Coordinated Market Economy

According to the approach laid out by Peter Hall and David Soskice in their research on capitalism, coordinated market economies (CMEs) are national economies that display a high share of nonmarket institutions in the governance of company relations. Focused on long-term outcomes, coordination among firms takes place largely through nonmarket means, such as extensive relational or incomplete contracting and network monitoring based on the exchange of private information inside of networks. These mechanisms of company governance tend to differ from those in countries that the authors describe as liberal market economies (LMEs), that is, systems in which competitive market arrangements are much more prevalent.

In each type of economy, strong complementarities exist between institutions from such realms as industrial relations, vocational training and education, corporate governance, interfirm links, and internal company relations. Conceived as tightly coupled institutional systems within which the presence of one institution increases the returns from another, both CMEs and LMEs endow their constitutive firms with a comparative institutional advantage for particular production strategies. While LME institutions provide an edge to service-sector companies and the establishment of new industries, CME institutions have proven particularly adept at supporting companies in mature industrial sectors (e.g., machine tools or automobiles). CME structures are most prevalent in Germany, many other continental European countries (Austria and Switzerland, the Benelux, and Scandinavia), as well [Page 158]as in Japan. In contrast to the successes of LMEs in radical innovation, CMEs tend to be better in incremental innovation, which is sustained by large skill and capital investments in specific technologies and long-term relationships among economic actors.

The distinction between coordinated and liberal market economies is the most recent embodiment of a long-standing research tradition that has attempted to account for the distinctiveness of national models of capitalism among the advanced industrialized countries. Hall and Soskice's focus on the firm as a strategic actor contrasts with earlier literature that sought to explain national differences in economic structures and performance through national cultures, relative state strength, and the degree of corporatism in state-society relations. The authors claim to provide microfoundations for macrodivergences across economies by embracing the assumptions of the new institutional economics. While other contributors to the literature on the varieties of capitalism have questioned the need to provide microfoundations, the success of the authors' attempt to do so and the appropriateness of the LME/CME macrodistinction shows that the importance of the authors' contribution remains uncontested.

Germany is often invoked as the ideal typical case of coordinated market economies. Many areas of the German economy feature institutions that promote nonmarket coordination between and within the companies rather than market institutions that require companies to pursue unilateral strategies. For example, high levels of patient capital are available through a system of company finance dominated by universal banks. Labor market institutions, such as collective wage bargaining, codetermination, and restrictions on layoffs, promote labor flexibility internally within the company at the expense of external labor market flexibility. Rather than individual skill acquisition in the market, public tertiary education and apprenticeship schemes administered collectively by employers and unions are widely available.

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