 0.65 0.99 1.2 0.76

2001 −1.9

0.010

OECD DTI 2000 2004 NA NA

OECD DTI 2000 2003 0.75 NA

2001 +0.6

0.018

OECD DTI 2000 2004 NA 3.76

1992 +1.2

R&D intensity, DTI OECD DTI OECD DTI OECD DTI percentage 2004 2000 2004 2000 2004 2000 2004 3.03 NA 2.05 NA 5.97 NA 4.97

1992 2001 +1.9 +1.7

OECD DTI 2000 2003 0.99 1.76

1992 2001 +1.5 +1.4

Production DTI OECD DTI OECD DTI OECD DTI specialisation 2003 2000 2003 2000 2003 2000 2003 1.22 1.12 0.83 1.00 3.59 NA 2.4

Weight on production, 2000

Sweden

1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 0.96 0.99 0.90 1.05 1.54 1.71 1.24 1.59 0.96 0.82 0.73 0.84 0.91 1.09 1.34 0.40 1.37 1.44 0.89 0.48

Manufacturing 1992 2001 trade balance, +2.6 +1.7 percentage of output

Patenting: RTA

United States United Kingdom

Table A6 Synthesis of data for Chemicals

Germany

Japan

0.86

–

0.009

0.006

0.001

0.002

0.001

0.005

Notes *DTI: Engineering and machinery. ** Industrial Development Bureau.

0.017

NA

NA

NA

0.041

Sweden

0.002

0.019

0.019

1992 +1.0

France

South Korea

0.004

0.014

0.013

1992 2001 −0.4 −0.5

1992 NA

NA

0.65

0.65

0.95

0.003

0.019

0.013

0.001

0.005

0.008

0.015

Italy

Taiwan

1992 2001 +5.7 +5.5

1992 2001 NA NA

NA

2.69

2.33

2.37

NA

–

–

–

0.005

0.013

0.014

0.004

0.017

0.019

0.041 NA

OECD DTI OECD DTI OECD 2000 2004 2000 2004 2000 1.0 NA 0.4 NA NA

1.66

1.05

1.05

OECD DTI OECD DTI IDB** 2000 2003 2000 2003 0.96 2.06 0.83

2001 NA

0.033

OECD DTI OECD DTI 2000 2004 2000 2004 3.6 NA 2.2 0.98

1.15

1.72

1.07

OECD DTI OECD DTI 2000 2003 2000 2003 1.23 0.68 1.25

2001 +0.9

0.038

OECD DTI 2000 2004 3.5 3.57

1.92

1.49

1.24

OECD DTI 2000 2003 1.22 12.7

2001 +4.1

0.032

OECD DTI 2000 2004 2.5 3.04

1.24

0.042

OECD DTI OECD DTI OECD DTI 2000 2004 2000 2004 2000 2004 2.0 1.75 2.0 3.03 NA 1.81

–

–

1.98

0.95

0.20

–

1.84

1992 +3.9

1.29

2001 +3.2

0.35

1992 +4.0

OECD DTI 2000 2003 1.59 1.35

1992 2001 5.6 4.6

OECD DTI OECD DTI OECD DTI 2000 2003 2000 2003 2000 2003 0.52 0.29 0.95 2.32 2.11 2.34

1992 2001 1.2 0.9

0.009

Production DTI specialisation 2003 M & E n.e.c., 1.43 of which General purpose M Special purpose M Domestic appliances R&D intensity, DTI percentage 2004 2.30

Weight on production, 2000 M & E n..e.c., of which General purpose M Special purpose M Domestic appliances

Switzerland

1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 0.98 0.94 1.01 0.90 0.73 1.55 0.99 1.18 0.93 1.04 1.76 1.50 0.94 1.01 0.48 0.46 0.82 1.37 0.63 0.63

Manufacturing 1992 2001 trade balance, 2.4 2.1 percentage of output

Patenting: RTA

United States United Kingdom

Table A7 Synthesis of data for machinery and equipment not elsewhere classified*

Switzerland

Germany

Japan

Sweden

France

South Korea

Italy

Taiwan

1992 +1.2

Note *Industrial Development Bureau.

OECD DTI 2000 2004 1.2 NA

2001 0.0

R&D intensity, DTI OECD DTI OECD DTI OECD DTI percentage 2004 2000 2004 2000 2004 2000 2004 NA 4.3 NA 2.4 NA NA NA

1992 +0.6

OECD DTI 2000 2003 1.54 NA

1992 2001 0.6 0.7

Production DTI OECD DTI OECD DTI OECD DTI specialisation 2003 2000 2003 2000 2003 2000 2003 NA 0.82 NA 0.82 NA 1.72 NA

1992 2001 0.1 0.3

1992 −0.8

OECD DTI 2000 2004 7.5 NA

OECD DTI 2000 2003 1.07 NA

2001 +1.0

1992 2001 +0.6 +0.4

1992 NA

OECD DTI OECD DTI 2000 2004 2000 2004 2.4 NA 3.1 NA

OECD DTI OECD DTI 2000 2003 2000 2003 0.45 NA 0.78 NA

2001 −0.6

1992 2001 +0.2 0

1992 2001 NA NA

OECD DTI OECD DTI OECD 2000 2004 2000 2004 2000 1.4 NA 1.1 NA NA

OECD DTI OECD DTI IDB* 2000 2003 2000 2003 0.90 NA 1.24 NA 5.39

2001 NA

1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1.08 1.00 0.98 0.76 0.64 0.85 0.71 0.92 0.86 1.07 1.02 0.84 0.88 0.99 0.60 0.96 0.64 0.76 1.42 1.82

Manufacturing 1992 2001 trade balance, 0.0 0.1 percentage of output

Patenting: RTA

United States United Kingdom

Table A8 Synthesis of data for Electrical machinery and apparatus

Switzerland

Germany

Japan

2001 +4.1

1992 +8.6

0.012

0.018

NA

0.0016

Notes *DTI: Automobiles and parts. **Industrial Development Bureau: Transport equipment.

0.019

0.027

0.042

0.057

1992 +2.2

France

South Korea

0.021

1992 2001 +1.5 +1.3

1992 NA

0.041

0.035

0.044

Italy

Taiwan

1992 2001 −3.3 −2.9

1992 2001 NA NA

0.026

0.012

0.019

NA

NA

OECD DTI OECD DTI OECD 2000 2004 2000 2004 2000 3.3 3.52 2.4 3.47 NA

OECD DTI OECD DTI IDB** 2000 2003 2000 2003 1.1 3.2 0.6 NA 0.46

2001 NA

0.042

OECD DTI OECD DTI 2000 2004 2000 2004 5.5 4.1 2.4 3.65

OECD DTI OECD DTI 2000 2003 2000 2003 1.11 2.3 1.2 1.5

2001 +0.6

0.054

OECD DTI 2000 2004 3.5 4.82

OECD DTI 2000 2003 1.01 0.47

2001 +8.6

0.042

OECD DTI 2000 2004 5.0 4.43

1992 +3.2

R&D intensity, DTI OECD DTI OECD DTI OECD DTI percentage 2004 2000 2004 2000 2004 2000 2004 3.64 4.3 2.19 3.1 NA NA 4.92

1992 2001 -3.9 -3.6

OECD DTI 2000 2003 1.38 1.64

1992 2001 -0.5 -2.0

Production DTI OECD DTI OECD DTI OECD DTI specialisation 2003 2000 2003 2000 2003 2000 2003 1.54 0.99 0.11 0.66 NA 0.05 2.58

Weight on production, 2000 Motor vehicles, trailers and semi-t. Motor vehicles

Sweden

1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1963– 1990– 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 1979 1999 0.93 0.75 1.40 0.97 0.56 0.74 1.26 2.01 1.12 1.32 1.45 1.45 1.28 0.91 1.27 0.69 0.91 0.99 1.13 0.92

Manufacturing 1992 2001 trade balance, −3.1 −3.2 percentage of output

Patenting: RTA

United States United Kingdom

Table A9 Synthesis of data for Automotive*

Statistical appendix

257

Table A10 Pattern of specialization in the production of machine tools

United States China Japan Germany United Kingdom France Italy South Korea Taiwan Switzerland Sweden

Percentage of world GDP (2004) (a)

Market share in machine tools (2004) (b)

Specialisation (b/a)

21.36 12.54 6.94 4.42 3.24 3.22 3.02 1.66 1.03 0.47 0.46

6.9 8.9 20.3 22.0 2.16 1.89 12.3 2.6 5.6 5.33 0.58

0.32 0.71 2.93 4.98 0.67 0.59 4.07 1.56 5.45 11.43 1.25

Source: (a) CIA World Fact Book (2005); (b) Cecimo (2005).

Sweden

Japan

Germany

Switzerland

UK

US

1963–1979 1980–1989 1990–1994 1995–1999 1963–1979 1980–1989 1990–1994 1995–1999 1963–1979 1980–1989 1990–1994 1995–1999 1963–1979 1980–1989 1990–1994 1995–1999 1963–1979 1980–1989 1990–1994 1995–1999 1963–1979 1980–1989

1.11 1.33 1.37 1.35 1.69 1.53 1.81 1.50 0.22 0.10 0.32 0.24 0.73 0.88 0.97 1.18 0.13 0.09 0.59 0.43 1.38 1.02

Aerospace

0.85 0.94 1.06 1.15 1.22 1.86 1.97 1.83 1.98 1.70 1.63 1.44 1.13 1.03 0.99 0.89 1.38 0.72 0.11 0.09 1.29 0.94

Pharma.

1.09 0.97 0.97 1.11 0.76 0.58 0.50 0.60 0.24 0.19 0.15 0.14 0.51 0.40 0.27 0.23 1.51 1.80 1.61 1.24 0.47 0.25

Office, accounting and computing machinery

Table A11 Revealed technological advantage, various periods

1.06 1.06 1.00 0.95 0.91 0.98 0.94 0.80 0.32 0.47 0.47 0.41 0.64 0.58 0.47 0.47 1.17 1.11 1.22 1.20 0.89 0.69

1.09 1.05 1.05 1.13 1.00 0.75 0.74 0.72 0.68 0.51 0.49 0.32 0.43 0.43 0.30 0.31 1.09 1.46 1.36 1.16 0.72 0.74

Radio, Software television and communication equipment 0.96 1.03 1.01 0.97 0.90 0.91 0.95 1.13 1.54 1.41 1.50 1.88 1.24 1.25 1.44 1.71 0.96 0.77 0.79 0.83 0.73 0.86

Chemicals

1.08 1.07 0.97 0.93 0.98 0.88 1.03 0.74 0.64 0.80 1.39 1.66 0.71 0.84 1.07 1.27 0.86 0.97 0.96 1.10 1.02 1.03

Machinery

0.93 0.76 1.05 0.96 1.40 1.05 0.73 0.78 0.56 0.56 0.77 0.92 1.26 1.43 0.85 0.98 1.12 1.50 0.99 1.13 1.45 1.52

0.98 0.98 0.77 0.74 1.01 0.90 0.99 0.93 0.73 1.20 0.68 0.78 0.99 0.98 1.70 2.30 0.93 0.93 1.29 1.34 1.76 1.94

Electrical Motor machinery vehicles

0.87 0.34 1.36 1.89 2.56 2.77 0.00 0.00 0.00 0.09 0.31 0.23 0.25 0.40 0.00 0.74 0.14 0.37 9.07 0.00 0.00 1.21

1.12 1.15 1.71 1.36 1.40 1.59 1.02 0.47 0.28 0.21 1.48 2.07 1.73 1.46 0.45 0.14 0.34 0.12 1.14 1.70 1.02 1.76

0.36 0.28 0.87 0.69 0.56 0.54 1.32 2.33 2.35 1.84 0.68 0.55 0.33 0.69 0.00 0.15 0.63 0.61 2.22 0.00 0.14 0.56

Note For definitions and sources see Notes at beginning of Statistical appendix.

1990–1994 1995–1999 France 1963–1979 1980–1989 1990–1994 1995–1999 South Korea 1963–1979 1980–1989 1990–1994 1995–1999 Italy 1963–1979 1980–1989 1990–1994 1995–1999 Taiwan 1963–1979 1980–1989 1990–1994 1995–1999 China 1963–1979 1980–1989 1990–1994 1995–1999

0.90 1.51 1.07 1.23 0.97 0.75 0.84 1.45 2.50 1.96 0.59 0.71 0.56 0.59 1.12 1.35 1.04 2.06 0.71 0.69 0.50 0.45

0.53 0.58 1.04 0.73 0.68 0.63 0.00 0.00 0.88 0.81 1.03 0.33 0.40 0.38 3.40 0.76 0.58 0.49 0.00 0.73 1.20 1.02

0.91 0.82 0.91 0.87 1.01 1.16 1.34 0.80 0.40 0.43 1.37 1.13 1.38 1.46 0.89 0.51 0.59 0.48 0.75 0.81 1.22 1.26

1.63 1.48 0.88 0.96 1.02 0.96 0.60 1.45 0.43 0.52 0.64 0.69 1.28 1.42 1.42 1.96 0.89 0.59 1.35 1.20 1.08 1.16

0.92 0.81 1.28 1.02 0.97 1.01 1.27 0.59 1.04 0.96 0.91 1.06 0.68 0.84 1.13 1.53 2.31 1.71 0.71 1.99 1.07 0.89

1.68 1.33 0.94 0.99 0.91 0.89 0.48 0.68 0.40 0.87 0.82 0.94 0.98 0.95 0.63 0.93 1.23 0.89 0.54 0.41 1.67 1.10

0.035

Aircraft and spacecraft

0.03

Chemicals

0.025

Office and computing machinery

0.02 0.015

Radio, TV, and communication equipment

0.01

Machinery and equipment Electrical machinery

0.005

Motor vehicles Italy

France

Sweden

Japan

Germany

UK

US

0

Figure A1 Weight of each sector in each country’s value added, 2000 (source: OECD (2003a)). Note Chemicals include pharmaceuticals.

0.5 Aircraft and spacecraft Pharmaceuticals

0.45 0.04

Chemicals

0.35

Office and computing machinery

0.3

Radio, TV, and communication equipment

0.25 0.2

Machinery and equipment

0.15 0.1

Electrical machinery

0.05 Italy

France

Sweden

Japan

Germany

UK

Motor vehicles US

0

Figure A2 Distribution of employees by sector among firms by nationality, 2001 (source: OECD (2005)). Note The figures are derived from the data for employment by sector in each country, subtracting employees of foreign local subsidiaries and adding employees of subsidiaries abroad. Data missing for: UK – local and foreign Radio, TV and communication equipment; Switzerland – local office accounting and computing machinery and local Aircraft and spacecraft; Germany – foreign Pharmaceuticals and Aircraft and spacecraft; Japan and US – foreign Aircraft and spacecraft.

0.35 Aircraft and spacecraft 0.30

Pharmaceuticals

0.25

Office and computing machinery Radio, TV, and communication equipment

0.20 0.15

Chemicals and pharmaceuticals

0.10

Machinery and equipment 0.05

Electrical machinery

Italy

France

Sweden

Japan

Germany

UK

US

Motor vehicles 0

Figure A3 Proportion of total R&D spending devoted to each sector. (source: OECD (2003a)). Note No data available for Switzerland.

Notes

1 Introduction: the role of corporate governance and finance in innovation 1 See Freeman (1995: p. 5). 2 They were in Research Policy, the most widely-read journal in the field. Of the seven, three were on the rather special area of venture capital (to which one might at a pinch add the whole issue devoted to technological entrepreneurship). A further 14 were on public funding of various kinds. The survey was crude and should only be taken as indicating the order of magnitude. 3 For an updated collection of contributions on CG see Grandori et al. (2006). 4 See Lazonick (2004); Lazonick and O’Sullivan (2000). 5 Customers who are ready to buy early, are demanding but otherwise fairly typical in their requirements, and are ready to interact with the supplier. 2 How sectors vary in their requirements from the system of corporate governance and finance 1 1980 patentability of artificially engineered genetic organisms (Diamond v. Chakrabarty); 1980 increased university patenting (Bayh–Dole Act); 1981 patentability of software (Diamond v. Diehr); 1982 creation of Court of Appeals for the Federal Circuit for patents (patent validity more likely to be upheld) (source: Cohen et al. 2000). 2 Costs of patent litigation dissuade small firms from patenting (Lerner 1995 cited in Cohen et al. 2000) and the cost of defending a patent in court is the reason for not applying for a patent more commonly the smaller the firm (Cohen et al. 2000). 3 The Economist, 5 December 2006, ‘When the drugs don’t work: Pfizer gives a lesson in risk and reward’. Economist.com. 4 It came first of 18 sectors on this count in the 1983 survey; second only to medical equipment among 34 sectors in the 1994 survey. 5 The Economist, 25 August 2005, ‘The lessons of Merck’s bad day in court’ Economist.com 6 The big pharma firm does not have a relationship with the biotech firm before it finds it has an NCE which may be worth licensing; once it has licensed the NCE it does not really need one; the intervening period is not very long. The relationship with the outside providers of clinical testing and even bio-informatics may be a longer term one; but all this is new and reinforces the need for organisational reconfiguration rather than long-term inter-firm relationships. 7 As argued by Bresnahan and Malerba (1999: 122), in the computer industry, although technological innovations have regularly been competence destroying they have usually not been so much destroying as to undermine the competitive advantage of the segment leader. Indeed, ‘within each segment, technological competencies were

Notes

263

routinely destroyed by the technological and market leader. IBM continuously advanced mainframes and DEC minis in ways that devalued not only specific old machines but the technical basis of whole product families. In the PC market, Intel and Microsoft routinely made own strategic competence destroying investments, as did Apple’. 8 Comparisons with means may be dangerous as the sector mix of the samples were not the same. However comparisons with specific sectors show the shift quite as clearly – e.g. from below all the industrial chemicals sectors in the 1983 survey, on both product and process patents, to above all of them, ditto, in the 1994 survey. 9 Dyker (1999: ch. 16, Table 16.1, p. 328), gives major product categories in electronics as: • • • • • •

10

11

12

13

14

15

Consumer electronics: CDs, high-definition TV, video-cassette players and recorder, stereo systems, camcorders, radios. Telecommunications: exchanges, telephones, radar, broadcast equipment, mobile and base stations, microwave, fibre-optics, satellite earth stations. Defence: aircraft, missiles, ships, space, vehicle and testing systems. Computing: personal mini and mainframe computers, disk drives, optical discs, laser and other printers, terminals. Industrial: process control equipment, robot systems, numerical control equipment, motor controls. Semiconductors: microprocessors, memory devices, diodes and transistors, optoelectronics, standard logic circuits, application-specific integrated circuits, linear devices.

For the aims of this book, Defence will not be considered and Industrial will be analysed in Machinery and equipment. The Japanese firm Sharp pioneered the use of first-generation passive matrix LCD in the early 1970s for the first palm-top calculator, and became a leader in the secondgeneration active matrix LCD in the late 1980s, used in laptops (Berggren and Nomura, 1994: 130). There is increasing reliance on outsourcing of assembly by Japanese producers because of the same problem of unpredictable sales (and same opportunity of CADCAM?) as the US computer producers have found (Berggren and Nomura, 1997: 137); but anyhow the end-products are not the key product. And they assemble them mainly offshore – mostly now in China. Strikingly, the Japanese firms which dominated analogue technology were slow to switch to digital and strongly resisted government appeals to recognise its inevitable victory once introduced in the USA and Europe (Berggren and Nomura, 1997: 134). A great deal of money can be lost by those who respond to such paradigm-shifts too soon – as the shareholders of Time-Warner, which merged with the internet firm AOL in 2000, can testify. The convergence of computers and consumer electronics has of course been going on for some time with respect to such common products as monitors; thus, NEC’s entry in the mid 1990s into plasma screen technology (Berggren and Nomura 1997: ch. 7). There were premature attempts in the 1980s to exploit convergence between telecommunications and computers (Dyker 1999: ch. 16). This presumably helps to account for the outrageous fact that (so we are told) the average car now has more computer power than the spacecraft that went to the moon; cars could be controlled with software that was far more economical, but it would not be worth the expense of writing it. It has been calculated that in today’s large software projects, the programming activity takes up only 1/6 of the time. The planning activity, on the other hand, accounts for over 1/3 of the whole project time (Brooks 1995).

264

Notes

16 The advent of biotechnologies, which is the most striking innovation of the past 20 years, has mainly affected the pharmaceutical and agrochemical sections of the industry, and it has not modified the overall innovative pattern. It may do soon, however (Swan 2001). 17 www.cefic.org 18 This category includes various types of machines and equipment ranging from machine tools, agricultural and forestry machinery, machinery for mining, for food and tobacco etc. 19 By 1961, German car producers were more efficient than North American. In 1970, controlling for factor prices, Germany was 17 per cent more efficient than the US (Foreman-Peck 2003, citing Fuss and Waverman, 1992). 20 Juergens et al. (1993: 377, cited by Foreman-Peck 2003) list six signs of change from pure Fordism which were becoming accepted in the world motor industry: task reintegration (less specialisation of tasks and job enrichment), employee participation (decentralising control and responsibility), shopfloor self-regulation, more automation, reduction of line-paced jobs, and skilled workers employed for direct work. All of these were more easily absorbed by the German system (and, alas for Germany, at least as easily by the Japanese). 21 And in its best days up to the 1950s GM was effectively under Du Pont family control (Yates 1983). 22 Cars and trucks themselves were lower on both counts: 42 for secrecy, 39 for patents. Parts processes were far better protected by secrecy (56, against a mean of 51) than by patents (24, against a mean of 23); just as effective – also 56 – was complementary manufacturing. 23 www.vmrintl.com/Usedcars/Reference%20Articles/women_buy_family_cars.htm 3 How national systems of corporate governance and finance vary 1 The nationality of ownership and control is becoming quite debatable in individual cases. If Nokia is mostly owned by US investors, is it still a Finnish firm? If AstraZeneca is incorporated and headquartered in the UK, is it a British firm, although its R&D HQ is in Sweden and its largest shareholder is American, and its second largest shareholder, which provides the chairman of the board, Swedish? The answer to both questions is, not entirely, and we shall respect such nuances when we come to the detailed discussions in Chapters 4–7. 2 Likewise, Soskice concedes that it is unlike the ‘other’ CMEs in that the government does not play ‘a role in setting a framework for technology transfer, through research institutes and higher education’ nor has it made vocational training the object of framework legislation (Soskice 1999: 107). It would also be appropriate to exclude it from the characterisation of company financing as involving a close involvement of banks (Soskice 1999: 108), and from the characterisation of industrial relations as cooperative (Soskice 1999: 107). 3 Of course the Japanese state has played a very forceful role in industry and an argument could be made for treating Japan as marginal between the business-coordinated and the government-coordinated categories. 4 But see below on the rights conceded voluntarily by large Japanese firms. 5 The legal rights of the Workers’ Representative Congress in each firm are extensive, and were in fact increased during the 1980s; but in reality the WRCs often do not even meet, and when they do, ‘it is mostly . . . an opportunity for a party’ (Cooke 2005: p. 38). Likewise the employees are represented on the (supervisory) board of directors of limited companies, but without real power (Tylecote and Cai, 2004). 6 Belgium, with moderate employment protection and no codetermination, is the only exception – and an unsurprising one, given its Walloon/Flemish division. We shall not discuss it further, since we have not included it in our 11.

Notes

265

7 All these countries have something negative in common: they, or at least their peoples, were never part of either the Roman or the Chinese empires. Why pick on these two? Because they were no ordinary empires: their administrations imprinted themselves upon their territories in such a thorough way that over centuries they crushed all rival structures and foci of loyalty above the minimum building block of the family. On the other hand, looking at all of the ‘barbarian’ peoples (as the imperial Romans and Chinese would have described them), one can trace some thread of organic evolution from tribe or clan. (D’Iribarne 1989, argues persuasively in this vein for the Netherlands. The comparative works of Whitley 1992b and Orru` et al. 1997 on the East Asian countries are at least thoroughly consistent with this line of argument, which was put earlier in Tylecote, 1996b.) Any argument from history may seem far-fetched, when one considers the very recent origins of the structures of ‘stakeholder inclusion’ which we see in those countries. German codetermination, for example, and still more so its very different Japanese equivalent, are creations of the late 1940s and early 1950s. There was not a hint of them in the running of German or Japanese firms 50 years earlier: the owner of a business in Germany as in Japan was Herr im Haus, master in his own house. And yet what there was, then and earlier, was an ingrained preference in both countries for Gemeinschaft over Gesellschaft, community over association. When the time came for the old hierarchies to be challenged, the stakeholder firm of one form or another was, not by coincidence, what emerged. In the same way, the various strong links among firms in Germany and Japan (to be explored later) appeared at particular times for particular reasons; but nonetheless the readiness to make and keep them has, we believe, deep roots. 8 We use the term Mainland China to refer to the territories currently under the control of the government in Beijing, excluding Hong Kong. We shall generally avoid using the term China in this sense because this infuriates patriotic mainlanders who treat it as implying that Taiwan is not part of China. We do not think it is any business of ours in this book to express or imply any opinion on such matters, one way or the other. None of our use of language should be taken as doing so. 9 The ‘right sort’ were Anglicans (Church of England), the ‘established’ or ‘state’ church; the ‘wrong sort’ were the more extreme Protestants, who briefly held power after the Civil War of the 1640s, and were subsequently excluded from public office and the universities. 10 Since the Swiss cantons threw off aristocratic rule, most of them more than 500 years ago, they have had no nobility. 11 Non-financial holdings are holdings by firms in other firms. If family X controls firm X and firm X controls firm Y, then family X controls firm Y too. Moreover the high figure for Switzerland in Table 3.7 is misleading. Swiss firms have an exceptionally large part of their operations outside Switzerland, so the appropriate denominator would be higher than Swiss GDP. 12 It also arises partly from the special German system of setting money aside for employee pensions which the firm can then use (Deeg, 1997). 4 Corporate governance, finance, and innovation in the US, the UK and Switzerland 1 3.4 million were involved in ESOPs. Most of them, 13.6 million, were involved in 401Ks, tax-sheltered retirement savings plans to which both employee and employer contribute. 4.8 million were in KSOPs, hybrids between ESOPs and 401Ks (Blasi et al. 2003b). 2 Charkham (1994: Table 3.11). He finds that holdings break down (as of 1989/90) 33: 53: 13 in the UK (compared with 14: 69: 17 in the US) between insurance companies, pension funds and mutual funds.

266

Notes

3 As of 1999 there were more than 50,000 ‘accredited investors’ – business angels – in the Seattle area alone. In the whole of the UK at the same point there were 18,000 (Gill et al. 2000: 24). 4 Although note that even more than Britain’s, Swiss firms tend to be multinational; and unlike Britain, little of the Swiss economy is owned by foreign multinationals. So the role of unlisted firms in the Swiss economy must be greater than in Britain. 5 According to Schreiner, the five biggest banks together held an average of 18.4 per cent of the voting rights in the four insurance companies and the other 25 big firms he examined. 6 They did however follow the practice of voting them in support of proposals by the board of directors, unless instructed otherwise (Anderson and Hertig 1994: 499). 7 Deutsches Aktieninstitut (2003). DAI Factbook, Frankfurt DAI, cited by Vitols (2005) in Corporate Governance. 8 For the OECD data this is the mean for our countries – those of them included in the OECD data. For the DTI data, which is anyway dominated by our countries, it is the overall mean. 9 Now as then they first need permission from regulatory agencies like the US Food and Drugs Administration; a modest change is that in some countries other government agencies, like the UK National Institute for Clinical Excellence, now decide whether the government will pay for a particular medicine. 10 C360 per head per year, against an EU average of about C190 (UK C188). 11 The sceptic about the role of finance and corporate governance might point out that the science base of biotechnology is far better funded in the US than in Europe. Need we look further for an explanation? Well, European scientists produce three-quarters as many published articles and citations in the life sciences (CEC 2001, cited in Marks 2003); that is a much narrower gap vis-à-vis the US than there is in quantity and quality of high-tech venture capital – or the performance of DBFs. 12 See Tylecote and Conesa (1999: Table 10), where this is demonstrated by trade and patent data. 13 As we pointed out above, patenting can be by foreign subsidiaries and so does not always reliably show the prowess of domestic firms; but it is unlikely that in this industry such subsidiaries would have played an important role in the 1960s and 1970s. 14 Seven of the 11 US firms in the Engineering & machinery section of the DTI Scoreboard have, according to their websites in summer 2006, headquarters in Illinois. 15 (www.vodafone.com). The most focused of the mobile manufacturers, Nokia, took until 1994 to divest itself of its non-electronics businesses (Ali-Yrkko et al. 2000). 5 Corporate governance, finance, and innovation in Japan, Germany and Sweden 1 ‘One job Mr Watanabe [the new President] is expected to take on is to groom Akio Toyoda, the son of honorary chairman Shoichiro Toyoda, as heir apparent . . . the family does not interfere in management decisions. But there is no question that it has a big influence’, Nakamoto and Pilling (2005: 30). 2 And also by public sector financial institutions, although their funds went mostly in and through the commercial banks. 3 This is much assisted by the Swedish preference for long-term employment. 4 As of 1990 the Wallenberg group included Alfa-Laval, ABB, Astra, Atlas Copco, Electrolux, Ericsson, Esab, Incentive, Saab-Scania, SKF, and Stora (Solvell et al. 1991). 5 As Shleifer and Vishny (1997) and La Porta et al. (1998) show, Swedish law gives effective protection; and the control premium is low. 6 A number became models of good practice, such as the Electrolux acquisition of Zanussi, and the running of ABB, put together from ASEA (Wallenberg-controlled)

Notes

7

8

9 10

267

and the Swiss firm Brown Boveri; although the gloss was taken from that story and the career of ABB’s CEO, then chairman Percy Barnevik, by its performance in the later period of his rule (Hall 2001: 28). A number of anecdotes we have heard directly or indirectly from senior ‘Wallenberg’ managers concur on this. Claes Wilhelmsson for example in an interview with AT in March 2000 stressed that in his experience there had been no Wallenberg interference with management in Astra (of which he had been been R&D director). This is a historical accident: after the First World War the Germans were forbidden to build planes and the German industry migrated to Sweden, then rather pro-German. By the time it returned to Germany in the 1930s, Swedish firms had acquired the technology. The A shares at least until 2002 had 1000 times the voting power of B shares (BrownHumes 2002: 27). Partly the reason for the abandonment of the network system was that Volvo had preferred a more American style from the beginning but been too weak to adopt it, thus making a virtue of necessity (Kinch 1995: 131). In this policy, and its abandonment, it was arguably following the British manufacturer Morris (Kinch 1995: footnote 14).

6 Corporate governance, finance, and innovation in France and Korea 1 In Korea, the tradition of government intervention in the economy goes back a long way, as Whitley (1992b) shows. In France there had been such a tradition, in the 17th and 18th centuries, as is well known (Colbertisme); less well known is the long period of liberalism in the nineteenth and early twentieth centuries. More important is the existence of a strong cohesive state capable of intervening effectively when it chose to do so (Cohen 1992). On the level of trust, outside the family, see Chapter 3; on trust in Korea, see also Sohn and Kim (2004). 3 This particular practice may still be alive and well: according to allegations mentioned in The Economist (2006b), Jacques Chirac used the threat of unsympathetic treatment of an inheritance tax issue to get the cooperation of Lagardere with his choice of Airbus director (see Section 6.3.1 below). 4 For statistics on the dismantling of conglomerates in France, see Goyer (2001). 5 Starting with the privatisations of the late 1980s, the government had reserved up to 10 per cent of the shares to the employees, who could also buy at a discounted price. At the moment of the privatisation in the largest companies large percentages of employees bought shares (for example, Saint-Gobain 50 per cent, Suez 59 per cent, Paribas 50 per cent). Right after the privatisation, however, many individual shareholders sold the shares that they had bought at discounted prices to get a quick profit (Schmidt, 1996: p. 156–158). 6 In 1997 the government granted tax incentives for private individuals to invest in venture capital funds (Fonds communs de placement dans l’innovation (FCPI)); yet the bulk of venture capital funds is still provided by traditional institutional investors, namely banks (33 per cent), insurance companies (11) and pension funds (10 per cent) (Dubocage and Rivaud-Danset, 2002 and AFCI, 2005). 7 This new form, contrary to the existing ones, is particularly favourable to the entering of venture capitalists into the ownership of the company as it allows for a much stronger control of the managers by the shareholders (besides allowing different classes of shares to be granted different voting rights, and the board of directors to make decision via phone or e-mail). At the same time, however, this form cannot be adopted by companies if they intend to get listed on the stock exchange, which is seen by venture capitalists as a serious obstacle. 8 In many bankruptcies of chaebol, one of the main reasons is a wrong strategic decision made by the owner, particularly by the second generation of the founding family (Lee 1999b).

268

Notes

9 The crisis started at the end of 1995 with a downturn in semiconductors, metals and petrochemical business. This, together with the high labour costs and high debt to equity ratios brought many chaebols into a deep crisis. In 1997 alone, six chaebols went bankrupt (The Economist 1997). 10 As to transparency, chaebol were encouraged to publish consolidated financial statements, stop guaranteeing subsidiaries’ borrowings with assets of other companies in the same group, and accept greater accountability to shareholders (‘Chaebol: Kim’s giant challenge’, Guy de Jonquieres, Financial Times Special Report on Korea, 23 April 1998). 11 FDI increased considerably during the 1990s and in wholly-owned foreign subsidiaries the HRM systems differ considerably from Korean firms (Bae and Rowley 2001). 12 This is not surprising, since the chaebol firms are under central group ownership and control, while the Japanese firms are relatively loosely linked by crossholdings. 13 OEM (Original equipment manufacturing): a company builds products or components that are used in products sold by another company (often called a value-added reseller, or VAR); ODM (Original design manufacturing): a company designs and manufactures a product that is then sold under other brand names; OIM (Original idea manufacturing): a company develops the product idea, and then designs and manufacture a product that is then sold under other brand names. OBM (Original brand manufacturing): a company develops, manufactures and sells the product with its own brand name. 14 For further information see INRIA (2006). 15 Between 1975 and 1985 there were two such two policy initiatives: one by Giscard d’Estaing’s Minister of Industry, Michel d’Ornano, the other by Mitterrand’s Minister of Industry, Pierre Dreyfus. 16 Bear in mind that its cars are considerably cheaper than those of most of its rivals: clearly a high-spec car takes longer to make. It is nonetheless a considerable achievement. 7 Corporate governance, finance, and innovation in Italy and Taiwan 1 The Italian capital market has historically been shallow and small. Only in the second half of the 1990s, due especially to the privatisation of the numerous state owned companies, did the Italian stock exchange grow progressively and become more liquid. By the end of 2000, the market capitalisation of the stock exchange had risen to over 70 per cent of GDP, and the institutionalisation of savings had become of major importance (see statistics on the stock exchange web page: www.borsaitalia.it). 2 Due to the bank law of 1936 (R.D.L. 12 March 1936 n. 375 converted in law 141/38), until 1993 Italian banks were not allowed to own equity shares in non-financial firms. 3 At the same time, a study by Ferri and Trento (1997) shows, that at least as far as large firms are concerned, particular forms of long-term links, not based only on equity shares, but on interlocking directorates and on trust, were in place and functioning. For example, Giovanni Agnelli who was the president of IFI, the financial holding company controlling the Fiat group, was also involved with Montecatini, Montedison, Bastogi and with Mediobanca and Credito Italiano. 4 See Chapter 1. 5 The privatisation process started in earnest in 1994 with the privatisation of IMI, BCI and IMA. 6 According to Malerba (1993) (the situation has not changed much since), the two main funds for the support of innovation mentioned above suffer from a lack of real coordination, a low degree of innovativeness of the projects funded, and an excessively wide range of sectors funded.

Notes

269

7 Moreover, becoming a researcher within academe or in a research centre is very difficult due to the limited number of positions available and the very low salaries. 8 Italy is divided into 20 administrative regions with substantial legislative and policy making power. 9 The Biagi reform (DL n. 276, 10/09/2003) introduced several new flexibility measures for the labour market. 10 See for example the case of Alitalia, which had to cancel over 1200 flights in 2004 and again in 2006 as a consequence of strikes organised to protest against the restructuring plan presented by the management to save the company from bankruptcy. 11 Districts are more widespread in the Northeast, in Lombardy, in some parts of Piedmont and in the Centre, especially on the Adriatic coast. In the South there are hardly any districts with the exception of Puglia, Campania and Sardinia. Some of them have been in existence for decades, such as the textile districts in northern Italy. 12 Regional and local governments, banks and professional schools provide public support, financial resources and qualified labour force to firms (Tappi 2000). Moreover, export and distribution associations contribute to the process of internationalisation of small firms, helping them to sell their final products abroad (Becattini 2000a; 2000b). 13 In Taiwan, institutional investors are too weak to play a role in corporate governance. In 1994 domestic institutional investors owned only 3.6 per cent of listed shares; in 2000, 10.3 per cent; very low compared with other advanced countries (Stock Exchange Corporation 2004). 14 For more evidence on the ownership and control structure of Taiwanese firms see La Porta et al. (1998), Claessens et al. (2000) and Yeh et al. (2003). 15 See Amsden (1985) for an in-depth analysis of the central role of the state in the development process. 16 This was an initiative of Mr Kwoh-Ting Li, a former minister of finance and economics, who is considered by many the father of Taiwan’s high-tech industry. In the 1970s and 1980s when the economy of the island was still based on labour-intensive and low-tech industries, Mr Li travelled frequently to the US in search of best practices and advice to bring back to his country. His initiatives have had a strong influence on the specialisation of the country (The Economist 1998b). 17 The Taiwanese financial system is made up mainly of banks (commercial banks, local subsidiaries of foreign banks, medium and small business banks, credit cooperative associations) and other financial institutions (postal savings, investment and trust companies, life insurance companies and a few other types). Medium and small business banks were established starting from the early 1920s to subsidise or promote small and medium enterprises operating in strategic industries or favoured groups. With the exception of the Medium and Small Bank of Taiwan, these banks are not state-owned and are listed on the stock exchange (Yu 1999). 18 See also Kim and von Tunzelmann (1998). 19 See note 6.13 above 20 Already in the 1940s, under Japanese rule, local workshops were assembling radios and making simple electrical equipment (Wade 1990). In the early 1950s the Kuomintang government introduced six years of universal education. In 1952, 42.1 per cent of the population aged six or older were illiterate, 14.7 per cent in 1970, 7.4 per cent in 1988 (Hou and Gee 1993). 21 Minimum labour standards are contained in the Labour Standards Law of 1984. The law regulates the use of fringe benefits, holiday payments, bonuses and working hours (the working week is 42 hours but many employees still work more than 44 hours). At the same time, health and safety issues are still not disciplined by law, and death and accident rates are higher than in other advanced countries (Buchanan and Nicholls 2003). 22 During the 1990s, there were several attempts (but no achievements) to obtain the introduction of forms of codetermination by company unions. See for example the

270

23 24

25

26 27 28 29 30

Notes

cases of the Independent Evening News, the Land Bank, the China Oil Company and the Chung-Hwa Telecommunications Company (Han and Chiu 2000). The group was privatised in 2000. At the moment a third of the shares is in the hands of the central government and the rest is held by small shareholders and financial institutions. The number of employees worldwide is just above 61,000. In 1959, Olivetti produced the first Italian electronic calculator, the Elea 9003 (10 years after the US and the UK). At the beginning of the 1960s, due to a deep financial crisis, the company was sold to a triumvirate of IRI, Mediobanca and Fiat. The new ownership decided to sell the Electronics division of Olivetti. After the takeover by De Benedetti in 1978, the company entered the PC market as a system integrator (Bussolati et al. 1995) but it is now mainly specialised in fax machines, photocopying machinery and printers. The group is very unusual in the Italian context. It produces Nano PCs and High Performance Computers on the basis of proprietary technologies. It was founded in 1992, reaching 160 employees by early 2006, with sales revenues of C19.9 billion in 2004. In November 2005 it went public. The group is world famous for the production of Apexnext, one of the existing most powerful processors. Only one in 2004. ‘Perhaps the most important trait associated with the machine-tool industry is the extreme cyclicity of its income, profits and cash flow’ (NRC, 1983: 10). In 2000 the first shareholder had an average share of 59.1 per cent (Visintin 2001). Mitsubishi owns 21 per cent of China Motors Corporation, Nissan 25 per cent of Yulon, Honda 13.5 per cent of San Yang, and Ford owns 70 per cent of Ford Lio Ho (TTVMA 2000). The Economist, ‘Saving Fiat’, 1 December 2005; The Economist, ‘Fiat after Umberto Agnelli’, 3 June 2004.

8 Corporate governance, finance and technological development in mainland China 1 A third ownership type which was set free at this time was collective enterprises, cooperatives that could be independent of all administrative levels. Data for them are normally given with T&V enterprises. 2 We say ‘he’ because the vast majority of top managers in China are men, at the time of writing. We apologise for this simplification. 3 This is in fact no longer strictly the case, but the change is very recent and attitudes will take time to change. 4 The then system for calculating national income slightly overstates R&D intensity, by about one sixth: but the point still stands. 5 Baosteel, it may be noted, is unusual in the longevity of its management. Thus, clearly the top management has been able to operate with unusually long time horizons (Lu et al. 2002). 6 The Economist, ‘The struggle of the champions’, 8 January 2005, pp. 57–59. 7 The Economist, ‘The struggle of the champions’, 8 January 2005, pp. 57–59. 9 Looking forward: current trends, future prospects and modest proposals 1 ‘Home Depot’s chief lost value, but Nardelli didn’t do it himself’, breakingviews.com, Wall Street Journal, 4 January 2007, p. 17. (Elsewhere in that day’s Journal – ‘Nardelli’s “Severance”, p. 11’ – it was pointed out that his ‘severance pay’ was mostly guaranteed to him as part of his original job offer – which draws attention to the exceptionally high level of US top executive pay.) 2 See Macdonald (1990). As it is clearly in US economic interests, it can be seen as an expression of US hegemony. As such, there is every reason to be sceptical of the

Notes

3 4

5

6 7

271

alleged benefits, as Macdonald very much is (and see also Chang, 2002, for the problems posed by it for developing countries). On the other hand, if there are to be globalised chains of production, in which the location of each operation is determined by comparative advantage, they must be held together by the communication of codified information, including information on product and process technology, as Sturgeon (2002) shows. This will not be communicated unless it enjoys strong legal protection. (We owe this point to Peter Gammeltoft.) The main UK exception is the pharmaceutical industry, where structures are different – far less divisionalised – and, as we have already seen, outcomes much better. A recent study of UK firms’ relationships with suppliers and industrial customers (Cantista and Tylecote 2003) finds that listed firms (the typical UK shareholder capitalist form) were significantly less inclined to develop close relationships than were firms controlled by families or subsidiaries of foreign MNCs based in stakeholder-capitalist countries. This helps, incidentally, to explain the strong performance of many Japanese and German firms over the decade after 1995. During this period, the Japanese and German economies have been afflicted by low demand and rising unemployment, but both show respectable rises in labour productivity over the same period; as one would expect if the more labour-intensive operations were being moved abroad. Thus, German growth in productivity per hour kept pace with American over the 1995–2002 period, in spite of the massive investment in US industry during the period, while Britain and (still more) France lagged behind (The Economist 2004). The recent Japanese recovery does not belie the continuing shift of labour-intensive operations to China – it shows that the strength of the Chinese boom has generated many more new hightech jobs in Japan. The takeover by Vodafone in 2001; the first hostile foreign bid for a listed German firm to succeed. The findings of British Venture Capital Association surveys (and our own interviews) indicate that, even in the traditionally arms-length British system, the private equity firms display the requisite engagement and (where necessary) industry-specific expertise.

Statistical appendix 1 Some classes are spurious and include also hardware devices. 2 11 and 19 were not included as they include classes that in ISIC Rev 3 are in other categories, e.g. rubber. 3 51 was not included as it contains several classes that are not part of ISIC rev 3 class 29. 4 55 includes several items that are not motor vehicles or parts thereof.

Bibliography

Abramovsky L., Griffith, R., and Sako, M. (2004) Offshoring of Business Services and its Impact on the UK Economy, November, AIM. www.aimresearch.org/portnews/ Articles/081104Offprt.pdf Achilladelis B., Schwarzkopf, A., and Cines, M. (1990) ‘The dynamics of technological innovation: the case of the chemical industry’, Research Policy, 19 (1): 1–34. Adolfsson P., Ask, U., Holmberg, U., and Jönsson, S. (1999) Corporate Governance in Sweden: a Literature Review, report submitted to the European Commission. AFCI (2005) French Private Equity Survey, 2004, downloaded from www.AFCI. asso.fr, accessed 22/03/06 Aifi (1997) Yearbook 1997: Venture Capital and Private Equity in Italy. Milan: AIFI. Aifi (2004) Yearbook 2004: Venture Capital and Private Equity in Italy. Milan: AIFI. Albertini, S., Visintin, F., and Maraschini, F. (2004) ‘Empowerment dei lavoratorie tecnologie dell’informazione: uno studio esplorativo in una prospettiva organizzativa “moderata” ’, Sviluppo e Organizzazione, 204 (6): 37–47. Ali-Yrkkö, J., Paija, L., Reilly, C., and Yla-Anttila, P. (2000) Nokia – A Big Company in a Small Country. Research Institute of Finnish Economy, ETLA Series B162. Helsinki: Taloustieto Oy. Allen, F. and Gale, D. (2000) ‘Corporate governance and competition’, in: X. Vives (ed.) Corporate Governance: Theoretical and Empirical Perspectives. Cambridge: Cambridge University Press, ch. 2. Allen, F. and Song, W.L. (2003) ‘Venture capital and corporate governance’, Working paper series, Wharton Financial Institutions Center, 5. Almeida, B. (2002) ‘Good jobs flying away: the US jet engine industry’, in: W. Lazonick and M. O’Sullivan (eds) Corporate Governance and Sustainable Prosperity. London: Palgrave, pp. 104–140. Alston, J. P. (1989) ‘Wa, Guanxi, and Inhwa: managerial principles in Japan, China and Korea’, Business Horizons, March–April: 26–31. Altshuler, A., Anderson, M., Jones, D. Roos, D., and Womack, J. (1984) The Future of the Automobile. London: Allen & Unwin. Amsden A. (1985) ‘The State and Taiwan’s economic development’ in: P. Evans (ed.) Bringing the State Back In. Cambridge: Cambridge University Press, ch. 3, pp. 78–106. Amsden, A. H. (1989) Asia’s Next Giant. Oxford: Oxford University Press. Anderson, M. and Hertig, T. (1994) ‘Institutional investors in Switzerland’, in: T. Baums, M. Buxbaum, and K. Hopt (eds) Institutional Investors and Corporate Governance. Berlin: de Gruyter, ch. 17, pp. 489–529.

Bibliography

273

Archibugi, D. and Pianta, M. (1996) ‘Innovation surveys and patents as technology indicators: the state of the art’, in: OECD (eds) Innovation, Patents and Technological Strategies. Paris: OECD, pp. 17–50. Archibugi, D., Evangelista, R., Perani, G., and Rapiti, F. (1996) ‘L’innovazione nelle imprese italiane: un’analisi dei risultati dell’indagine Istat’, Economia e Politica Industriale, 89(2): 37–55. Argyris, C. and Schön, D. (1973) Organizational Learning: A Theory of Action Perspective. Reading: Addison Wesley. Arrow, K. (1962a) ‘Economic welfare and the allocation of resources for invention’, in: R. R. Nelson (ed.) The Rate and Direction of Inventive Activity. Princeton: Princeton University Press, pp. 609–625. Arrow, K. (1962b) ‘The economic implications of learning by doing’, Review of Economic Studies, 29(3): 155–173. Asiaweek.com (2000) Pulling Back from the Brink, May 26, 26(20). Assimakopoulos, D. and Macdonald, S. (2001) ‘A Dual Approach to Understanding Information Networks’, International Journal of Technology Management, 12(1/2): 96–112. Bae, J. and Rowley, C. (2001) ‘The impact of globalization on HRM: the case of South Korea’, Journal of World Business, 36(4): 17–50. Bank of England (1996) The Financing of Technology-Based Small Firms. London: Bank of England, October. Barca, F. and Becht, M. (2001) The Control of Corporate Europe. Oxford: Oxford University Press. Barca, F. et al. (1994) Assetti proprietarie mercato delle imprese, vol. I. Milan: Il Mulino. Barnes, H. (2001) ‘Among Europe’s élite’, Financial Times Survey of Sweden, 12 December: 3. Bärtschi, H.P. (2004) Kilometer Null: vom Auf- und Abbau der industriellen Schweiz. Zurich: Vontobel. Bassanini, A. and Ernst, E. (2002) ‘Labour market regulation, industrial relations and technological regimes: a tale of comparative advantage’, Industrial and Corporate Change, 11(3): 391–426. Bauer, M. and Bertin-Mourot, B. (1995) L’Accès au Sommet des Grandes Entreprises Françaises. 1985–1994. Paris: CNRS. Observatoire des Dirigeants and Boyden. Becattini, G. (1979) ‘Dal “settore” industriale al “distretto” industriale. Alcune considerazioni sull’unità di indagine dell’economia industriale’, Rivista di economia e politica industriale, 1(3): 56–78. Becattini, G. (1991) ‘Italian industrial districts: problems and perspectives’, International Studies of Management & Organisation, 21(1): 83–90. Becattini, G. (2000a) Distretti industriali e sviluppo locale. Torino: Bollati Boringhieri. Becattini, G. (2000b) Il distretto industriale, un nuovo modo di interpretare il cambiamento economico. Torino: Rosenberg & Sellier. Becker, S., Ichino, A., and Peri, G. (2004) ‘How much is the brain drain from Italy?’, Giornale degli Economisti e Annali di Economia, 63(1): 1–32. Bellandi, M. (1996) ‘Innovation and change in the Marshallian industrial district’, European Planning Studies, 4(3): 357–368. Bender, Y. (2002) ‘EU ponders shareholder rights’, Financial Times, Survey of Pension Fund Investment, 5 June: 2. Benoit, B. (2001) ‘SAP set for deals with end of two-tier share structure’, Financial Times, 1 March: 24.

274

Bibliography

Berggren, C. and Nomura, M. (1997) The Resilience of Corporate Japan: New Strategies and Personnel Practices. London: PCP. Berglöf, E. (1997) ‘Reforming corporate governance: redirecting the European agenda’, Economic Policy, 24 (April): 93–123. Berle, A.A. and Means G.C. (1932) The Modern Corporation and Private Property. San Diego, California: Harcourt, Brace and World. Beroutsos, A. and Conor, K. (2006) ‘A lesson in governance from the private equity firms’, Financial Times, November 30. Betts, P. (2002) ‘Fiat’s fate’, Financial Times, 30 May: 20. Bianchi, P. (2002) ‘Grandi imprese, privatizzazioni, e riorganizzazioni produttive’, Quaderni di economia, Università di Ferrara, 1. Bianchi, R., Enrietti, A., and Lanzetti, R. (2001) ‘The car technological district in Piedmont: definition, dynamics, policy’, International Journal of Automotive Technology and Management, 1(4): 23–36. Birnbaum, P. (1994) Les sommets de l’État. Essai sur l’élite du pouvoir en France. Paris: Seuil. Blair, M. (1995) Ownership and Control: Rethinking Corporate Governance for the 21st Century. Washington, DC: Brookings Institution Press. Blair, M. (1996) Wealth Creation and Wealth Sharing: a Colloquium on Corporate Governance and Investments on Human Capital. Washington, DC: Brookings Institution Press. Blair, M. (1999) Employees and Corporate Governance. Washington, DC: Brookings Institution Press. Blasi, J. and Kruse, D. (1991) The New Owners: the Mass Emergence of Employee Ownership and What it Means to American Business. New York: Harper Business. Blasi, J., Kruse, D., and Bernstein, A. (2003a) In the Company of Owners: The Truth About Stock Options. New York: Basic Books. Blasi, J., Kruse, D., Sesil, J., and Kroumova, M. (2003b) ‘An assessment of employee ownership in the United States with implications for the EU’, International Journal of Human Resource Management, 14(66): 893–919. BmB+F (Bundesministerium für Bildung und Forschung) (2001) Zur Leistungsfähigkeit Deutschlands: Zusammenfassender Endbericht 2000, Bonn: March. Boari, C. and Lipparini, A. (1999) ‘Networks within industrial districts: organising knowledge creation and transfer by means of moderate hierarchies’, Journal of Management and Governance, 3(4): 339–360. Bourdieu, P. (1989) La Noblesse d’État. Grandes écoles et esprit de corps. Paris: Éditions de Minuit. Braczyk, H., Cooke, P., and Heidenreich, R. (1998) Regional Innovation System: the Role of Governances in a Globalised World. London: University of London Press. Breschi, S. and Malerba, F. (1997) ‘Sectoral innovation systems: technological regimes, schumpeterian dynamics, and spatial boundaries’, in: C. Edquist C. (ed.) Systems of Innovation: Technologies, Institutions and Organizations. London: Cassell, ch. 6, pp. 130 –156. Bresnahan, T. and Malerba, F. (1999) ‘Industrial dynamics and the evolution of firms and nations competitive capabilities in the world computer industry’ in: D. Mowery and R. Nelson (eds) The Sources of Industrial Leadership. Cambridge: Cambridge University Press, ch. 3, pp. 79–132. Brookfield, J. (2003) ‘Firm strategy, organizational structure and industrial districts: a study of Taiwan’s machine tools industry’, presented at conference on Clusters, Industrial Districts and Firms: the Challenge of Globalisation, Modena, 12–13 September.

Bibliography

275

Brooks, F. (1995) The Mythical Man Month and other Essays on Software Engineering. Reading: Addison Wesley. Brousseau, E. (2001) Globalisation and E-commerce: Growth and Impacts in France, Report of Center for Research on Information Technology and Organizations. Irvine: University of California. Brown-Humes, C. (2002) ‘Ericsson warns gloom will continue’, Financial Times, 5 June: 27. Brunt, L. (2006) ‘Rediscovering risk: country banks as venture capital firms in the first industrial revolution’, Journal of Economic History, 66(1): 74–102. Brusco, S. (1982) ‘The Emilian model: productive decentralization and social integration’, Cambridge Journal of Economics, 6(2): 167–184. Bruton, G.D. and Ahlstrom, D. (2003) ‘An institutional view of China’s venture capital industry: explaining the difference between China and the West’, Journal of Business Venturing, 17(5): 1–27. Buchanan, P.G. and Nicholls, K. (2003) ‘Labour politics and democratic transition in South Korea and Taiwan’, Government and Opposition, 38(2): 203–237. Burckart, M., Gromb, D. and Panunzi, F. (1997) ‘Large shareholders, monitoring, and the value of the firm’, Quarterly Journal of Economics, 112(3): 693–728. Burgess, R.G. (1982) Field Research: a Sourcebook and Field Manual. London: Allen & Unwin. Burns, P. and Whitehouse, O. (1996) Family Ties. London: 3i European Enterprise Centre. Bush, T. (2004) ‘Reporting rules fail corporate US’, Financial Times fm, 13 December: 8. Bussolati, C., Malerba, F., and Troisi, S. (1995) ‘L’evoluzione del sistema industriale italiano e l’alta tecnologia’, Working paper series, Serie Economia e Impresa, Liuc, 5(25). BVCA (2004) The Economic Impact of Private Equity in the UK, 3rd edn. London: British Venture Capital Association, November. BVCA (2006) The Economic Impact of Private Equity in the UK 2006. London: British Venture Capital Association. Cai, J. and Tylecote, A. (2005) ‘A healthy hybrid: the technological dynamism of minority state-owned firms in China’, Technology Analysis and Strategic Management, 17(3): 257–278. Camuffo, A. and Volpato, G. (1998) ‘Making manufacturing lean in the Italian automobile industry: the trajectory of Fiat’, in: M. Freyssenet, A. Mair, K. Shimizu, and G. Volpato (eds) One Best Way? Trajectories and industrial models of the world’s automobile producers. Oxford: Oxford University Press, ch. 13, pp. 162–184. Camuffo, A. and Volpato, G. (2001) ‘From lean to modular manufacturing? The case of FIAT 178 world car’, IMVP Working paper series, MIT Centre for Technology, Policy and Industrial Development, 34. Cantista, I. and Tylecote, A. (2003) ‘Innovation, corporate governance, and supplier–customer relationships’, Working paper series, Management School, Sheffield University, 15. Cantwell, J. and Kosmopoulou, E. (2001) ‘Determinants of internationalisation of corporate technology’, Working paper series, Druid, 1(8). Capra, L., D’Amico, N., Ferri, G., and Pesaresi, N. (1994) Assetti proprietari e mercato delle imprese, vol.III. Milano: Il Mulino. Carlin, W. and Mayer, C. (2000) ‘How do financial systems affect economic performance?’ in X. Vives (ed.) Corporate Governance: Theoretical and Empirical Perspectives. Cambridge: Cambridge University Press, ch. 4, pp. 137–159.

276

Bibliography

Carlin, W. and Mayer, C. (2003) ‘Finance, investment and growth’, Journal of Financial Economics, 69(3): 191–226. Carlsson, B. (1989) ‘Small scale industry at a crossroads: US machine tools in a global perspective’, Small Business Economics, 1(4): 245–262. Carlsson, B. and Stankiewicz, R. (1991) ‘On the nature, function and composition of technological systems’, Journal of Evolutionary Economics, 1(2): 93–118. Carpentier, C. and Serfati, C. (1997) R&D militaire, grands programmes et capacités technologiques nationales: caractérisation et indicateurs. Paris: OST. Casper, S. and Matraves, C. (2003) ‘Institutional frameworks and innovation in the German and UK pharmaceutical industry’, Research Policy, 32(10): 1865–1879. Casper, S. and Whitley, R. (2004) ‘Managing competences in entrepreneurial technology firms: a comparative analysis of Germany, Sweden and the UK’, Research Policy, 33(1): 89–106. Castells, M. (2000) The Rise of the Network Society, 2nd edn. Oxford: Blackwell. Castley, R.J. (1998) ‘The Korean electronics industry: the Japanese role in its growth’, Asia Pacific Business Review, 4(2–3): 29–47. Cathie, J. (1998) ‘Financial contagion in East Asia and the origins of the economic and financial crisis in Korea’, Asia Pacific Business Review, 4(2–3): 18–28. Cazal, D. (1994) ‘Ethics and global competitiveness: confucianism in Korean companies’, in: H. Shuttle (ed.) The Global Competitiveness of the Asian Firm. London: Macmillan. CdP (Commissariat General du Plan/Deutsch-Französisches Institut) (2001) Competitivité Globale: Une Perspective Franco-Allemande. Paris: CdP. Cecimo (2005) Facts and Figures, www.cecimo.be Cetorelli, N. and Gambera, M. (2001) ‘Banking market structure, financial dependence and growth’, Journal of Finance, 56(2): 617–648. Chandler, A. (1990) Scale and Scope: the Dynamics of Industrial Capitalism. Cambridge, MA: Harvard University Press. Chang, C.S. and Chang, N.L. (1994) The Korean Management System. Westport, CT: Quorum. Chang, H.J. (2002) Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem. Chang, H.J. and Park, H.J. (2004) ‘An alternative perspective on government policy towards the Chaebol in Korea’, in: S.H. Jwa and I.K. Lee (eds) Competition and Corporate Governance in Korea: Reforming and Restructuring the Chaebol. Cheltenham: Elgar, ch. 2, pp. 24 –64. Chang, P.L. and Hsu, C.W. (1998) ‘The development strategies for Taiwan semiconductors industries’, IEEE Transactions on Engineering Management, 45(4): 349–356. Chang, P.L. and Hsu, C.W. (2001) ‘The industrial park: government’s gift to industrial development’, in: P.L. Yu and C.Y. Chang (eds) Made by Taiwan: Booming in Information Technology Era. Singapore: World Scientific Publishing, ch. 11, pp. 273–297. Chang, P.L. and Shih, H.Y. (2004) ‘The innovation systems of Taiwan and China: a comparative analysis’, Technovation, 24(7): 529–539. Charkham, J. (1994) Keeping Good Company: A Study of Corporate Governance in Five Countries. Oxford: Oxford University Press. Chatie, J. (1998) ‘Financial contagion in East Asia and the origins of the economic and financial crisis in Korea’, in: C. Rowley and J. Bae (eds) Korean Business: Internal and External Industrialisation. London: Routledge, ch. 2, pp. 18–28.

Bibliography

277

Chen, D.Z, Chang, H.W., Huang, M.H., and Fu, F.C. (2005) ‘Core technologies and key industries in Taiwan from 1978 to 2002: a perspective from patent analysis’, Sociometrics, 64(1): 31–53. Chen, M. (1995) Asian Management Systems: Chinese, Japanese and Korean Styles of Business. London: International Thomson Business Press. Chen, S., Ko, R.J., and Lawler, J. (2003) ‘Changing patterns of industrial relations in Taiwan’, Industrial Relations, 42(3): 315–340. Chen, T.-J. (2003) ‘E-commerce to protect the network relationships: the case of Taiwan’s PC industry’, Information Society, 19(1): 59–67. Chien, D.S. (2003) ‘The role of Asia in global drug discovery and development’, Drug Information Journal, 37(4): 3–9. Cho, D., Kim, D., and Rhee, D. (1998) ‘Latecomer strategies: evidence from the semiconductor industry in Japan and Korea’, Organization Science, 9(4): 489–505. Cho, M.C. (2003) ‘Restructuring of Korea’s defence aerospace industry: challenges or opportunities?’ Bonn: Bonn International Center for Conversion, WP n. 28. Cho, Y.J. and Kim, J.K. (1995) ‘Credit policies and the industrialization of Korea’, World Bank Discussion Papers, 286. Christensen, J. (1992) ‘The role of finance in national systems of innovation’ in B.-Å. Lundvall (ed.) National Systems of Innovation. London: Pinter, ch. 8, pp. 146–168. Chung, C.N. (2003) ‘Managerial structure of business groups in Taiwan: the inner circle system and its social organization’, Developing Economies, XLI(1), March: 37–40. Chung, M.K. (1994) ‘Transforming the subcontracting system and changes of industrial organization in the Korean automobile industry’, presented at Second GERPISA International Colloquium ‘The New Industrial Models of Automobile Firms’, Paris, June, 83–97. Chung, M.K. (2001) ‘Strategies and restructuring for survival: new managerial strategies of Hyundai’, presented at Ninth GERPISA International Colloquium on ‘Reconfiguring the auto industry: Merger & Acquisition, Alliances and Exit’, June, Paris. CIA (2005) World Fact Book 2005, www.cia.gov/cia/publications/factbook/ accessed 24/03/06 Cieply, S. (2001) ‘Bridging capital gaps to promote innovation in France’, Industry and Innovation, 8(2): 159–178. Claessens, S., Djankov, S., and Lang, L.H.P. (2000) ‘The separation of ownership and control in East Asian corporations’, Journal of Financial Economics, 58(1): 81–112. Clark, C. (1989) Taiwan’s Development: Implications for Contending Political Economy Paradigms. New York: Greenwood Press. Clark, C. and Payne, R. (1997) ‘The nature and structure of worker’s trust in management’, Journal of Organizational Behaviour, 18(3): 205–225. Clark, C and Roy, K.C. (1997) Comparing Development Patterns in Asia. Boulder and London: Rienner. Cohen, E. (1992) Le Colbertisme High-Tech. Paris: Hachette. Cohen, W.M., Nelson, R.R., and Walsh, J. (2000) ‘Protecting their intellectual assets: appropriability conditions and why US manufacturing firms patent (or not)’, Working paper series, NBER, 7552. Commission of the European Communities (CEC) (1990) Report on Workplace Involvement in Technological Innovation in the European Community. Brussels: CEC. Compagno, C., Pittino, D., and Visintin, F. (2003) ‘Family firms and empowerment: a way to sustainable competitive advantage’, in: P. Poutziouris and L. Steier (eds) New

278

Bibliography

Frontiers in Family Business Research: The Leadership Challenge. Lausanne: IFERAFBN, ch. 1, pp. 1–25. Compagno, C., Pittino, D., and Visintin, F. (2004) ‘ICT e cambiamento organizzativo nelle piccole e medie imprese’, in: A. D’Atri (ed.) Innovazione organizzativa e tecnologie innovative. Milan: ETAS, ch. 7, pp. 45–56. Cooke, F.L. (2005) HRM, Work and Employment in China. London and New York: Routledge. Cooke, P. and Morgan, K. (1998) The Associational Economy: Firms, Regions and Innovation. Oxford: Oxford University Press. Corbett, J. (1987) ‘International perspectives on financing: evidence from Japan’, Oxford Review of Economic Policy, 3(4): 30–55. Corbett, J. and Jenkinson, T. (1996) ‘The financing of industry, 1970–1989: an international comparison’, Journal of the Japanese and International Economies, 10(1): 71–96. Coriat, B., Petit, P., and Schméder, G. (eds) (2007) The Hardship of Nations: Exploring the Paths of Modern Capitalism. Cheltenham: Elgar. Corò, G. and Grandinetti, R. (1999) ‘Evolutionary patterns of Italian industrial districts’, Human Systems Management, 18(2): 117–129. Costa, G. (1997) Economia e direzione delle risorse umane. Bologna: UTET. Costa, G. (2006) Il Nord est e i porcospini di Schopenhauer. Venezia: Marsilio. Courtois, G. (1995) ‘Éducation et formation: grandes tendances’, in: S. Cordellier (ed.) L’État de la France 95–96. Paris: La Découverte, ch. 3, pp. 85–90. Crossley, A. (2001) ‘Why London?’, in: DTI (ed.) R&D Scoreboard 2001. London: DTI, pp. 8–9. Crozier, M. (1964) Le phénomène bureaucratique. Paris: Seuil. Dahlman, C.J. and Aubert, J.E. (2001) China and the Knowledge Economy: Seizing the 21st Century. Washington: The World Bank. Davies, A. (2004) ‘Moving base into high-value integrated solutions: a value stream approach’, Industrial and Corporate Change, 13(5): 727–756. Davis, J.H., Schoorman, F.D., and Donaldson, L. (1997) ‘Towards a stewardship theory of management’, Academy of Management Review, 22(1): 20–47. Deeg, R. (1997) ‘Banks and industrial finance in the 1990s’, Industry and Innovation, 4(1): 53–74. Dei Ottati, G. (1994) ‘The industrial district. Transaction problems and the “community market” ’, Cambridge Journal of Economics, 18(2): 25–48. de Jonquieres, G. (1998a) ‘Small business: living with the crumbs’, Financial Times Special Report on Korea, 23 April: 4. de Jonquieres, G. (1998b) ‘Foreign trade: new truth, old maxim’, Financial Times Special Report on Korea, 23 April: 2. Delapierre, M. and Zimmermann, B. (1991) ‘Towards a new Europeanism: French firms in strategic partnership’, in: L.K. Mytelka (ed.) Strategic Partnerships. London: Pinter, ch. 2, pp. 35–48. De Marco, T. and Lister, T. (1999) Peopleware, Productive Projects and Teams. New York: Dorset House. Demirag, I. and Tylecote, A. (1992) ‘The effects of organisational culture, structure and market expectations on technological innovation’, British Journal of Management, 3(1): 7–20. Demirag, I., Tylecote, A., and Morris, B. (1994) ‘Accounting for financial and managerial causes of short term pressures in British corporations’, Journal of Business Finance and Accounting, 21(8): 1195–1213.

Bibliography

279

Demirguc-Kunt, A. and Maksimovic, V. (1996) ‘Stock market development and firm financing choices’, World Bank Economic Review, 10 (2): 354–377. Department of Trade and Industry (DTI) (2001) R&D Scoreboard. London: DTI. Department of Trade and Industry (DTI) (2003) R&D Scoreboard. London: DTI. Department of Trade and Industry (DTI) (2004a) R&D Scoreboard. London: DTI. Department of Trade and Industry (DTI) (2004b) Value-Added Scoreboard. London: DTI. Department of Trade and Industry (DTI) (2005) R&D Scoreboard. London: DTI. Di Guardo, C. and Schillaci, C. (2003) ‘Le prospettive di sviluppo di un aggregato territoriale high-tech: il caso di Catania’, in: F. Cesaroni and A. Piccaluga (2003) Distretti industriali e distretti tecnologici, Modelli possibili per il Mezzogiorno. Milan: Franco Angeli, ch. 2, pp. 23–41. d’lribarne, A. (1989a) La compétitivité: Défi social, enjeu éducatif. Paris: Presses du CNRS. d’Iribarne, P. (1989b) La logique de l’honneur. Paris: Seuil. Dore, R., Lazonick, W., and O’Sullivan, M. (1999) ‘Varieties of capitalism in the twentieth century’, Oxford Review of Economic Policy, 15(4): 102–120. Donaldson, T. and Preston, L. (1995) ‘The stakeholder theory of the corporation: concepts, evidence and implications’, Academy of Management Review, 20(1): 65–91. Dorfman, P.W., Howell, J.P., Hibino, S., Lee, J.K., Tate, U., and Bautista, A. (1997) ‘Leadership in Western and Asian countries: commonalities and differences in effective leadership processes across cultures’, Leadership Quarterly, 8(3): 233–274. Dosi, G., Freeman, C., Nelson, R., Silverberg, G., and Soete, L. (eds) (1992) National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning. London: Pinter. Doudeyns, M. and Hayman, E. (1993) ‘Statistical indicators of innovation’, Economic Trends, 479, September: 112–123. Driver, C. and Shepherd, D. (2005) ‘Capacity utilisation and corporate restructuring: a comparative study of the US, UK and other EU countries’, Cambridge Journal of Economics, 29(1): 119–140. Dubocage, E. and Rivaud-Danset, D. (2002) ‘Government policy on venture capital support in France’, Venture Capital, 4(1): 25–43. Dumontier, P. and Laurin, C. (2003) The Financial Impact of the French Government’s Nationalization/Privatization Strategy, January 10, EFMA 2003 Helsinki Meetings. Dyker, D. (ed.) (1999) The European Economy, 2nd edn. London: Longman. EADS (2005) Company webpage, www.eads.net, accessed 28 March 2006. Easterby-Smith, M., Thorpe, R. and Lowe, A. (2002) Management Research – An Introduction, 2nd edn. London: Sage. Echikson, W. (2007) ‘EU sets price-fixing fines’, Wall Street Journal, 25 January: 11. Economist, The (1996) ‘In the shadow of the chaebol’, 6 July: 53. Economist, The (1997a) ‘Venture capitalists: a really big adventure’, 25 January: 19–21. Economist, The (1997b) ‘Aircraft engines: Rolls-Royce flies high’, 28 June: 97. Economist, The (1998a) ‘Silicon Valley (East)’, 5 November: 56. Economist, The (1998b) ‘Italy’s industrious clusters . . . ’, 31 December: 48. Economist, The (2000) ‘The final curtain’, 22 April: 30. Economist, The (2001) ‘Sweden’s Investor: Prepare to board’, 9 June: 36. Economist, The (2002) ‘The great Swiss hope: can Josef Ackermann give Deutsche Bank the punch it lacks?’, 18 May: 90. Economist, The (2004) ‘The missing guest at Gordon’s party: why productivity growth has slowed in Britain while rising in America’, 24 January: 28.

280

Bibliography

Economist, The (2005a) ‘Struggle of the champions’, 8 January: 57–59. Economist, The (2005b) ‘Rolls-Royce: whirring not purring’, 16 July: 63. Economist, The (2005c) ‘The lessons of Merck’s bad day in court’, 25 August. Economist, The (2006a) ‘Off with their EADS’, 3 July: 35. Economist, The (2006b) ‘Special report, Airbus: the making of a jumbo problem’, 11 November: 79–80. Economist, The (2006c) ‘Disney’s Bob Iger’, 26 Jan. Edquist C. (1997a) ‘Systems of innovation approaches – their emergence and characteristics’, in: C. Edquist (ed.) Systems of Innovation: Technologies, Institutions and Organizations. London: Cassell, ch. 1, pp. 1–35. Edquist C. (ed.) (1997b) Systems of Innovation: Technologies, Institutions and Organizations. London: Cassell. Edwards, J. and Fischer, K. (1994) Banks, Finance and Investment in Germany. Cambridge: Cambridge University Press. Ehrentreich, N. and Schmidt, R. (1999) The German Corporate Governance System with Special Respect to Innovation, paper submitted to the European Commission, October. Ehrentreich, N. and Schmidt, R. (2002) Situation and Trends in the German Corporate Governance System, paper submitted to the European Commission, October. Eriksson, S. (2005) ‘Global shift in the aircraft industry, a study of airframe manufacturing with special reference to Asian NIEs’, PhD thesis, Department of Geography, University of Gothenburg, B(86). Ernst, D. (1998) ‘High-tech competition puzzles. How globalization affects firm behavior and market structure in the electronics industry’, Revue d’Économie Industrielle, 85(3): 9–30. Ernst, D. (2000) ‘Inter-organizational Knowledge outsourcing: what permits small Taiwanese firms to compete in the computer industry’, Asian Pacific Journal of Management, 17(2): 223–255. European Chemicals Industry (2005) www.cefic.org European Commission (2001) European Innovation Scoreboard, 2001. Brussels: CEC. Eurostat (1997) INNOVAT – Survey on innovation in EU enterprise (CIS I). Brussels: Eurostat. Faccio, M. and Lang, H.P. (2002) ‘The ultimate ownership of western European corporations’, Journal of Financial Economics, 65(3): 365–395. Fagerberg, J., Mowery, D., and Nelson, R. (eds) (2004) Oxford Handbook of Innovation. Oxford: Oxford University Press. Fama, E.F. and Jensen, M.C. (1983) ‘Separation of ownership and control’, Journal of Law and Economics, 26: 301–325. Ferner, A. and Quintanilla, J. (1998) ‘Multinationals, national business systems and HRM: the enduring influence of national identity or a process of Anglo-Saxonisation’, International Journal of Human Resource Management, 9(4): 710–731. Ferri, G. and Trento, S. (1997) ‘La dirigenza delle grandi banche e imprese’, in: F. Barca et al. (eds) Storia del capitalismo italiano dal dopoguerra ad oggi. Rome: Donzelli, ch. 2, pp. 35–56. Florence, P.S. (1961) Ownership, Control and Success of Large Companies. London: Sweet and Maxwell. Forrant, R. (2002) ‘Good jobs and the cutting edge, in: W. Lazonick and M. O’Sullivan (eds) Corporate Governance and Sustainable Prosperity. New York: Palgrave, pp. 78–103. Foreman-Peck, J. (2003) Technological Mutations and Henry Ford, mimeo.

Bibliography

281

Franks, J. and Mayer, C. (1997) ‘Corporate ownership and control – the UK, Germany and France’, Journal of Applied Corporate Finance, 9(4): 30–45. Franks, J., Mayer, C., and Rossi, S. (2003) ‘The origination and evolution of ownership and control’, Working paper series, ECGI-Finance, 9. Fransman, M. (1986) ‘International competitiveness, technical change, and the state: the machine tool industry in Taiwan and Japan’, World Development, 14(12): 1375–1396. Freeman, C. (1987) Technology Policy and Economic Performance: Lessons from Japan. London: Pinter. Freeman, C. (1995) ‘The “National System of Innovation” in a historical perspective’, Cambridge Journal of Economics, 19(1): 5–24. Freeman, C. and Louçã, F. (2001) As Time Goes By: from the Industrial Revolution to the Information Revolution. Oxford: Oxford University Press. Freeman, C. and Perez, C. (1988) ‘Structural crises of adjustment: business cycles and investment behaviour’, in: G. Dosi, C. Freeman, R. Nelson, G. Silverberg, and L. Soete (eds) Technical Change and Economic Theory. London: Pinter, ch. 2, pp. 38–66. Freyssenet, M. (1998) ‘Renault: from diversified mass production to innovative flexible production’, in: M. Freyssenet, A. Mair, K. Shimizu, and G. Volpato (eds) One Best Way? Trajectories and Industrial Models of the World’s Automobile Producers. Oxford: Oxford University Press, pp. 365–394. Freyssenet, M., Mair, A., Shimizu, K., and Volpato, G. (eds) One Best Way? Trajectories and Industrial Models of the World’s Automobile Producers. Oxford: Oxford University Press. Gadhoum, Y., Lang, L.H.P., and Young, L. (2005) ‘Who controls US?’, European Financial Management, 11(3): 339–363. Galli, G. (1995) Il padrone dei padroni, Enrico Cuccia, il potere di Mediobanca e il capitalismo italiano. Milan: Garzanti. Gao, J. and Fu, J. (1996) ‘The key problems of technological innovation in business firms’, Science and Technology International, 1: 24–33. Gaved, M. (1998) ‘Institutional investors and corporate governance’, Issues Paper, Foundation for Business Responsibilities, 3. George, N. and Hall, W. (2001) ‘Heady days seem over as chairman’s star fades’, Financial Times, 22 November: 28. Ghauri, P.N. and Prasad, B. (1995) ‘A network approach to probing Asia’s inter-firm linkages’, Advances in International Comparative Management, 10(3): 63–77. Gill, D., Martin, C., Minshall, T., and Rigby, M. (2000) Funding Technology: Lessons from America. London: Wardour Communications. Global Insight (2004) Venture Impact 2004: Venture Capital Benefits to the U.S. Economy. Arlington, Virginia: NVCA (National Venture Capital Association). Gordon, E.M., Barrett, R.W., Dower, W., Fodor, J., and Gallop, M.A. (1994) ‘Applications of combinatorial technologies to drug discovery. 2’, Journal of Medicinal Chemistry, 37(10): 1385–1401. Goyer, M. (1997) ‘Privatization and corporate governance: the role of labor in France and Germany’, paper presented at the annual meeting of the Academy of Management, Washington, DC. Goyer, M. (2001) ‘Corporate governance and innovation system in France 1985–2000’, Industry and Innovation, 8(2): 135–158. Goyer, M. (2006) ‘Varieties of institutional investors and national models of capitalism: the transformation of governance in France and Germany’, Politics & Society, 34(3), September, 399–430.

282

Bibliography

Grandori, A. (ed.) (2006) Corporate Governance and Firm Organization: Microfoundations and Structural Forms. Oxford: Oxford University Press. Granstrand, O. (2004) ‘Innovation and intellectual property rights’, in: J. Fagerberg, D. Mowery, and R. Nelson (eds) Oxford Handbook of Innovation. Oxford: Oxford University Press, pp. 266–290. Gu, S. (1999) China’s Industrial Technology, Market Reform and Organisational Change. London: Routledge/UNU Press. Gu, S. (2003) ‘NIS Transformation and Recombination Learning in China’, Globelics Conference, Rio de Janeiro, November. Guan, J.C. (2000) ‘Industrial innovation in China: a comparative study based on survey data’, Working paper series, Peking University. Guerrieri, P. and Pietrobelli, C. (2004) ‘Industrial districts’ evolution and technological regimes: Italy and Taiwan’, Technovation, 4(11): 36–56. Guerrieri, P. and Tylecote, A. (1997) ‘Interindustry differences in technical change and national patterns of technological accumulation’, in: C. Edquist (ed.) Systems of Innovation: Technologies, Institutions and Organizations. London: Cassell, pp. 107–129. Gugler, K., Mueller, D.C. and Yurtoglu, B.B. (2004) ‘Corporate governance and globalization’, Oxford Review of Economic Policy, 20(1): 129–156. Haake, S. (2002) ‘National business systems and industry-specific competitiveness’, Organization Studies, 23(5): 711–736. Hackethal, A., Schmidt, R.H., and Tyrell, M. (2005) ‘Banks and German corporate governance: on the way to a capital market-based system?’, Corporate Governance, 13(3): 397–407. Hage, J. (2002) ‘Contests for corporate control – book review’, Organization Studies, 23(5): 847–850. Hall, B.H., Jaffe, A.B., and Tratjenberg, M. (2001) ‘The NBER patent citation data file: lessons, insights and methodological tools’, Working paper series, NBER, 8498. Hall, P. and Soskice, D. (2001a) ‘An introduction to varieties of capitalism’ in P. Hall and D. Soskice (eds), Varieties of Capitalism: Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press, ch. 1, pp. 1–68. Hall P. and Soskice, D. (eds) (2001b) Varieties of Capitalism: Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press. Hall, W. (2001) ‘Barnevik takes blame and quits ABB’, Financial Times, 22/11/01:28 Hamilton, G.G. (1997) ‘Organization and market processes in Taiwan’s capitalist economy’, in: M. Orrù, N.W. Biggart, and G. Hamilton (eds) The Economic Organization of East Asian Capitalism. Thousands Oaks: Sage Publications, ch. 9, pp. 237–296. Hampel Report, Final Report (1998) London: Committee on Corporate Governance and Gee Publishing, January. Han, T.S. and Chiu, S.F. (2000) ‘Industrial democracy and institutional environments; a comparison of Germany and Taiwan’, Economic and Industrial Democracy, 21(2): 147–182. Hanazaki, M. and Horiuchi, A. (2000) ‘Is Japan’s financial system efficient?’, Oxford Review of Economic Policy, 16(2): 61–73. Hancké, B. (1998) ‘Trust or hierarchy? Changing relationships between large and small firms in France’, Small Business Economics, 11(3): 237–252. Hancké, B. (2001) ‘Revisiting the French model: coordination and restructuring in French industry in the 1980s’, in: P. Hall P. and D. Soskice (eds) Varieties of Capitalism:

Bibliography

283

Institutional Foundations of Comparative Advantage. Oxford: Oxford University Press, ch. 9, pp. 307–336. Harnischfeger, U. (2003) ‘Auto industry: drive to keep Golf on profits course’, Financial Times, 25/11/03, Special Report on Germany, 5. Harris Corporation (1996) ‘Founding dates of the 1994 “Fortune 500” U.S. companies’, Business History Review, 70(1): 69–90. Harrison, B. (1991) ‘Industrial districts: old wine in new bottles?’, Regional Studies, 26(5): 469–483. Hart, O. (1995) Firms, Contracts and Financial Structure. Oxford: Oxford University Press. Henderson, R. and Clark, K. (1990) ‘Architectural innovation: the reconfiguration of existing product technologies and the failure of established firms’, Administrative Science Quarterly, 35(2): 9–30. Henderson, R., Orsenigo, L., and Pisano G. (1999) ‘The pharmaceutical industry and the revolution in molecular biology’, in: D. Mowery and R. Nelson (eds) The Sources of Industrial Leadership. Cambridge: Cambridge University Press, ch. 7, pp. 267–311. Henrekson, M. and Jakobsson, U. (2005) ‘The Swedish model of corporate governance and control in transition’, in: H. Huizinga and L. Jonung (eds) The Internationalisation of Asset Ownership in Europe. Cambridge: Cambridge University Press, ch. 7, pp. 207–246. Henwood, D. (2003) After the New Economy. New York: New Press. Herrigel, G. (1994) ‘Industry as a form of order: a comparison of the historical development of the machine tool industries in the United States and Germany’, in: J.R. Hollingsworth, P.C. Schmitter and W. Streeck (eds) Governing Capitalist Economies. Oxford: Oxford University Press, ch. 5, pp. 97–128. Hippel, E. von (1987) ‘Cooperation between rivals: informal know-how trading’, Research Policy, 16(6): 291–302. Hiroatsu, N. and Verdier, E. (2001) ‘Sources of resilience in the computer and software industries in France’, Industry and Innovation, 8(2): 201–220. Hobday, M. (1995a) Innovation in East Asia, the Challenge to Japan. Aldershot: Elgar. Hobday, M. (1995b) ‘Innovation in East Asia: diversity and development’, Technovation, 15(2): 55–63. Hobday, M. (1998) ‘Latecomer catch-up strategies in electronics: Samsung of Korea and ACER of Taiwan’, Asia Pacific Business Review, 4(2–3): 48–83. Hobday, M. and Heighes, T. (1999) ‘The European electronics industry’, in: D.A. Dyker (ed.) The European Economy, 2nd edn. London: Longman, ch. l6, pp. 326–351. Hope, J. and Fraser, R. (2003) Beyond Budgeting. Cambridge, MA: Harvard Business School Press. Hou, C.M. and Gee, S. (1993) ‘National systems supporting technical advance in industry: the case of Taiwan’, in: R. Nelson (ed.) National Systems of Innovation: A Comparative Study. Oxford: Oxford University Press, ch. 12, pp. 384–413. Howells, J. and Neary, I. (1995) Intervention and Technological Innovation: Government and the Pharmaceutical Industry in the UK and Japan. London: Macmillan. Höpflinger, F. (1977) Das unheimliche Imperium. Wirtschaftsverflechtung in der Schweiz. Zürich: eco-Verlag. Hsu, C.W. and Chang, H.C. (2001) ‘The government strategy for the upgrading of industrial technology in Taiwan’, Technovation, 21(2): 123–132. Hu, M.C. (2004) ‘Explaining the drivers of Innovation in East Asia’, presented at Innovation Measurement symposium, Melbourne, 9 November.

284

Bibliography

Huddart, S. (1993) ‘The effect of a large shareholder on corporate value’, Management Science 39(11): 1407–1421. Hung, S.-C. (2003) ‘The Taiwanese system of innovation in the information industry’, International Journal of Technology Management, 26(7): 788–800. IAB (Innovation Advisory Board) (1990) Innovation: City Attitudes and Practices. London: DTI. Il Giornale (2006) ‘Dai motori aerei allo spazio, il fior fiore del Made in Italy’, 30 January. Il Sole 24 Ore (2005) ‘La R&S diventa Made in Taiwan’, 12 March: 5. INRIA (2006) www.Inria-transfert.fr accessed 6 February 2006. Invest in France Agency (2003) The Automotive Industry in France, www.investin france.org/ accessed 15 February 2006. Istat (1994) Statistiche industriali. Rome: Istat. Istat (1995) Indagine sull’innovazione tecnologica, anni 1990–1992. Rome: Istat. Itami, H. (1994) ‘Learning and technology accumulation by Japanese firms and the concept of Ba (interactive field)’, paper presented at Corporate Change Conference, University of New South Wales, Sydney, Australia, 22–24 August. ITIS Center for Biotechnologies development (2003) Sectoral reports, www.itis.org.tw accessed 18/11/05. Jackson, G. (2003) ‘Corporate Governance in Germany and Japan: liberalization pressures and responses during the 1990s’, in: K. Yamamura and W. Streeck (eds) The End of Diversity? Prospects for German and Japanese Capitalism. Ithaca/London: Cornell University Press, ch. 9, pp. 261–305. James, W. and Movshuk, O. (2003) ‘Comparative advantage in Japan, Korean and Taiwan between 1980 and 1999: testing for convergence and implications for closer economic relations’, Developing Economies, XLI(3): 287–308. Jeidels, O. (1905) Das Verhältnis der deutschen Grossbanken zur Industrie. Leipzig: Duncker & Humblot. Jenkinson, T. and Mayer, C. (1992) ‘The assessment: corporate governance and corporate control’, Oxford Review of Economic Policy, 8(3): 1–10. Jensen, M.C. and Meckling, W.H. (1976) ‘Theory of the firm: managerial behaviour, agency costs and ownership structure’, Journal of Financial Economics, 3(4): 305–360. Joh, S.W. (2003) ‘Corporate governance and profitability: evidence from Korea before the economic crisis’, Journal of Financial Economics, 68(2): 287–322. Johansson, D. (2002) In Search for an Integrative Model of Corporate Governance and Accounting, University of Gothenburg, mimeo. Johnson, P. (ed.) (2003) Industries in Europe: Competition, Trends and Policy Issues, 2nd edn. Cheltenham: Elgar. Jones, L. and Sakong, I. (1980) Government, Business, and Entrepreneurship in Economic Development: the Korean Case. Cambridge, MA: Harvard University Press. Jou, S.-C. and Chen, D.-S. (2001) ‘Keeping the high-tech region open and dynamic: the organizational networks of Taiwan’s integrated circuit industry’, GeoJournal, 53: 81–87. Juergens, U., Malsch, T., and Dohse, K. (1993) Breaking from Taylorism: Changing Forms of Work in the Automobile Industry. Cambridge: Cambridge University Press. Jun, I. and Gong, B. (1995) Corporate Governance in Korea. Seoul: Korea Economic Research Institute. Jwa, S.H. (2004) ‘The chaebol, corporate policy and Korea’s development paradigm’, in: S.-H. Jwa and K. Lee (eds) Competition and Corporate Governance in Korea: Reforming and Restructuring the Chaebol. Cheltenham: Elgar, ch. 1, pp. 3–23.

Bibliography

285

Jwa, S.H. and Lee, I.K. (eds) (2004) Competition and Corporate Governance in Korea: Reforming and Restructuring the Chaebol. Cheltenham: Elgar. Kaplan, S.N. (1997) ‘Corporate governance and corporate performance: a comparison of Germany, Japan and the US’, in: D.H. Chew (ed.) Studies in International Corporate Finance and Governance systems: a Comparison of the US, Japan and Europe. Oxford: Oxford University Press, pp. 251–258. Kay, J. and Silberston, A. (1995) ‘Corporate governance’, National Institute Economic Review, August: 84–97. Kenney, M., Han, K., and Tanaka, S. (2004) ‘The globalization of venture capital: the cases of Taiwan and Japan’, in: A. Bartzokas and S. Mani (eds) Financial Systems, Corporate Investment in Innovation, and Venture Capital. Cheltenham: Elgar, ch. 4, pp. 52–84. Key Note Report (2001) Computer Software. London: Keynote. Kidd, PT. (1994) Agile Manufacturing: Forging New Frontiers. Reading, MA: AddisonWesley. Kienzle, R. and Shadur, M. (1997) ‘Developments in business networks in East Asia’, Management Decision, 35(1): 23–32. Kikkawa, T. (2001) The ‘Successes’ and ‘Failures’ of Japanese Firms, and the ‘Successes’ and ‘Failures’ of Explanatory Models for these ‘Successes’ and ‘Failures’, ISS-Sheffield Workshop on Corporate Governance in Asian-European Perspective, 17–18 March. Kim, D. and Seongsu, K. (2003) ‘Industrial relations in Asia: transformation or transition?’, Industrial Relations, 42(3): 311–314. Kim, D. and Yu, G.C. (2000) ‘Emerging patterns of human resource management in Korea: evidence from large Korean firms’ presented at 12th IIRA World Congress, Tokyo, Japan. Kim, D., Hoskisson, R., Tihany, L., and Hong, J. (2004a) ‘The evolution and restructuring of diversifying business groups in emerging markets: the lessons of Chaebols in Korea’, Asian Pacific Journal of Management, 21(2): 25–48. Kim, L. (1993) ‘National system of industrial innovation: dynamics of capability building in Korea’, in: R. Nelson (ed.) National Systems of Innovation: A Comparative Study. Oxford: Oxford University Press, ch. 11, pp. 357–383. Kim, L. (1997) Imitation to Innovation: the Dynamics of Korea’s technological learning. Harvard: Harvard Business School Press. Kim, S.R. and von Tunzelmann, N. (1998) ‘Aligning internal and external networks: Taiwan’s specialization in IT’, Working paper series (electronic), University of Sussex, 17. Kim, W., Shi, Y., and Gregory, M. (2004b) ‘Transition from imitation to innovation: lessons learnt from Korean multinational corporation’, International Journal of Business, 9(4): 108–120. Kinch, N. (1995) ‘The road from dreams of mass production to flexible specialisation: American influences on the development of the Swedish automobile industry, 1920–39’, in: H. Shiomi and K. Wada (eds) Fordism Transformed: the Development of Production Methods in the Automobile Industry. Tokyo: Fuji, ch. 5, pp. 107–138. Knack, S. (2001) ‘Trust, associational life and economic performance in the OECD’, in: J.F. Helliwell (eds) The Contribution of Human and Social Capital to Sustained Economic Growth and Well-being. Paris: OECD, ch. 9. Knack, S. and Keefer, P. (1997) ‘Does social capital have an economic payoff? A crosscountry investigation’, Quarterly Journal of Economics, 112(4): 1251–1288. Korea Information Society Development Institute (KISDI) (2007) IT Industry Outlook of Korea, www.kisdi.re.kr

286

Bibliography

Kuo, C.T. (1998) ‘Private governance in Taiwan’, in: S. Chan, C. Clark, and D. Lam (eds) Beyond the Developmental State: East Asia’s Political Economies Reconsidered. London: Macmillan, ch. 4, pp. 84–95. Kynge, J. (2003) ‘China plans shake-up for state enterprises’, Financial Times, November 12: 11. Lane, C. (1989) Management and Labour in Europe. Cheltenham: Elgar. Langlois, J.D. (2001) ‘China’s financial system and the private sector’ URL: www.ksg.harvard.edu/cbg/Conferences/financial_sector/Langloispaper.pdf Lannoo, K. (1999) ‘A European perspective on corporate governance’, Journal of Common Market Studies, 37(2): 269–294. La Porta, R., Lopez de Silanes, F., Shleifer, A., and Vishny, R.W. (1997) ‘Legal determinants of external finance’, Journal of Finance, 52(3): 1131–1150. La Porta, R., Lopez de Silanes, F., Shleifer, A., and Vishny, R.W. (1998) ‘Law and finance’, Journal of Political Economy, 106(6): 1133–1155. La Porta, R., Lopez de Silanes, F., Shleifer, A., and Vishny, R.W. (1999) ‘Corporate ownership around the world’, Journal of Finance, 54(2): 471–517. La Porta, R., Lopez de Silanes, F., Shleifer, A., and Vishny, R.W. (2000) ‘Investor protection and corporate governance’, Journal of Financial Economics, 58(1): 3–27. Lansbury R.D., Lee, B.H., and Woo, S. (2002) ‘Technology, human resources and international competitiveness in the Korean Auto Industry’, International Journal of Technology and Globalisation, 1(1): 15–30. Larch, M. (2005): ‘Stuck in a rut? Italy’s weak export performance and unfavourable product specialisation’, Ecfin Country Focus, 2(9): 1–6. Lazonick, W. (2000) ‘Innovative enterprise and historical transformation’, Enterprise & Society: The International Journal of Business History, 3(1): 3–47. Lazonick, W. (2002a) ‘Organizational learning and international competition: the skillbase hypothesis’, in: W. Lazonick and M. O’Sullivan (eds) Corporate Governance and Sustainable Prosperity. London: Palgrave, pp. 37–77. Lazonick, W. (2002b) ‘The Japanese economy and corporate reform: what path to sustainable prosperity?’ in: W. Lazonick and M. O’Sullivan (eds) Corporate Governance and Sustainable Prosperity. London: Palgrave, pp. 226–255. Lazonick, W. (2004) ‘The innovative firm, in J. Fagerberg, D. Mowery and R. Nelson, (eds) The Oxford Handbook of Innovation. Oxford: Oxford University Press. Lazonick, W. and O’Sullivan, M. (1996) ‘Organisation, finance and international competition’, Industrial and Corporate Change, 1(1): 1–36. Lazonick, W. and O’Sullivan, M. (1998) Governance of Innovation for Economic Development, Report to the European Commission in project on Innovation Systems and European Integration, March. Lazonick, W. and O’Sullivan, M. (2000) ‘Maximizing shareholder value: a new ideology for corporate governance’, Economy and Society, 29(1): 13–35. Lazonick, W. and O’Sullivan, M. (eds) (2002) Corporate Governance and Sustainable Prosperity. London: Palgrave. Lazonick, W. and Prencipe, A. (2005) ‘Dynamic capabilities and sustained innovation: strategic control and financial commitment at Rolls-Royce plc’, Industrial and Corporate Change, 14(3): 501–542. Lee, B.Y. and Lee, S.J. (2004) ‘Case study of Samsung mobile phone business’, Working paper series, KDI School of Public Policy and Management, 11. Lee, H. (1999a) ‘A “stroke” hypothesis of Korea’s 1997 financial crisis: causes, con-

Bibliography

287

sequences and prospects’, Working paper series, Department of Economics, University of Melbourne, 696. Lee, H. and Han, S. (2002) ‘The evolution of the national innovation system in Korean mobile telecommunication industry’, Communication and Strategies, 48(4): 161–186. Lee, J.W. and Miller, D. (1999) ‘People matter’, Strategic Management Journal, 20(6): 579–593. Lee, K. (1999b) ‘Corporate governance and growth in the Korean chaebols: a microeconomic foundation for the 1997 crisis’, Working paper series, Institute of economic research, Seoul National University, 18. Lee, K. (2003) ‘Sources of industrial innovation in the Korean innovation system’, paper presented at The Second Globelics Conference: Innovation systems and Development: Emerging Opportunities and Challenges. Lee, J.W. and Lee, M. (1994) Korean Management in Global Competition. Seoul: GimYoung Sa. Lehrer, M. (2000) ‘Has Germany finally fixed its high-tech problem?: the recent boom in German technology-based entrepreneurship’, California Management Review, 42(4): 89–107. Levin, R., Klevorick, A., Nelson, R.R., and Winter, S.G. (1987) ‘Appropriating the returns from industrial R&D’, Brookings Papers on Economic Activity, 3: 783–820. Levine, R. (1997) ‘Financial development and economic growth: views and agenda’, Journal of Economic Literature, 35(2): 688–726. Levine, R. (2002) ‘Bank-based or market-based financial systems: which is better?’, Journal of Financial Intermediation, 11(1): 1–30. Li, R. (2005) ‘Large-scale state owned enterprises will not be involved in MBOs’, Speech at a press conference. URL: www.sasac.gov.cn/gzjg/cqgl/200504140163.htm Lin, J.C. (2001) ‘Research on Taiwan’s software industry and its adoption of CMM Model’, Master’s thesis, National Sun-Yat Sen University. Liu, X.L. and White, S. (2001) ‘China’s national innovation system in transition: an activity-based analysis’, Proceedings of China–U.S. Joint Conference on Technological Innovation Management. Liu, Y.Q. (2002) ‘Development of private entrepreneurship in China: process, problem and countermeasures’, www.mansfieldfdn.org/programs/program_pdfs/ent_china.pdf Llerena, P., Matt, M., and Trenti, S. (1997) ‘Government technological procurement: the case of digital switching systems in France’, Paper submitted to the European Commission, within TSER Project Government Technology Procurement as a Policy Instrument. Lo, J. (2000) ‘The problem with venture capital in China’, www.vcchina.com/ english/source/sj02_02.html London, S. (2006) ‘Private equity dogged by success’, Financial Times, February 14. Lorenz, C. (1989b) ‘The Italian connection: a stark contrast in corporate manners’, Financial Times, 23 June: 20. Lorenz, E.H. (1989a) ‘The search for flexibility: subcontracting networks in French and British engineering’, in: P. Hirst and J. Zeitlin (eds) Reversing Industrial Decline. Oxford: Berg, ch. 6, pp. 122–131. Lorenzoni, G. and Lipparini, A. (1999) ‘The leveraging of interfirm relationships as a distinctive organizational capability: a longitudinal study’, Strategic Management Journal, 20(4): 317–338. Loubet, J.L. (1998) ‘Peugeot meets Ford, Sloan, and Toyota’, in: M. Freyssenet, A. Mair, K. Shimizu, and G. Volpato (eds) One Best Way? Trajectories and Industrial Models

288

Bibliography

of the World’s Automobile Producers. Oxford: Oxford University Press, ch. 13, pp. 338–364. Lu, F. (2005) Learning by Innovating: Lessons from the Development of the Chinese Digital Video Player Industry, Mimeo. Lu, F. and Feng, K. (2004) Fazhan woguo zizhu zhishichanquan qichegongye de zhengce xuanze (In Chinese: The Policy Choice in Developing China’s Proprietary Passenger Car Industry). Beijing: Beijing University Press. Lu, F., Zhang, H., and Wang, T. (2002) ‘Xunqiu Jiaru WTO hou Zhongguo Qiye Jingzhengli de Yuanquan – Dui Baogang zai Qicheban Shichang Yingde Jingzheng Youshi Guocheng de Fenxi (in Chinese: In search for the source of competence after WTO – A case study of Bao Steel in Automobile Sheet Metal Industry)’, Management World, 2: 110–127. Lubatkin, M.H., Lane, P.J., Collin, S.O., and Very, P. (2005) ‘Origins of corporate governance in the USA, Sweden and France’, Organization Studies, 26(6): 867–888. Lundvall, B.Å. (1988) ‘Innovation as an interactive process: from user-producer interaction to the national system of innovation’, in: G. Dosi et al. (eds) Technical Change and Economic Theory. London: Pinter. Lundvall, B.Å. (ed.) (1992) National Systems of Innovation. London and New York: Pinter. Lundvall, B.Å. (2002) Innovation, Growth and Social Cohesion: The Danish Model, Cheltenham: Elgar. Luo, Y.-L. (2004) Innovation System in Taiwan, Working paper series, Science, Technology Policy Research and Information Center, Industry Center, Taiwan. Luo, Y.-L., Liao, Y.-C., Tsai, M.-H., and Liang, C.J. (2003) ‘The development and innovation capacity of Taiwan’s industrial clusters’, in: The Evolution of Industrial Clusters, Science and Technology Information Center, NSC, June (1): 23–46. Lynn, M. (1991) The Billion-Dollar Battle: Merck v Glaxo, London: Heinemann. Maassen, G. F. (2000) An International Comparison of Corporate Governance Models, 2nd edn. Amsterdam: Spencer Stuart. McBeath, G.A. (1997) ‘Taiwan privatizes by fits and starts’, Asian Survey, 23 (December): 1145–1162. Macdonald, S. (1990) Technology and the Tyranny of Export Controls. London: Macmillan. McGreevy, M. (2000) ‘The changing nature of work’, Industrial and Commercial Training, 34(5): 191–195. McKelvey, M. and Orsenigo, L. (2001) ‘Pharmaceuticals as a sectoral innovation system’, Paper presented for the ESSY Project and the Epris Project, CESPRI, Milan. Mackintosh, J. (2006) ‘Jobs driven away: why the rubber is hitting the road for western carmakers’, Financial Times, 7 February: 13. Major, T. (2002) ‘Small companies lose touch with their banks’, Financial Times, Survey of German Industry, 15 May: 2. Malerba, F. (1993) ‘The national system of innovation: Italy’, in: R. Nelson (ed.) National Innovation Systems. Oxford: Oxford University Press, ch. 7, pp. 230–260. Malerba, F. (1997) ‘Technological regimes and sectoral patterns of innovative activities’, Industrial and Corporate Change, 6(1): 83–118. Malerba, F. (2004) ‘Sectoral systems: how and why innovation differs across sectors’, in: J. Fagerberg, D. Mowery, and R. Nelson (eds) Oxford Handbook of Innovation. Oxford: Oxford University Press, pp. 380–406.

Bibliography

289

Mallin, C. (1999) ‘Financial institutions and their relations with corporate boards’, Corporate Governance, 7(3): 248–255. Mahmood, I.P. and Singh, J. (2003) ‘Technological dynamism in Asia’, Research Policy, 32(6):1031–1054. Mansfield, E. (1986) ‘Patents and innovation: an empirical study’, Management Science, 32(2): 173–181. Marks, L. A. (2003) ‘Biotechnology’, in: P. Johnson (ed.) Industries in Europe: Competition, Trends and Policy Issues, 2nd edn. Cheltenham: Elgar, ch. 7, pp. 170–203. Marris, R. (1964) The Economic Theory of Managerial Capitalism. London: Macmillan. Marsh, P. (1990) Short-termism on Trial. London: Institutional Fund Managers Association. Mathews, J. (2004) ‘Industrial dynamics and corporate strategy: the case of the flat panel display industry’, paper presented at the DRUID summer conference, Elsinore, Denmark, 14–16 June. Matsumoto, K. (1983) The Rise of the Japanese Corporate System: The Inside View of a MITI Official. London and New York: Kegan Paul. Maurice, M., Sellier, F., and Silvestre, J. J. (1986) The Social Foundations of Industrial Power. Cambridge: Cambridge University Press. Mayer, C. (1996) ‘Corporate governance, competition and performance’, Working paper series, OECD Economics Department, 164. Mayer, C. (2002) ‘Financing the new economy: financial institutions and corporate governance’, Information Economics and Policy, 14: 311–326. MIC (2004) http://mic.iii.org.tw accessed on 24 February 2006. Miles, I., Kastrinos, N., Flanagan, K., Bilderbeek, R., Hertog, P., Huntink, W., and Bouman, M. (1995) ‘Knowledge-intensive business services: users, carriers and sources of innovation’, EIMS Publication n.15, Innovation Programme, Directorate General for Telecommunications, Information Market and Exploitation of Research, Commission of the European Communities, Luxembourg. Miozzo, M. and Grimshaw, D. (2003) ‘The other side of IT outsourcing: the new boundaries and coordination of the large innovating firm’, Working paper series, CRIC, Manchester School of Management. Monks, R. and Minow, N. (2001) Corporate Governance, 2nd edn. Oxford: Blackwell. Monks, R. and Sykes, A. (2002) Capitalism without Owners will fail: a Policy-maker’s Guide to Reform. London and New York: Centre for the Study of Financial Innovation. Moretti, A. (1999) ‘Technological change in the fine chemicals industry’, Working paper series, Economics Department, University of Udine, Italy, 1. Morin, F. (1998) Le Modèle Francais de Détention et Gestion du Capital. Paris: Éditions de Bercy. Morin, F. (2000) ‘The transformation of the French model of shareholding and management’, Economy and Society, 29(1): 36–53. Morikawa, H. (1992) Zaibatsu: The Rise and Fall of Family Enterprise Groups in Japan. Tokyo: University of Tokyo Press. Moss, B. H. (1988) ‘After the Auroux laws: employers, industrial relations and the right in France’, West European Politics, 11 January. Movshuk, O. (2001) ‘International trade, technology and changing comparative advantage: a comparative study of transition economies (1988–1998)’, Working paper series, International Center for the Study of East Asian Development, Kitakyushu, 7 (July). Munstar, P. and Larédo, P. (2002) ‘Innovation and research policy in France (1980–2000) or the disappearance of the Colbertist state’, Research Policy, 31(1): 55–72.

290

Bibliography

Murmann, P.J. (2003) Knowledge and Competitive Advantage: The Coevolution of Firms. Cambridge: Cambridge University Press. Myners, P. (2001) Institutional Investment in the United Kingdom: a review (The Myners Report). www.hm-treasury.gov.uk/media/2F9/02/31.pdf Nakamoto, M. and Pilling, D. (2005) ‘Watanabe is rewarded for his patience’, Financial Times, 10 February: 30. National Research Council (1983) United States Machine Tool Industry and the Defense Industrial Base. Washington DC: National Academy of Science Press. Nelson, R.R. (1959) ‘The simple economics of basic scientific research’, Journal of Political Economy, 67(2): 297–306. Nelson, R.R. (1992) ‘National innovation systems: a retrospective on a study’, Industrial and Corporate Change, 1(2): 347–374. Nelson, R.R. (ed.) (1993) National Systems of Innovation: A Comparative Study. Oxford: Oxford University Press. Nelson, R.R. (1996) ‘The evolution of comparative or competitive advantage: a preliminary report on a study’, Industrial and Corporate Change, 5(2): 597–617. Nelson, R.R. and Winter, S. (1977) ‘In search of a useful theory of innovation’, Research Policy, 6(1): 36–76. Nelson, R.R. and Winter, S. (1982) An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press. Niedenhoff, H.U. (2005) ‘Mitbestimmung im europäischen Vergleich’, IW-Trends, 32(2). Nightingale, P. (1998) ‘A cognitive model of innovation’, Research Policy, 27(7): 689–709. Nightingale, P. (2000) ‘Economies of scale in experimentation: knowledge and technology in pharmaceuticals R&D’, Industrial and Corporate Change, 9(2): 315–359. Nightingale, P. (2003), ‘Pharmaceuticals’, in: P. Johnson (ed.) Industries in Europe: Competition, Trends and Policy Issues, 2nd edn. Cheltenham: Elgar, ch. 6. Niosi, J., Saviotti, P.P., Bellon, B., and Crow, M. (1993) ‘National systems of innovation: in search of a workable concept’, Technology in Society, 15(2): 207–27. Nohara, H. and Verdier, E. (2001) ‘Sources of resilience in the computer and software industries in France’, Industry and Innovation, 8(2): 201–220. Nolan, P. (2001) China and the Global Economy, National Champions, Industrial Policy and the Big Business Revolution. Basingstoke: Palgrave. Nooteboom, B. (2002) Trust: Forms, Foundations, Functions, Failures and Figures. Cheltenham, UK and Northamption, MA, USA: Edward Elgar Numazaki, I. (1986) ‘Networks of Taiwanese big business’, Modern China, 12(4): 487–534. OECD (1993) National Systems for Financing Innovation. Paris: OECD. OECD (1994) Economic Survey of Italy. Paris: OECD. OECD (1995) National Systems for Financing Innovation. Paris: OECD. OECD (1999) Perspectives de l’emploi. Paris: OECD. OECD (2000) Science, Technology and Industry Outlook, 2000. Paris: OECD. OECD (2001a) OECD Science, Technology and Industry Scoreboard. Paris: OECD. OECD (2001b) Structural Statistics for Industry and Services. Paris: OECD. OECD (2002a) R&D Expenditure in Industry 1987–2000. Paris: OECD. OECD (2002b) Small and Medium Enterprise Outlook. Paris: OECD. OECD (2002c) Measuring the Information Economy. Paris: OECD. OECD (2003a) Science, Technology and Industry Scoreboard. Paris: OECD. OECD (2003b) Structural Statistics for Industry and Services 1993–2000. Paris: OECD. OECD (2004a) Science, Technology and Industry Scoreboard. Paris: OECD. OECD (2004b) Structural Statistics Online Database. Paris: OECD.

Bibliography

291

OECD (2005) Measuring Globalisation: OECD Economic Globalisation Indicators. Paris: OECD. Ogger, G. (1994) Nieten in Nadelstreifen. Munich: Droemer Knaur. Oi, J.C. (1995) The role of the local state in China’s transitional economy’, China Quarterly, 144: 1132–1149. Orrù, M., Biggart, N.W., and Hamilton G. G. (1997) The Economic Organization of East Asian Capitalism. Thousand Oaks, CA: Sage. Osborn, A. (2002) ‘Golden shares lose glitter’, The Guardian, 5 June: 22. O’Sullivan, M. (2000) ‘The innovative enterprise and corporate governance’, Cambridge Journal of Economics, 24(4): 393–416. O’Sullivan, M. (2001) ‘Change and continuity in the French system of corporate governance’, Report for the EC within the TSER Project: Corporate Governance, Innovation, and Economic Performance in the EU. O’Sullivan, M. (2002) ‘Corporate governance in Germany: productive and financial challenges’, in: W. Lazonick and M. O’Sullivan (eds) Corporate Governance and Sustainable Prosperity. London: Palgrave, pp. 255–300. Pack, H. and Lin, D. (2001) ‘The role of industrial policy in Taiwan’s development’, in: Y.H. Wan and E. Thorbecke (eds) Taiwan’s Development Experience: Lessons on Roles of Government and Market. Norvell, MA: Kulver, ch. 11, pp. 207–230. Pagano, U. and Trento, S. (2002) ‘Continuity and change in Italian corporate governance: the institutional stability of one variety of capitalism’, Working paper series, University of Siena Department of Economics, 365. Pagano, M. and Volpin, P. (2000) ‘The political economy of corporate governance’, Working paper series, CSER, 29, www.dise.unisa.it/WP/wp29.pdf Pagano, M. and Volpin, P. (2001) ‘The political economy of finance’, Oxford Review of Economic Policy, 17(4): 502–519. Paguet, J.M. (2000) Innovation within the Automobile Industry, Report submitted to the European Commission, June. Park, W.S. and Yu, G.C. (2000) ‘Transformation and new patterns of HRM in Korea’, presented at the International conference on Transforming Korean Business and Management Culture, 19–20 September, Michigan State University. Patel, P. and Pavitt, K. (1988) ‘The international distribution and determinants of technological activities’, Oxford Review of Economic Policy, 4(4): 81–99. Patel, P. and Pavitt, K. (1990) ‘Sources and directions of technological accumulation in France: a statistical comparison with Germany and the UK’, Technology Analysis and Strategic Management, 2: 3–26. Patel, P. and Pavitt, K. (1994) ‘National innovation systems: why they are important, and how they might be measured and compared’, Economics of Innovation and New Technology, 3(1): 77–95. Pavitt, K. (1999) Technology, Management and Systems of Innovation. Cheltenham: Elgar. People’s Daily (2000) August 1, URL: english.peopledaily.com.cn/ People’s Daily (2002) February 20, URL: english.peopledaily.com.cn/ Perez, C. (1983) ‘Structural change and assimilation of new technologies in the economic and social systems’, Futures, 15(4): 357–375. Perez, C. (2002) Financial Capital and Technological Revolutions. Cheltenham: Elgar. Persson, B. (1997) ‘Unions, management and the government: the Swedish model’, International Contributions to Labour Studies, 7: 119–133. Plender, J. (2006a) ‘Europe feels the toxic effect of corporate nationalism’, Financial Times, 6 April: 19.

292

Bibliography

Plender, J. (2006b) ‘An acceptable poison pill? It’s not an oxymoron’, Financial Times, 9 April: 20. Plihon, D. and Jeffers, E. (2001) ‘Investisseurs institutionnels et gouvernance des entreprises’, Revue d’Économie Financière, 63(3): 137–152. Porter, M. (1990) The Competitive Advantage of Nations. London: Macmillan. Porter, M. (1992) ‘Capital choices: changing the way America invests in industry’, Journal of Applied Corporate Finance, 5(2): 4–16. Poutsma, E. (2000) ‘Recent developments in financial participation within the European Union’, European Foundation for the Improvement of Living and Working Conditions, Project 0218. Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of the corporation’, Harvard Business Review, 68(3): 79–91. Pree, W. (1997) ‘Component-based software development: a new paradigm in software engineering?’, Software Concepts and Tools, 18(2): 169–174. Pugh, W.N., Jahera, J.S., and Oswald, S. (1999) ‘ESOPs, takeover protection and corporate decision making’, Journal of Economics and Finance, 23(2): 170–183. Putnam, R. (1993) Making Democracy Work: Civic Traditions in Modern Italy. Princeton, NJ: Princeton University Press. Pye, L.W. and Pye, M.W. (1985) Asian Power and Politics: The Cultural Dimensions of Authority. Cambridge, MA: Belknap Press. Rajan, R. and Zingales, L. (1998) ‘Financial dependence and growth’, American Economic Review, 88 (1): 559–586. Rajan, R. and Zingales, L. (2001) ‘The great reversals: the politics of financial development in the 20th century’, Working paper series, CRSP, University of Chicago, 526. Ramirez, P. and Tylecote, A. (1999) ‘Technological change in the pharmaceutical industry: a literature review from the point of view of Corporate Governance’, Paper submitted to the European Commission, August. Ramirez, P. and Tylecote, A. (2004) ‘Hybrid corporate governance and its effects on innovation: a case study of AstraZeneca’, Technological Analysis and Strategic Management, 16(1): 97–119. Rébérioux, A. (2002) ‘European style of corporate governance at the crossroads: the role of worker involvement’, Journal of Common Market Studies, 40(1): 111–34. Regnier, P. (1992) ‘Small business and industrialisation in South Korea’, Asia Pacific Journal of Management, 9(1): 107–117. Robinson, A., Wilson, N., and Zhang, H. (2002) ‘Employee ownership and firm specific human capital’, paper presented at the 11th conference of the International Association for the Economics of Participation, Brussels, 4–6 July. Roe, M. (1994) Strong Managers and Weak Owners: the Political Roots of American Corporate Finance. Princeton: Princeton University Press. Rogers, J. and Streeck, W. (eds) (1995) Work Councils: Consultation, Representation, and Cooperation in Industrial Relations. Chicago: University of Chicago Press. Royal Society for the Encouragement of Arts, Manufactures and Commerce (RSA) (1995) Tomorrow’s Company. Aldershot, UK: RSA, Gower. Sako, M. (1994) Prices, Quality and Trust: Inter-firm Relations in Britain and Japan. Cambridge: Cambridge University Press. Santarelli, E. and Sterlacchini, A. (1990) ‘Innovation, formal vs. informal R&D, and firm size: evidence from Italian manufacturing’, Small Business Economics, 2(3): 223–228. Sato, H. (1998) ‘Career formation and development of white-collar workers’ individual

Bibliography

293

capabilities: an international comparison of Japan, Germany and the United States’, in: Japan Institute of Labour (ed.) Human Resource Development of Professional and Managerial Workers in Industry: An International Comparison. JIL Report Series, 7. Tokyo: Japan Institute of Labour. Saussure, J. D., Frechette, H., and Gryziak, B. (2001) ‘Is the banking system of the People’s Republic of China ready to play with competitive WTO?’ www.nhh.no/ geo/chinese/2001/papers/BankWTO.pdf Saxenian A. (1994) Regional advantage: culture and competition in Silicon Valley and Route 128. Cambridge, MA: Harvard University Press. Schmid, F.A. (1996) ‘Beteiligungen deutscher Geschäftsbanken und Corporate Performance’, Zeitschrift für Wirtschafts- und Sozialwissenschaften, 116: 273–310. Schmidt, V. (1996) From State to Market? The Transformation of French Business and Government. Cambridge: Cambridge University Press. Schreiner, J. P. (1984) ‘Le capital financier et le réseau des liaisons personnelles entre les principales sociétés en Suisse’, Revue d’Économie Industrielle, 29(3): 78–95. Schumpeter, J.A. (1911/1996) The Theory of Economic Development (with Introduction by J.E. Elliott). New Brunswick, NJ: Transaction Publishers. Schumpeter, J.A. (1939/1982) Business Cycles (2 vols.). Philadelphia: Porcupine Press. Schumpeter, J.A. (1942) Socialism, Capitalism and Democracy. New York: Harper and Brothers. Sciberras, E. and Payne, B.D. (1985) Machine Tool Industry, Technical change and International Competitiveness. Harlow, Essex: Longman. Science (2005) ‘Is Italian brain drain becoming a flood?’, 5 October: 6. SCITEB (1991) ‘R&D short-termism: enhancing the performance of the UK team’, ORBIC for SCITEB, Faversham. Seoul National University Management Research Institute (1985) Issues and Tasks of Korean Firms. Seoul: Seoul National University Press. Serfati, C. (2001) ‘The adaptability of the French armaments industry in an era of globalisation’, Industry and Innovation, 2(1): 221–239. Shi, Q. and Shang, Y. (2000) Zhongguo chanye chuangxin nengli yanjiu (Study of Industrial Innovation Capability in China). Beijing: Zhongguo qinggongye chubanshe (Light Industry Publishing House of China). Shin, H. and Park, Y.S. (1999) ‘Financing constraints and internal capital markets: evidence from Korean chaebols’, Journal of Corporate Finance, 5(2): 169–191. Shiomi, H. (1995) The Formation of Assembler Networks in the Automobile Industry: the Case of Toyota Motor Company (1955–80), in: H. Shiomi and K. Wada (eds) Fordism Transformed: the Development of Production Methods in the Automobile Industry. Tokyo: Fuji, ch. 2, pp. 29–48. Shiomi, H. and Wada, K. (eds) (1995) Fordism Transformed: the Development of Production Methods in the Automobile Industry. Tokyo: Fuji. Shleifer, A. and Vishny, R.W. (1986) ‘Large shareholders and corporate control’, Journal of Political Economy, 94(3): 461–488. Shleifer, A. and Vishny, R.W. (1997) ‘A survey of corporate governance’, Journal of Finance, 52(2): 737–783. Small and Medium Enterprise Administration (2005): Statistical report. Sohn, D.W. and Kim, J.Y. (2004) ‘Restructuring and corporate governance of the Korean chaebol’, in: S.H. Jwa and I.K. Lee (eds) Competition and Corporate Governance in Korea: Reforming and Restructuring the Chaebol. Cheltenham: Elgar. Solomon, J., Tylecote, A., and Solomon, A. (1999) ‘UK corporate governance and

294

Bibliography

innovation, corporate governance and product innovation’, report for the European Commission (DGXII), Targeted Socio-Economic Research programme (TSER). Solvell, O., Zander, I., and Porter, M.J. (1991) Advantage Sweden. Stockholm: Norstedts. Sonobe, T., Kawakami, M. and Otsuka, K. (2003) ‘Changing roles of innovation and imitation in industrial development: the case of the machine tool industry in Taiwan’, Economic Development and Cultural Change, 52: 103–128. Soskice, D. (1997) ‘German technology policy, innovation, and national institutional frameworks’, Industry and Innovation, 4(1): 75–96. Soskice, D. (1999) ‘Divergent production regimes: coordinated and uncoordinated market economies in the 1980s and 1990s’, in: H. Kitschelt et al. (eds) Continuity and Change in Contemporary Capitalism. Cambridge: Cambridge University Press, ch. 4, pp. 101–134. Steele, M. (2005) ‘Time for investors to come in from the cold’, FT Mastering Corporate Governance, Financial Times, 20 May: 6–7. Steers, R.M., Shin, Y.K., and Ungson, G.R. (1989) The Chaebol: Korea’s New Industrial Might. New York: Harper & Row. Stiglitz, J. (1988) Economic Organisation, Information and Development. Princeton: Princeton University Press. Stock Exchange Corporation (2004): www.Tse.com.tw – statistics section. Sturgeon, T. (2002) ‘Modular production networks. A new model of industrial organization’, Industrial and Corporate Change, 11(3): 451–496. Suleiman, E. (1979) Les Élites en France. Paris: Seuil. Suleiman, E. and Mendras, H. (1995) Le recrutement des élites en Europe. Paris: La Découverte. Sundin, A. and Sundqvist, S.I. (1997) Ägarna och makten i svenskt näringsliv. Stockholm: Dagens Nyheters Förlag. Sung, K.T. and Carlsson, B. (2003) ‘The evolution of a technological system: the case of CNC machine tools in Korea’, Journal of Evolutionary Economics, 13(4): 435–460. Swan, R. (2001) ‘Emerging technologies: a step change improvement’, Financial Times, 25 September: 3. Taiwan Transportation Vehicle Manufacturers’ Association (TTVMA) (2000) Annual Report of Taiwan’s Automotive Industry, 1999. Taiwan: TTVMA. Tappi, D. (2000) Evolutionary Path of Italian Industrial Districts: the Importance of Formal and Informal Institutions in the Background of Technological Innovation, presented at Schumpeter Conference, Manchester, 28 June–1 July. Taylor, M. (2004) ‘Empirical evidence against Varieties of Capitalism’s theory of technological innovation’, International Organization, 58(3): 601–631. Teece, D. (1986) ‘Profiting from technological innovation: implications for integration, collaboration, licensing, and public policy’, Research Policy, 15(6): 285–305. Teece, D. (1998) ‘Capturing value from knowledge assets: the new economy, markets for know-how, and intangible assets’, California Management Review, 40(3): 55–79. Teece, D. and Pisano, G. (1998) ‘The dynamic capabilities of firms: an introduction’ in: G. Dosi, D.J. Teece and J. Chytry (eds) Technology, Organisation and Competitiveness, Oxford: Oxford University Press, ch. 5, pp. 93–212. Teece, D., Pisano, G. and Shuen, A. (1998) ‘Dynamic capabilities and strategic management’, Strategic Management Journal, 18(7): 509–533. Teramoto, Y., Takai, T., and Richter, F.J. (1994) ‘Global competitiveness through strategic alliances: the case of the German and Japanese chemical industries’, in: H. Schuette (ed.) The Global Competitiveness of the Asian Firm. London: Macmillan, ch. 17.

Bibliography

295

Thomas, L.G. (1994) ‘Implicit industrial policy: the triumph of Britain and the failure of France in global pharmaceuticals’, Industrial and Corporate Change, 3(2): 451–489. Tidd, J., Bessant, J., and Pavitt, K. (2001) Management of Technological Innovation. Chichester: Wiley. Torrisi, S. (1996) ‘Firm specialisation and growth: a study of the European software industry’, Working paper series, Economia e Impresa, Luic, 35(9). Traxler, F., Blaschke, S., and Kittel, B. (2001) National Labour Relations in Internationalized Markets. Oxford: Oxford University Press. Trumbull, J.G. (2004) Silicon and the State: French Innovation Policy in the Internet Age. Washington, DC: Brookings Institution Press. Tsai, K.H. and Wang, J.C. (2002) An Examination of Taiwan’s Innovation Policies and R&D Performance, Division of Taiwan Economy, Chung-Hua Institution for Economic Research. Tsai, K.S. (2002) Back-alley Banking: Private Entrepreneurs in China. Ithaca, NY: Cornell University Press. Tsang, E.W.K. (1994) ‘Threats and opportunities faced by private business in China’, Journal of Business Venturing, 9(9): 451– 468. Tushman, M.L. and Anderson, P. (1986) ‘Technological discontinuities and organisational environments’, Administrative Science Quarterly, 31(3): 439–465. Tylecote, A. (1982) ‘German ascent and British decline, 1870–1980: the role of upper class structure and values’, in: E. Friedman (ed.) Ascent and Decline in the WorldSystem. London and Beverly Hills: Sage, ch. 2, pp. 41–68. Tylecote, A. (1991) The Long Wave in the World Economy. London: Routledge. Tylecote, A. (1996a) ‘Managerial objectives and technological collaboration: the role of national variations in cultures and structure’, in: R. Coombs, A. Richards, P.P. Saviotti, and V. Walsh (eds) Technological Collaboration: the Dynamics of Cooperation in Industrial Innovation. Cheltenham: Elgar, ch. 2, pp. 34–53. Tylecote, A. (1996b) ‘Cultural differences affecting technological innovation in Western Europe’, European Journal of Work and Occupational Psychology, 5(1): 137–147. Tylecote, A. (1999) Corporate Governance and Product Innovation: A Critical Review of the Literature, paper submitted to the European Commission, May. Tylecote, A. and Cai, J. (2004) ‘China’s SOE reform and technological change: a corporate governance perspective’, Asian Business and Management, 3(1): 57–84. Tylecote, A. and Conesa, E. (1999) ‘Corporate governance, innovation systems and industrial performance’, Industry and Innovation, 6(1): 25–50. Tylecote, A. and Demirag, I. (1992) ‘Short-termism: culture and structures as factors in technological innovation’, in: R. Coombs, V. Walsh, and P. Saviotti (eds) Technological Change and Company Strategies. London: Academic Press, ch. 6: 201–225. Tylecote, A. and Ramirez, P. (2004) ‘Hybrid corporate governance and its effects on innovation: a case study of AstraZeneca, Technology Analysis and Strategic Management, 16(1) March: 97–119. Tylecote, A. and Ramirez, P. (2005) ‘UK corporate governance and innovation’, Working paper series, Management School, Sheffield University, 8. Tylecote, A. and Ramirez, P. (2006) ‘Corporate governance and innovation: the UK compared with the US and “insider” systems’, Research Policy, 35(1): 160–180. Tylecote, A. and Vertova, G. (2007) ‘Technology and institutions in changing specialisation: chemicals and motor vehicles in the US, UK and Germany in the 20th Century, Industrial and Corporate Change. Tylecote, A. and Visintin, F. (2002) ‘Financial and corporate governance systems and

296

Bibliography

technological change: the incompleteness of fit of the UK and Italy’, Rivista di Economia Politica e Industriale, 114: 81–108. Tylecote, A. and Visintin, F. (2007) ‘A new taxonomy of national systems of corporate governance’, in: L. Mjøset and T.H. Clausen (eds) Capitalisms Compared. Elsevier Science Comparative Social Research Yearbook. Tylecote, A., Ramirez, P., Solomon, J., and Solomon, A. (2002) UK Governance and Innovation, paper submitted to the European Commission, May. UCIMU (2005) Rapporto di settore 2004. Milan: UCIMU. Van Dijk, M.P. and Wang, Q. (2005) ‘The development of a software cluster in Nanjing’, Contribution to the European Congress on ITC. The Hague: June 9 and 10, URL: www.nwo.nl/nwohome.nsf/pages/NWOP_6D4ARV/$file/ICT_Van_Dijk.pdf Vertova, G. (2002) ‘A historical investigation of the geography of innovative activities’, Structural Change and Economic Dynamics, 13(3): 259–283. Visintin, F. (2001) Corporate governance and product innovation in the machine tools sector in Italy. PhD Thesis, University of St. Andrews, Scotland. Vitols, S. (2005) ‘Changes in Germany’s bank-based financial system: implications for corporate governance’, Corporate Governance: an International Review, 13(3): 386–396. Vives, X. (ed.) (2000) Corporate Governance: Theoretical and Empirical Perspectives. Cambridge: Cambridge University Press. Vogel, S.K. (2003) ‘The reorganisation of organized capitalism: how the German and Japanese models are shaping their own transformations’, in: K. Yamamura and W. Streeck (eds) The End of Diversity? Prospects for German and Japanese Capitalism. Ithaca/London: Cornell University Press, ch.10, pp. 306–334. Volpato, G. and Stocchetti, A. (2000) ‘Managing information flows in supplier-customer relationships: issues, methods and emerging problems’, IMVP Working paper series, MIT’s Centre for Technology, Policy and Industrial Development. Vossen, R. (1999) ‘Market power, industrial concentration and innovative activity’, Review of Industrial Organization, 15(4): 367–378. Wade, R. (1990) Governing the Market: Economic Theory and the Role of Government in East Asian Industrialisation. Princeton: Princeton University Press. Waldenberger, F. (2000) ‘From corporatist to market capitalism? Japanese and German systems of corporate governance facing a changing environment’, Internationale Politik und Gesellschaft Online: International Politics and Society, 3. Waldenberger, F. (2001) ‘Japanese economic performance in the 1990s: a problem of corporate governance?’ in A. Kudo (ed.) Approaches to Corporate Governance, ISS Research Series 3, Institute of Social Science, University of Tokyo, 91–112. Waldenberger, F. (2003) ‘The link between employment and finance’, in: H.G. Nutzinger (ed.) Regulation, Competition and the Market Economy. Göttingen: Vandenhoeck & Rupprecht, pp. 61–75. Waldenberger, F. (2004) ‘International differences in corporate governance structures: research agenda and empirical evidence’, Working paper series, Japan Centre, Munich University, 1. Walkush, P., Binns, D., Szuszczewicz, E., Tobriner, M., and Scott, B. (1997) Employee Ownership: A Formula for Corporate Success and Broadened Capital Ownership. New York: Science Applications International Corporation. Wang, J.C. (1998) ‘The impacts of R&D expenditure on Taiwan’s economic growth and related industrial technology policy’, a paper presented during the Study Meeting on Total Factor Productivity, Singapore, May 1998.

Bibliography

297

Wang, P.P. (2002) ‘Taiwan venture capital industries’, Working paper series, Epoch Foundation, 23. Watson, J. (2001) ‘Constructing success in the electric power industry: flexibility and the gas turbine’, Working Paper series (electronic), SPRU, 64 (Feb). Weston, J.F., Mitchell, M., and Mulherin, J.H. (2004) Takeovers, Restructuring and Corporate Governance. London: Pearson/Prentice Hall. Wheeler, D. and Sillanpää, M. (1997) The Stakeholder Corporation. London: Pitman. Whitley, R. (1992a) ‘The comparative analysis of business systems’, in: R. Whitley (ed.) European Business Systems: Firms and Markets in their National Context. London: Sage, ch.1, pp. 5–45. Whitley, R. (1992b) Business Systems in East Asia: Firms, Markets and Societies. London: Sage. Whitley, R. (1999) Divergent Capitalisms: The Social Structuring and Change of Business Systems. Oxford: Oxford University Press. Whitley, R. (2000) ‘The institutional structuring of innovation strategies: business systems, firm types and patterns of technical change in different market economies’, Organization Studies, 21(5): 855–886. Whitley, R. (2002) ‘Developing innovative competencies: the role of institutional frameworks’, Industrial and Corporate Change, 11(3): 497–528. Whitley, R. (2003) ‘The institutional structuring of organizational capabilities: the role of authority sharing and organizational careers’, Organization Studies, 24(5): 667–695. Wieandt, A. (1994) ‘Innovation and the creation, development and destruction of markets in the world machine tool industry’, Small Business Economics, 6(6): 421–437. Williams, K., Colin, H., Sukhdev, J., and Williams, J. (1994) Cars: Analysis, History, Cases. Oxford: Berghahn. Winkler, E. and Greenhalgh, S. (eds) (1988) Contending Approaches to the Political Economy of Taiwan. Armonk, NY: ME Sharpe. Woczik, D. (2002) ‘Change in the German model of corporate governance: evidence from blockholdings, 1997–2001’, Working paper series, Oxford University. Womack, J.P., Jones, D.T., and Roos, D. (1990) The Machine that Changed the World. New York: Harper Perennial. Wong C.P.W. (1991) ‘Central-local relations in an era of fiscal decline: the paradox of fiscal decentralization in post-Mao China’, China Quarterly, 128: 691–715. Woo, J.E. (1991) Race to the Swift: State and Finance in Korean Industrialization. New York: Columbia University Press. Wook, J.S. (2004) ‘The monitoring role of financial institutions in the Korean corporate sector’, in: S.H. Jwa and I.K. Lee (eds), Competition and Corporate Governance in Korea: Reforming and Restructuring the Chaebol. Cheltenham: Elgar, ch. 4 pp. 93–114. Woolley, P. (2004) ‘How hedge funds are destabilising the markets’, Financial Times, 28 September: 19. Wu, Y.C. (2001) Banking Industry in China: Problems and Prospects, CIEC China International Economic Consultants, URL: www.friedlnet.com/0009.html Wymeersch, E. (1994) ‘Elements of comparative corporate governance in Western Europe’, in: M. Isakson and R. Skog (eds) Aspects of Corporate Governance. Stockholm: Juristforlaget, ch. 3, pp. 83–116. Yada, H. (2004) Corporate governance and technological innovation in Japan: two case studies. MBA dissertation, Sheffield University Management School. Yamashita, S. (1991) ‘Japan’s role as a regional technological integrator in the Pacific

298

Bibliography

Rim’, presented at conference on The Emerging Technological Trajectory of the Pacific Rim. Tufts University, Medford, MA, 4–6 October. Yang, Y.H. (2002) ‘Financing Taiwan’s knowledge intensive firms’, presented at AT10 Research Conference 7–8 March, Chung-hua Institution for Economic Research. Yates, B.W. (1983) The Decline and Fall of the American Automobile Industry. Greensboro, NC: Empire Books. Yeh, Y.H. (2002) ‘Board composition and the separation of ownership and control’, Working Paper, Fu-Jen Catholic University, Taipei, 5. Yeh, Y.H., Ko, C., and Su, Y.H. (2003) ‘Ultimate control and expropriation of minority shareholders: new evidence from Taiwan’, Academia Economic Papers, 31(3): 263–299. Yeh, Y.H., Lee, T.S., and Woidtke, T. (2001) ‘Family control and corporate governance: evidence from Taiwan’, International Review of Finance, 2(1): 21–48. Yin, R.K. (2003) Case Study Research: Design and Methods. Beverly Hills: Sage. Yoo, S. and Lee, S.M. (1987) ‘Management style and practice of Korean chaebols’, California Management Review, 29(4): 95–110. Yoon, B.L. (1992) ‘Reverse brain drain in South Korea: state-led model’, Studies in Comparative International Development, 27(1): 4–26. Young, D. and Scott, P. (2004) Having their Cake: How the City and Big Bosses are Consuming UK Business. London: Kogan Page. Yu, G.C. (2000) ‘The changing role of HR department and career development of HR managers’, in: Korea Labor Institute (ed.) Human Resource Management in the 21st century. Seoul: Myung-Kyung, ch. 3, pp. 78–91. Yu, M.T. (1999) ‘Banking environment and reform measures in Taipei, China during the Asian financial crisis’, Working paper series, Department of Finance, National Centre University, Taipei, 8. Ziegler, J.N. (1997) Governing Ideas: Strategies for Innovation in France and Germany. New York: Cornell University Press. Zysman, J. (1983) Governments, Markets and Growth: Financial Systems and the Politics of Industrial Change. New York: Cornell University Press.

Index

ABB 147, 266–7, 282 ACER 193, 283 Aérospatiale 167 aerospace appropriability 38 effectiveness of patents 38, 39 employee inclusion 38 France and Korea 165–9 Italy and Taiwan 196–8 Japan, Germany and Sweden 137–8 need for reconfiguration 38 opportunity 37 secrecy 38 statistics 245 US, UK and Switzerland 107–10 Airbus 38, 40, 110, 137, 166, 167, 168, 267, 280 Alenia Spazio 197 Anam industries 170, 212, 214 Apple 12, 47, 116, 228, 263 application service providers 44 appropriability aerospace 38 chemicals 51 effectiveness of patents 38, 39 ICT hardware 45–6 machinery 56, 57 pharmaceuticals 42 scale effects 37 software and IT services 49 spill-overs and stakeholder inclusion 31 and visibility 34 Ares-Serono 114 arms-length relationship between shareholders and management 64 of banks and firms in Italy 185 of chaebol with the few external suppliers 160

ASEA 132 asset management houses 66, 242 Astra 138, 139, 266, 267 AstraZeneca 108, 113, 139, 239, 264, 292, 295 Atos 176 Auditors board of 209 independent 190 Automotive 58 digitalisation of information 180 effectiveness of patents 53, 59 employee inclusion 59 France and Korea 180–2 Japan, Germany and Sweden 148–51 inter-firm relationships 150 Italy and Taiwan 205–7 need for reconfiguration 58 opportunity 58 paradigm shifts 54 secrecy 59 statistics 256 suppliers 59 US, UK and Switzerland 124 Aventis 170 Avio 197 AXA Private Equity 175 BAC 167 BAE Systems 167 bank-based financial system see financial Systems: stock-exchange and bank-based bank finance, level of 86 banks changing role in stakeholder capitalism 236 China 210–13 family-state capitalism 85

300

Index

banks continued France 154–6 Germany 127–8 in industrial districts 85 as insider shareholders 20, 65–6 Italy 185–6, 268 Japan 129–31 Korea 157–60 shareholder capitalism 82 stakeholder capitalism 72–3, 83–4 state-led capitalism 84 Sweden 132 Switzerland 102–4 Taiwan 191–3, 269 UK 97–8 US 92–3 Banque Nationale de Paris for Paribas 156 Baosteel 220, 270 base chemicals 51–2, 227 Bayer 139 Beecham 113 beyond budgeting control systems 232 biotechnology Germany 138 part of pharmaceuticals 41 Sweden 139, 226 Switzerland 114 Taiwan 198 UK 113 US 111–12, 224 Bird 216, 218 Black, James 113 black-box re-use 49 blockholders long-term relationships with stakeholders 7 BMW 59, 89, 206 Boeing 38, 40, 167, 168 Borealis 232 British Aerospace 109 Bull 173, 174, 176 business angels 82, 94, 100 CAD-CAM impact on codification of knowledge in automotive 59, 150, 180 and reconfiguration 228 role in the transformation of the PC industry 44 Cadre de Prix 169 Canon 10, 11 Cap Gemini 176 CAPS 175 Carlyle 197

CASA 167 CDC enterprises 175 CEA 175 Center-Satellite Programme 193 Centre-satellite organisation of aerospace industry in Taiwan and Italy 196 CETOINE 175 CGE 173, 174, 175 chaebol 157–63, 170 the Anam case 212 chemicals 178 cross-subsidisation by 172 in ICT hardware sector development 172–4 machinery 179 as a mean of coordination 68 Chalco 220 chemicals appropriability 51 China 221 customers 52 effectiveness of patents 52, 53 France and Korea 177–9 inter-firm relationships 52, 122 Italy and Taiwan 202–3 Japan, Germany and Sweden 145–6 need for reconfiguration 51 opportunity 51–2 paradigm shifts 54 secrecy 51–2 statistics 253 suppliers 52 US, UK and Switzerland 121–2 visibility 51–2 China banks 210 business performance 220 CG in outsiders 218 economic reform 208 employee inclusion 213 evolving status of the entrepreneur 209 financial constraints 210 government 75, 208–21 great economic reform programme 215 guanxi – contacts 209 minority state-owned firms 219 national team of chosen champions 216 private enterprise – definition 209 private firms 213 role of foreign direct investment 215 SOE (state-owned enterprise) 208 firm-specific perceptiveness 212 industry-specific expertise 212

Index 301 R&D expenditures 217 spin-offs from research institutes 218 stakeholder inclusion 213 stock-market 211 synthesis of performance 227 township and village enterprises 208 visibility and catching-up problems 211 China Minmetals 220 Chinese Academy of Sciences 219 Chiron 114 CIBA-Geigy 104 Cisco 94, 96, 116 CNC (computer numerically controlled) tools codification of knowledge 35 development in Japan 147 diffusion in automotive 58 first employed in aerospace 38 paradigm shift in machinery 56 CNOOC 220 codetermination of employees Germany 69–71 possible introduction in Taiwan 194 Sweden 134 codification of knowledge and difficulty of replication 14, 36 effects on visibility and appropriability 34 combinatorial chemistry 41 Combined Cycle Gas Turbine 57 Commerz 127 Compaq 228 competence-destroying innovation see technological paradigm: competence- destroying innovation Competence-enhancing innovation see technological paradigm: competence-enhancing innovation Competitive Advantage of Nations 27 complementary assets and technologies and appropriation of returns of innovation 14 component-based development of software 49 computer numerically controlled machine tools see CNC conflict of interest in outsider systems 66, 98 consumer chemicals 51 control by banks 136 categorisation of countries by ownership and 6

direct shareholder 15, 74 double divorce of ownership from 66 effects on R&D spending 96 of employees, for their firm-specific investments 22 by families 59, 76–81, 88, 93, 102–4, 129–30, 133, 157–8, 164, 183, 190, 208 indirect shareholder 65–6, 210 by informed shareholders 10 in insider systems 20–1 by insiders 64, 224 management 65, 87 market for corporate 18 oriented systems 6 in outsider systems 15–20 polarity of 72–3 by the state 159, 166, 183 Coordinated Market Economies see varieties of capitalism: definition coordination 71–2 among actors in various countries 67 business 67, 75 by government 67–8, 75, 154 informal in Italy 67, 195 informal in Taiwan 68 inter-firm 143 inter-functional 231 by kigyo shudan in Japan 67 non-market 67 role in the development of just-in-time practices 149 Soskice’s measure of 67 corporate governance broad definition 1, 67 current trends 234 narrow definition 64 cross-holding 20, 27, 40, 66–7, 80, 101, 128, 131, 132, 155, 156, 185, 190, 234, 268 cross-subsidising in Samsung 173 customers aerospace 40 chemicals 52 China 213 customers 40 female in automotive 59 France 165, 182 Germany 136 ICT hardware 45–6 inclusion of 136 Italy 189, 204 Japan 131, 136

302

Index

customers continued Korea 164, 172, 177 lead 27, 55 machinery 55–6 pharmaceuticals 43 software and IT services 50 as a source of competitive advantage 27 as stakeholders of innovation 9–10, 13–15, 35, 39, 54, 121–2, 131 Switzerland 106, 136 Taiwan 191, 193 UK 101, 271 Daewoo 165, 170, 180, 181 DaimlerChrysler 167 Data Systems Co Ltd now Samsung SDS 176 dedicated biotechnology firms (DBF) 41, 56, 58, 111, 113 Delaware 93, 95, 225 Dell 1 Deutsche 84, 127, 167, 279 Development Funds of the Executive Yuan 192 difficulty of replication and appropriation of returns of innovation 14 digital technology 47, 263 direct shareholder control see control: direct shareholder Direction Générale des Télécommunications 174 District of Mirandola 188 domestic rivalry importance of, in competitive advantage 27 Doerr, John 94 Dresdner 127 dual board system of corporate control 127 dual class share system see Sweden: dual class share system DuPont 19, 92, 93, 124 Dyestuffs 40 Dynamics v. CTS: 93 EADS 38, 108, 166, 167, 168, 279, 280 Edgar v. MITE 93 effectiveness of patents aerospace 38, 39 and appropriability 35 automotive 53, 59 changes over time 35–6

chemicals 52, 53 ICT hardware 39, 44–6 machinery 53, 56 pharmaceuticals 39, 42 and scale 37 software and IT services 50 and stakeholder spill-overs 31, 34 EFIM 186 Electric motors/generators 57 Electrolux 140, 266 Elf Aquitaine 156 embedded software 144 employee inclusion 10, 23, 34, 106, 129, 136, 150 aerospace 38 automotive 59 China 213 Stock Ownership Plan 95 Japan 236 Germany 236 US 95–6, 240 UK 101 France 154, 156 Germany 128 Italy 188, 195, 205 Japan 130 Korea 159 machinery 55 Taiwan 195 US 94 protection 7, 68, 69, 70, 71, 75, 78 representation 69 shareholding 22, 236 support of direct shareholder control 95 employees contribution to an organisation’s learning 9, 13–15, 35, 38, 42–3, 45, 49, 50, 55–6, 59 and firm-specific human capital 22 importance of long-term relationships with see employee inclusion and secrecy 9, 14 ENA 156 engagement China 224 family-state capitalism 195 importance of, in case of low visibility 31, 90 shareholder capitalism 106–7 stakeholder capitalism 136 state-led capitalism 164 Enron 17, 22, 234 enterprise software 48, 50, 62, 119–20, 143, 144, 177, 201, 226

Index 303 entrepreneur as defined by Schumpeter 5 Ericsson 116, 132, 139, 140, 141, 143, 176, 266, 275 Etna Valley 188 Fairchild 170 family businesses China and Italy 75 evolution of 75 Germany 127 in insider systems 20 Italy 184 Japan 129 Korea 70, 158 relationship with management 66 Sweden 132 Taiwan 190 UK 96 US 92 family capitalism see family business Fanuc 57, 147 Federation of Korean Industries 160 Fiat 59, 187, 189, 205, 206, 268, 270, 274, 275 Filiere Électronique Action Plan 173 finance and corporate governance in the economics of innovation literature 5 effects on investments and innovation 8–11 financial capital role in technological revolutions 25 commitment to finance the uncertain learning process 23 constraints to technological development 87, 137 institutions France 153 Italy 185 Japan 130 ownership by 81 as shareholders in outsider systems 7, 64, 66 UK 97, 99 systems insider-dominated and outsiderdominated 6, 7 stock-exchange and bank-based 5 Finmeccanica 197 firm-specific understanding

China 212 family-state capitalism 195 of Haus-banks in Germany 83 importance of, in case of low visibility 13, 20, 31 shareholder capitalism 106 stakeholder capitalism 136 state-led capitalism 164 of venture capitalists 84 FMS (Flexible Manufacturing System) 56 Ford 19, 58, 59, 92, 93, 96, 124, 270, 280, 287 ‘Fordist’ system of production 264 Germany 58 UK 124 foreign owners/investors 81, 97, 133, 154, 170, 185, 186, 211, 219, 221, 235, 241 France aerospace 165–9 Airbus 167 automotive 180–2 banks 154–6 chemicals 177–9 diffusion of Just-in-Time 155 employee inclusion 154 engagement 164 firm-specific understanding 164 government 152–6, 161–5, 166–9, 173–4, 177–83 Grande Ecoles 153, 156, 167 hard core of long-term investors 154 ICT hardware 170–5 machinery 179–80 management autonomy 164 nationalisation and privatisation processes 153 pharmaceuticals 169–70 pressures for reconfiguration 162–3 small and medium enterprises as a lower form of industrial life 155 software and IT services 175–7 stakeholder inclusion 155, 164 synthesis of performance 227 transformation of CG system 155 use of stock options 156 Viènot report and first appearance of foreign institutional investors 154 France Télécom 154, 175 Friuli Venezia Giulia 188, 200 Fujitsu 48, 120, 143 Gabrielsson, Assar 149 gas turbines 57

304

Index

Gates, Bill 94 GE 38, 57, 58, 110, 230 Genentech 111 General Motors (GM) 19, 92–3, 96, 124, 181, 241, 264 General Park Chung Hee 157 general purpose equipment 56 general purpose minicomputer 43 genetic engineering 41 Germany aerospace 137–8 automotive 148–51 banks 127–8 chemicals 145–6 codetermination 128 employee inclusion 136 engagement 136 family business 127 firm-specific understanding 136 government 128 ICT hardware 139–42 industry-wide expertise 134 large firms 128 machinery 146–8 management autonomy 136 pharmaceuticals 138–9 pressures for reconfiguration 135 role of banks 127–8 software and IT services 143–4 stakeholder inclusion 136 synthesis of performance 226 Girolamo, Paul 113 Glass–Steagall Act 93 Glaxo 113, 288 globalisation as a consequence of ICT revolution 230 effects on ICT hardware 45 effects on shareholder capitalism 225 effects on stakeholder capitalism 150 Sweden 133 GM see General Motors Goldstar 170 Google 1 government China 75, 208–21, as a customer in aerospace 40 family-state capitalism 88 France 152–6, 161–5, 166–9, 173–4, 177–83 Germany 128 as an insider 6, 20, 65, 234 Italy 75, 186–7, 197, 206 Japan 129 Korea 157–65, 169–70, 177

as owner 71–4, 79, 81, 85, 88, 161, 191, 195 source of cohesion among firms 67–8, 71, 75, 154 stakeholder capitalism 88 state-led capitalism 84 Sweden 131–2, 137 Taiwan 191–6, 201, 207 UK 100, 110 Guanxi see China: guanxi-contacts guided discovery approach 41 Haangul and Computer Co. see Haansoft Haansoft 176, 177 Haier 220 Hambrecht & Quist 192 Handelsbank group 132 Hanson Trust 122 Hewlett-Packard 44, 116, 228 high-throughput screening 41 Hitachi 48, 120, 143 Hoechst 139 Hoffmann-La Roche 104 Honda 89, 130, 149, 216, 270 Huawei 216, 218, 219, 220 hybrid corporate governance system danger of crony capitalism 242 employees 240 engagement of shareholders 239 risk of active management 241 Hyundai 157, 165, 172, 173, 180, 181, 216, 222, 277 reforms 181 IBM 48, 63, 119, 120, 173, 220, 228, 263 ICI 113, 122 ICT hardware appropriability 45–6 customers 45–6 effectiveness of patents 39, 44–5 France and Korea 170–5 Italy and Taiwan 198–201 Japan, Germany and Sweden 139–42 need for reconfiguration 44, 46 opportunity 44–5 paradigm shift 43, 46–7 secrecy 45–6 statistics 248–51 suppliers 45–6 US, UK and Switzerland 114–19 visibility 45–6 ICT technological revolution effects on CG 228

Index 305 engagement 234 organisations’ structures 229 visibility 233 lower-level employees’ initiative 232 industrial district(s) 27, 56, 96 Industrivärden 132, 133, 135, 136 industry-wide expertise current trends 239 of financers 12, 20 shareholder capitalism 105 stakeholder capitalism 134 state-led capitalism 161 of venture capitalists 94 information asymmetry 17–18 between principal and agent 16 informed shareholder support in building relationships with stakeholders 10 INRIA 175, 268, 284 insider system see ownership and control: categorisation of countries by integrated circuit 46 Intel 46, 94, 96, 116, 173, 263 intellectual property protection of 14, 34, 36, 44, 49, 50, 58, 62, 225, 282 inter-firm relationships automotive 150 chemicals 52, 122 districts 27 enterprise software 201 Italy 189 Japan 160 pharmaceuticals 262 shareholder capitalism 105 software and IT services 50 Switzerland 92 Taiwan 193 interlocking directorates in coordinated market economies 67 Internet 44, 295 investor 74, 132, 133, 135, 136, 140, 279, 286 IT services 29, 32, 33, 47, 50, 119, 120, 143, 144, 175, 176, 201, 202, 252 Italy aerospace 196–8 automotive 205–7 banks 185–186, 268 chemicals 202–3 dualism of the economy 184 employee inclusion 188 engagement 195 family business 184

Fiat and the Agnellis 205 financial institutions 185 government 75, 186–7, 197, 206 ICT hardware 198–201 industrial districts 189 inter-firm relationships 189 machinery 203–5 management autonomy 196 Mediobanca 185 pharmaceuticals 198 pressure for reconfiguration 196 public sector 186 software and IT services 201–2 stakeholder inclusion 189 synthesis of performance 227 venture capitalism 186 Japan aerospace 137–8 automotive 148–51 banks 129–31 chemicals 145–6 employee inclusion 130 engagement 136 family business 129 firm-specific understanding 136 ICT hardware 139–42 industry-wide expertise 134 inter-firm relationships 160 Kigyo shudan 129 machinery 146–8 management autonomy 136 pharmaceuticals 137–8 software and IT services 143–4 stakeholder inclusion 131, 136 synthesis of performance 226 John C. Parsons Corporation 56 Kia 180, 181 kigyo shudan (horizontal industrial groups in Japan) 67, 129, 131, 149 Korea aerospace 165–9 automotive 180–2 banks 157–60 chemicals 177–9 Confucian tradition, effects on labour relations 159 employee inclusion 159 engagement 164 family business 158 firm-specific perceptiveness 164 government 157–65, 169–70, 177 ICT hardware 170–5

306

Index

Korea continued machinery 179–80 management autonomy 164 pharmaceuticals 169–70 small and medium enterprises 161 software and IT services 175–6 stakeholder inclusion 160, 164 state control over the chaebol 159 synthesis of performance 227 tensions in labour relations 160 venture capital 161 Korea Computer Center 176 Korea Trigem 170 Korean Aerospace Industries Ltd 165 Korean Employers Federation 160 Lenovo 216, 219, 220 LG 172, 173, 222 Liberal Market Economies see varieties of capitalism: definition Liquid crystal 15, 46 London Stock Exchange 96 Lucky Goldstar 157 machinery appropriability 56 customers 55–6 effectiveness of patents 53, 56 employee inclusion 55 France and Korea 179–80 Italy and Taiwan 203–5 Japan, Germany and Sweden 146–8 need for reconfiguration 56 opportunity 57 paradigm shift 54, 56–7 secrecy 57 statistics 254 US, UK and Switzerland 122–3 Makino Milling Machine 147 management autonomy definition 74 effects on innovation 19 effects on management behaviour 18 family-state capitalism 196 shareholder capitalism 106 stakeholder capitalism 136 state-led capitalism 164 market for corporate control see control: market for corporate Matra 168, 173 Matra Hautes Technologies 168 Matsushita 89, 129, 170, 171, 216 Mazda 149 Merck 43, 262, 280, 288

Microprocessor 44 Microsoft 19, 48, 50, 93, 94, 96, 120, 177, 263 Middleware software 48, 119, 120, 143, 144, 175, 201, 227 Minority investors protection of 76 MIT 56, 147, 275, 296 Mitac 193, 199 Mitsubishi 146, 270 Mitsubishi Electrical 170 Mitsui 146 monitoring active, by shareholders 17 by banks 83, 154 by Mediobanca 185 Montedison 202, 268 Moore’s Law 46 Motorola 96, 170, 173 multinationals role in British ICT industry 120 role in the development of Taiwanese semiconductor industry 199 Murdoch, Rupert 93, 225 NEC 48, 120, 143, 170, 173, 263 Nestlé 103 New Chemical Entities 40 News Corp 93 Nissan 182, 270 Nokia 47, 108, 116, 139, 140, 173, 264, 266, 272 non-executive directors 17, 65, 75, 242 Novartis 104, 111, 114 Olivetti 186, 187, 270 ONERA 166 opportunity 12, 15 aerospace 37 automotive 58 chemicals 51–2 and finance 89, 94 ICT hardware 44, 45 machinery 57 and need for reconfiguration 24, 31, 33, 34 pharmaceuticals 42 software and IT services 49 optical fibre cables 47 organic chemicals 40, 50, 52, 202 organic, internal growth 18, 82, 102 organisational integration to cope with collective learning 23 Original Design Manufacturing (ODM) 172, 193, 199, 268

Index 307 Original Equipment Manufacturing (OEM), 172, 193, 199, 268 Orion 172 outsider system see ownership and control ownership and control categorization of countries by 6 path-dependence and sectoral specialisation 26 pension funds and double divorce of ownership from control 66 Personal Computer 44 Petrochina 220 Peugeot 59, 287 pharmaceuticals appropriability 42 customers 43 effectiveness of patents 39, 42 France and Korea 169–70 inter-firm relationship 262 Italy and Taiwan 198, Japan, Germany and Switzerland 138–9 need for reconfiguration 42 opportunity 42 paradigm shift 41 secrecy 42 statistics 247 US, UK and Switzerland 111–14 visibility 42–3 Pharmacia 139 Philips 29, 116, 135 Plan-Calcul 173 poison pills 66 POSCO 157, 216 Pratt & Whitney 13, 38, 110, 224 pressure for shareholder value shareholder capitalism 105 stakeholder capitalism 136 state-led capitalism 164 principal/agent, theory 16 private equity diffusion in shareholder capitalism 82, 237 and technological revolutions 25 Quandt 89 Racal 125 random screening approach 40 RCA 199 reconfiguration, need for aerospace 38 automotive 58

chemicals 51 ICT hardware 44, 46 machinery 56 pharmaceuticals 42 software and IT services 49, 50 relational banking 83 Renault 154, 182, 281 Revealed Technological Advantage 1, 109, 244, 258 Roche 111, 114 Rock, Arthur 94 Rolls-Royce 13, 38, 58, 109, 110, 279, 280, 286 Royal Dutch/Shell 29 SAAB 137 Samsung 116, 157, 162, 165, 170, 172, 173, 174, 216, 222, 283, 286 Sandoz 104 Sanofi-Aventis 108 Sanofi-Synthelabo 170 Sanyo 170 SAP 48, 120, 143, 175, 202, 230, 273 satellite earth station 47 scale of production effects on visibility and appropriability 36 Scandinavia 232 Scania-Vabis 148, 149 secrecy aerospace 38 and appropriability 34, 36, 39, 53 automotive 59 chemicals 51, 52 and dynamic capabilities 14 ICT hardware 45–6 machinery 57 pharmaceuticals 42 software and IT services 50 and visibility 9, 15 Seiko 170 Sema Group 176 Semiconductors 45 Servomechanisms Laboratory, MIT 56 shark repellents 234 short-termism in outsider systems 17, 96, 232, 236 Siemens 139, 140, 147, 172, 236 Signetics 170 Sinopec 220 SK Telecom 173 Skandinaviska Enskilda Bank 132 Slump and Krueger scandal 132 Snecma 166

308

Index

Societè Gènèrale 156 software and IT services appropriability 49 customers 50 effectiveness of patents 50 France and Korea 175–6 inter-firm relationships 50 Italy and Taiwan 201–2 Japan, Germany and Sweden 143–4 need for reconfiguration 49–50 opportunity 49 paradigm shift see ICT hardware statistics 252 US, UK, and Switzerland 119–21 visibility 49 South Korea’s Defence Development Agency 165 specialised engineering firms 51 specialised suppliers 55 specialty and fine chemicals 51 stakeholder inclusion and appropriability 14 concept 31 family-state capitalism 195 and need for reconfiguration 15 shareholder capitalism 106 stakeholder capitalism 136 state-led capitalism 164 standard software 48, 49, 119, 143, 144 state see government steam turbine 57 stewardship theory, definition 21 stock-exchange financial system see financial systems: stockexchange and bank-based stock option(s) as a mean of aligning incentives 17, 19, 22, 66, 82, 93, 95–6, 106, 156, 160, 164, 194, 236–7 Sud-Aviation 167 Sulzer 103 Sumitomo 146 suppliers aerospace 40 automotive 59 chemicals 52 ICT hardware 45–6 machinery 55 as part of incumbent production capital 25 role in visibility and appropriability 34 software and IT services 50 as a source of competitive advantage 27

as stakeholders of innovation 9, 10, 13, 14, 15, 35, 39, 54 supremacy of ownership in shareholder capitalism 72 Svenska Handelsbanken 232 Sweden aerospace 137–8 automotive 148–51 banks 132 chemicals 146 clusters of firms 131 dual class share system 132–3 family business 132 government 131–2, 137 ICT hardware 139–42 large firms 132 machinery 146–8 pension funds 132 pharmaceuticals 138–9 social democratic plan 132 software and IT services 143–4 synthesis of performance 226 trust 133 unions 132 Switzerland aerospace 107–10 automotive 124 banks 102–4 chemicals 121–2 family business 102 ICT hardware 114–19 inter-firm relationships 92 interlocking directors 102 large firms, role in the economy 102 levels of analysis 3 machinery 122–3 main electronics sectors 115 managerial autonomy 104 pharmaceuticals 111–12 software and IT services 119–21 venture capital 104 systems of innovation 3–4 Taiwan aerospace 196–8 automotive 205–7 banks 190–193, 269 chemicals 202–3 employee inclusion 194 family business 190 government 191–6, 201, 207 Hsinchu Science Park 192 human resources 191 ITRI 191

Index 309 venture capital 192 ICT hardware 198–201 inter-firm relationships 193 large firms 193 machinery 203–5 PC cluster 199 pharmaceuticals 198 relationships with foreign transnational corporations 193 software and IT services 201–2 synthesis of performance 228 Taiwan Semiconductor Manufacturing Company 192 takeover 18–20, 65, 89, 90–7, 104, 110, 122, 130, 135, 156, 164, 183, 186, 224, 235–6, 240, 242, 270–1, 292 protection devices 18 TCL 216, 218, 220 team-working in the software development process 49 technological advantage how to measure 1 capability difficulties in analysing 8 opportunity definition 12 paradigm competence-destroying innovations 10, 11, 15, 25, 46, 49–50, 60, 88, 95, 119, 143, 175, 196, 226, 262 competence-enhancing innovations 11 and direction of technological change 10 shift 33, 34, 39, 54, 263 aerospace 39 automotive 54 chemicals 54 effects of ICT 228, 233–4, 329 ICT hardware 39, 43, 46–7 machinery 54, 56–7 pharmaceuticals 39, 41 software and IT services see ICT hardware regimes demands upon financial and corporate governance systems 11 revolution definition 25 uncertainty see technological capability: difficulties in analysing

telecommunications equipment 47 Thales 166 Third Italy 74 Thompson 175 Thomson 173–4, 220, 277 Toshiba 143, 170 Total for Elf-Aquitaine 156 Toyoda 81, 89, 130, 266 Toyota 23, 59, 81, 84–5, 89, 129–30, 149–50, 287, 293 TRIPS agreement 36 trust in Chinese and Italian cultures 75 and extent of development of family capitalism 76 statistics 76 Sweden 133 TSMC 199 UK aerospace 107–10 automotive 124 banks 97–8 British version of venture capital 99 chemicals 121–2 diffusion of new institutional investors 97 era of indirect shareholder control 99 era of management control 98 family business 96 finance capitalism 96 government 100, 110 ICT hardware 114–19 machinery 122–3 pharmaceuticals 111–14 role of large firms in the economy 97 software and IT services 119–21 synthesis of performance 225 the Vodafone case 124 Unilever 29 United Microelectronics Corporation 192, 199 Upjohn 139 US aerospace 107–10 automotive 124 banks 92–3 chemicals 121–2 disengagement of banks after Great Crash 93 employee shareholdings 94 extent of direct shareholder control 95 family business 92 ICT hardware 114–19 machinery 122–3

310

Index

US continued main electronics sectors 115 pharmaceuticals 111–14 software and IT services 119–21 synthesis of performance 223 venture capital, role in the development of high-tech industry 94 US Air Force 56 user-producer interaction as a source of innovation 14 Valentine, Donald 94 varieties of capitalism definition 7 Veneto 189, 194 venture capital China 211, 224 in different countries 83 effects on R&D spending 96 family-state capitalism 85 importance in setting up new firms 12 Italy 186 reconfiguration and high opportunity 24, 31, 49, 88–9 shareholder capitalism 82, 105 software and IT services 49 stakeholder capitalism 84 state-led capitalism 161–2, 164 Sweden 135

Switzerland 104, 113 Taiwan 192 UK 100 US 94, 96 Vioxx 43 visibility aerospace 38 and appropriability 34–5 automotive 60 chemicals 51–2 ICT hardware 45–6 of innovation, definition 12–13, 31, 34 and insiders 20 pharmaceuticals 42–3 and scale of production 36 and secrecy 15 software and IT services 49 Vodafone 124, 126, 271 Volkswagen 60 Volvo 148, 149, 267 Walkman 46 Wallenberg 132, 136, 138, 266, 267 Walmart 19, 93 Wanxiang 220 works councils 69, 70 Zeneca 139 Zhejiang 74