Carla I. Koen. Comparative International Management
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across different ones. They develop a greater degree of employer–employee interdepend-
ence and trust of skilled workers than employers in compartmentalized and state-organised
business systems’ (Whitley, 1999: 43–4). Prominent examples are to be found in western
continental Europe, in German-speaking countries, and also in Scandinavia.
Highly coordinated business systems are also dominated by alliance forms of owner
control and, in addition, have extensive alliances between larger companies, which are
usually conglomerates, and a differentiated chain of suppliers. Employer–employee inter-
dependence is high, and a large part of the workforce is integrated into the enterprise in
a more stable way. Japan is the most prominent example of this type of system.
Whitley’s typology is not the only one that has been developed within the insti-
tutional literature, but in organization studies in Europe it is the most frequently used and
most differentiated one.
3
Typologies are, of course, very crude tools that help us to sketch
broadly the differences between, say, Korea and Japan, but that are unable to capture the
more specific differences thus failing on more demanding analysis. In general, and also in
Whitley’s case, typologies fail to explain why a particular country develops a specific type
of business system at a particular time. In other words, there is a lack of theory building.
Typologies are useful, though, in forcing us to identify linkages between different insti-
tutional domains (Sorge, 2003).
Background versus proximate institutions
In considering the key social institutions that influence the sorts of business system that
become established in different market economies, and the ways in which they vary,
Whitley (1992a: 19) distinguishes between more basic, or ‘background’ institutions and
‘proximate’ institutions.
Background institutions are social institutions (norms and legal rules such as property
rights) that structure general patterns of trust, cooperation, identity and subordination in
a society (i.e. commitment of employees, corporate culture) (see Table 4.3).
They are reproduced through the family, religious organizations and the education
system, and often exhibit considerable continuity. They are crucial because they structure
exchange relationships between business partners, and between employers and
employees. They also affect the development of collective identities and prevalent modes
of eliciting compliance and commitment within authority systems. Variations in these
institutions result in significant differences in the governance structures of firms, the
ways in which they deal with each other and other organizations, and prevalent patterns
of work organization, control and employment. For example, how trust is granted and
guaranteed in an economy especially affects the level of inter-firm cooperation and tend-
ency to delegate control over resources. Another example is the impact of a society’s level
of individualism or collectivism. Individualistic societies such as the USA and the UK tend
to have ‘regulatory’ states, a preference for formal, contractual regulation of social
relationships, and market-based employment and skill development systems.
Proximate institutions are more directly involved in the economic system and constitute
the more immediate business environment. They are often a product of the industrializa-
tion process and frequently develop with the formation of the modern state (see Table 4.3).
NATIONAL DIVERSITY AND MANAGEMENT 161
3
Soskice (1991, 1994) develops a similar but less diversified typology.
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162 COMPARATIVE INTERNATIONAL MANAGEMENT
Source: Whitley (1999: 34).
Table 4.2 Six types of business system
Business system
features
Business system
type
Fragmented Coordinated
industrial district
Compartmentalized State organized Collaborative Highly coordinated
Ownership
coordination
Owner control
Ownership
integration of
production chains
Ownership
integration of
sectors
direct
low
low
direct
low
low
market
high
high
direct
high
some to high
alliance
high
limited
alliance
some
limited
Non-ownership
coordination
Alliance
coordination of
production chains
Collaboration
between
competitors
Alliance
coordination of
sectors
low
low
low
limited
some
low
low
low
low
low
low
low
limited
high
low
high
high
some
Employment relations
Employer–employee
interdependence
Delegation to
employees
low
low
some
some
low
low
low
low
some
high
high
considerable
Hong Kong Italian districts Anglo-Saxon
countries
France
Korea
Germany
Scandinavian
countries
Japan
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Proximate social institutions affect forms of business organization and, in turn,
become influenced by long-established and successful business systems. While there is no
doubt about the existence of these causal relationships, the overemphasis of the business
systems approach on ‘thick’ description is not matched by equally meticulous efforts at
spelling out and theorizing the causal relationships between the relevant variables (Foss,
1999). This is perhaps due to the fact that the approach is ‘aggregative and is not rooted
in any spelled-out theory of individual behavior’ (Foss, 1999: 4). Aside from being a
theoretical flaw, the neglect of the actor within the framework is also a lost opportunity to
explain (institutional) change and institutionalization. As is explained in more detail
below, the societal effect approach surpasses this problem by using structuration theory
(Giddens, 1986) or the ‘actor–structure’ argument.
Major societal institutions
Unlike societal effect analysis, the business systems approach is not open-ended but con-
centrates on a fixed number of dominant societal institutions that help to explain the
variations between the business systems in different countries. The framework of a priori
defined institutions and business system features, which have to be researched within the
approach, helps the researcher to focus during his/her analysis, and probably contributes
to the widespread use of the framework.
According to Whitley, the crucial institutional arrangements, which guide and con-
strain the nature of ownership relations, inter-firm connections and employment
relations – or, in other words, that help us to explain business systems – are argued to be
those governing access to critical resources, especially labour and capital. In particular,
these institutions are the state, the financial system, and the skill development and control
systems (Table 4.3).
Particularly important aspects of the state are its dominance of the economy, its
encouragement of intermediary economic associations and its formal regulation of
markets. The crucial aspect with regard to the financial system concerns the processes
by which capital is made available and priced (see Chapter 6 for an extended expla-
nation of this topic). A central distinction is made between capital-market-based and
credit- or bank-based financial systems. In the former, resources are allocated through
competition in capital markets, whereas in the latter they are allocated by the state or
by financial institutions. In terms of the skill development and control systems,
important factors are, first, the types of skill produced by education and training
systems, and the extent to which employers, trades unions, and the state are involved
in developing and managing such systems. This area also concerns the organization
and control of labour markets, in particular the strength and organization of inde-
pendent trade unions and the coordination of bargaining (see Chapter 5 for a
discussion of this topic).
Connections between dominant institutions and
business system features
In the same way as the characteristics of business systems are seen as interconnected,
interrelations between the institutions are also stressed. The political, financial and labour
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164 COMPARATIVE INTERNATIONAL MANAGEMENT
institutions, together with cultural features, are argued to work interdependently to
structure business systems. Hence the explanation of differences between individual busi-
ness systems, and of changes in their characteristics, depends on an analysis of all the
major institutions and how they interdependently structure the specific form of economic
organization that has developed.
The connections between dominant institutions (Table 4.3) and business system fea-
tures (Table 4.1) enable us to identify the different institutional contexts that are
associated with each of the six types of business system outlined in Table 4.2.
4
In general,
the overall level of organizational integration of economic activities in an economy is
argued to be connected to the existence and nature of general coordinating institutions in
the wider society. Specifically, low levels of state risk-sharing, weak intermediaries and low
market regulation, coupled with weak unions, a poor public training system and low trust
in formal institutions limit the degree of organizational integration in an economy. More
organizationally integrated business systems develop in societies where institutional
mechanisms for managing uncertainty and trust are more established, and the political
and social order encourages collaboration between social actors.
Fragmented business systems
As Whitley explains, ‘fragmented business systems, then, develop in particularistic business
environments with low trust cultures where formal institutions are unreliable, risks are dif-
ficult to share, and the state is at best neutral, and at worst predatory’ (Whitley, 1999: 59).
5
Source: adapted from Whitley (1999: 48).
Table 4.3 Key institutional features structuring business systems
Proximate institutions
The state
Dominance of the state and its willingness to share risks with private owners
State antagonism to collective intermediaries
Extent of formal regulation of markets
Financial system
Capital market or credit-based
Skill development and control system
Strength of public training system and of state–employer–union collaboration
Strength of independent trade unions
Strength of labour organizations based on certified expertise
Centralization of bargaining
Background institutions
Trust and authority relations
Reliability of formal institutions governing trust relations
Predominance of paternalist authority relations
Importance of communal norms governing authority relations
4
Foran explanation of the link between dominant institutions and business system features see Whitley(1999: 54–9).
5
The following explanation of the institutional context of different business system types draws on Whitley
(1999: 59–64).
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Coordinated industrial districts
Coordinated industrial districts develop and continue to be reproduced in an institutional
context in which both formal and informal institutions limit opportunism and provide an
infrastructure for collaboration to occur. ‘Local governments, banks, and training organ-
izations typically work with quite strong forms of local labour representation in these
situations to restrict adversarial, price-based competition in favour of high-quality, inno-
vative strategies based on highly skilled and flexible labour. Firm size is limited in these
localities by strong preferences for direct owner control by ‘artisanal’ entrepreneurs and
consequent high levels of skilled labour mobility, often coupled with preferential tax and
credit arrangements for small firms’ (Whitley, 1999: 61).
Compartmentalized business systems
Compartmentalized business systems develop in arm’s length institutional contexts with
large and highly liquid markets in financial assets and unregulated labour markets with a
highly mobile workforce. ‘States are here regulatory rather than developmental, and often
quite internally differentiated. . . . Unions may be influential at times but are usually
organized around craft skills rather than industries, and bargaining is decentralized.
Practical manual worker skills are not highly valued and training in them is typically gov-
erned by ad hoc arrangements with little or no central coordination. . . . Such a relatively
impoverished institutional infrastructure restricts organizational integration between
ownership units and leads to a strong reliance on ownership-based authority relations for
coordinating economic activities’ (Whitley, 1999: 61).
State-organized business systems
‘State-organized business systems develop in less pluralist, dirigiste environments where
the state dominates economic decision-making and tightly controls intermediary associ-
ations. . . . Firms and their owners are highly dependent on state agencies and officials. As
a result, they delegate little to employees and find it difficult to develop long-term commit-
ment with business partners or competitors’ (Whitley, 1999: 61–2).
Collaborative and highly coordinated business systems
‘In contrast, both collaborative and highly coordinated business systems are established and
reproduced in more collaborative institutional contexts that encourage and support cooper-
ation between collective actors. The state here performs a greater coordinating role than in
the previous case, and encourages the development of intermediary associations for mobi-
lizing support and implementing collective policy decisions’ (Whitley, 1999: 62). Markets
are typically quite regulated in these societies, limiting the mobility of skilled workers and
the price-based allocation of capital through impersonal market competition. ‘Similarly,
these kinds of business systems are much more likely to develop in economies with credit-
based financial systems in which the providers of capital are strongly interconnected with
its users and cannot easily exit when conditions alter’ (Whitley, 1999: 62). ‘Corporatist-type
bargaining arrangements based on strong unions often lead to considerable
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employer–employee collaboration here. . . . Often organized around strong public training
systems in which strong sectoral or enterprise unions cooperate with employers, labour
systems in these economies encourage investment in high levels of skills which are cumu-
lative and linked to organizational positions’ (Whitley, 1999: 62). Whitley also adds that
‘Additionally, societies where trust in the efficacy of formal institutions governing exchange
relations and agreements is considerable are more likely to encourage joint commitments
between the bulk of the workforce and management to enterprise development than those
where trust is overwhelmingly dependent on personal obligations’ (Whitley, 1999: 62).
Whitley concludes by stating that ‘Essentially, I suggest that these result from vari-
ations in the extent of institutional pluralism across societies, especially with regard to
those governing the organization and control of labour power, and the concomitant dom-
inance of the state’s coordinating role. Highly coordinated business systems are more
likely to develop and continue in societies where the state dominates the coordination of
economic development and the regulation of markets, as distinct from those where banks,
industry associations, and similar organizations perform coordinating functions indepen-
dently of state guidance’ (Whitley, 1999: 62–3).
‘Perhaps, even more important in separating the two types of business system, though,
are the autonomy and influence of unions and other forms of labour representation in
policy-making processes’ (Whitley, 1999: 63). Collaborative business systems develop
when unions are strong at the national and sector level. Strong unions at the national level
limit the capacity of state–business coalitions to coordinate and integrate economic devel-
opment and restructuring on a significant scale. In particular, strong sector-based unions,
involved in national policy networks, limit state coordination of economic changes across
sectors. Additionally, powerful national unions, coupled with strong public training
systems, limit worker dependence on particular employees, which, in turn, restricts the
extent of organizational integration of manual workers within firms. Whitley adds that
‘centralized bargaining, collaboration in the management of training systems, and other
factors do, of course, encourage greater integration of the bulk of the workforce in many
firms in continental Europe than in the Anglo-Saxon economies’ (Whitley, 1999: 63).
Societies, such as Japan, that develop highly coordinated business systems have less
strong unions at the national and sector level. Japan has company-based unions, which
do not form a strong counterweight against state dominance of economic coordination.
Japan has limited public training systems. Training is organized at the company level,
resulting in high employer–employee interdependence.
Conclusions
To sum up, differences in economic organization or business systems arise from con-
trasting processes of industrialization and are reproduced by different kinds of
institutional context.
Variations in political arrangements and policies, as well as in the institutions gov-
erning the allocation and use of capital, have major effects on the extent and direction
(vertical/horizontal) of organizational integration.
Equally, the ways that skills are developed, certified and controlled exert significant
influence on prevalent employment relations and work systems, as do the dominant
norms governing trust and authority relationships.
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All these institutional arrangements, in addition, affect the management of produc-
tion and market risks, and structure the ways that dominant firms are organized and
controlled in market economies, as well as the sorts of competitive strategy they pursue.
4.3 Business Systems Research Applied to
Taiwan and South Korea
6
As indicated, the business systems approach argues that different societal contexts or
dominant institutions encourage and constrain the development of distinctive and effec-
tive ways of organizing economic activities, or business systems, which constitute the
dominant hierarchy-market configurations. Of course there are deviant patterns from the
dominant one, but these can easily be identified. For instance, while there are some large
capital-intensive firms in Taiwan, these are either state owned, or controlled and sup-
ported (such as Formosa Plastics), and do not reflect the dominant pattern of specialized,
family businesses interconnected through elaborate personal networks. The focus here is
on forms of business organization in South Korea (henceforth referred to as Korea) and
Taiwan that compete effectively in the world markets or, in other words, on the ways of
organizing competitive economic activities. The analysis of the business systems features
deals with the situation in the 1980s and 1990s. The dominant institutions that together
help to explain these features, and how they do so, are also discussed briefly. The intention
is to help you understand how to apply the business systems approach, as well as to
provide you with a brief account of two less well-known business systems.
The major distinguishing features of the postwar business systems in Korea and
Taiwan are summarized in Table 4.4. These features were established between 1960 and
1990, and remained largely unchanged in the 1990s. Some features are quite similar in
both business systems, particularly those concerned with employment relations and own-
ership control. There are also, however, significant differences between the two; these are
to do with firm size, ownership integration and horizontal linkages in particular.
The Korean business system
Ownership relations
The Korean economy is dominated by very large family-owned and controlled conglom-
erate enterprises called Chaebol (well-known examples are Hyundai, Daewoo and
Samsung). ‘These quite diversified and vertically integrated firms have been the main
agents of industrialization in Korea since the war under the strongly directive and coordi-
nating influence of the authoritarian state’ (Whitley, 1999: 141). They dominate many
manufacturing industries (i.e. the heavy and chemical industries), as well as significant
parts of the service sector – in particular, the construction industry, transport services,
insurance and related financial services. ‘Finally, seven large general trading companies
which are members of the largest ten Chaebol have come to dominate Korea’s export
trade’ (Whitley, 1999: 142).
6
The explanation on these two business systems is based on Whitley’s research (1999: Chapters 6 and 7). For a
more detailed elaboration see the original text, as well as Whitley (1992a).
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‘The Chaebol remain largely family owned and controlled, despite their rapid growth
and state pressure to sell shares on the stock market’ (Whitley, 1999: 142). In the large
Chaebol most of family holdings are indirect in the sense that owner control is exercised
through a number of core companies rather than direct family ownership in all firms. The
smaller Chaebol are more directly dominated by family owners. As Whitley states, ‘This
continuance of high levels of family ownership despite the rapid expansion and very large
size of these conglomerates was facilitated by most of their expansion being funded by
state-subsidized debt which did not dilute family shareholdings. Family ownership con-
tinues to mean largely family control and direction, with most of the leading posts held by
family members and/or trusted colleagues from the same region or high school as the
founding entrepreneur’ (Whitley, 1999: 142). Family ownership also continues to imply
strong central control over decision-making. ‘This high level of direct owner control is
implemented by substantial central staff offices that intervene extensively in subsidiary
affairs. These offices typically deal with financial, personnel, and planning matters,
including internal auditing and investment advice, and some have as many as 250 staff.
. . . The high level of centralized decision-making encouraged considerable integration of
economic activities, as capital, technology, and personnel could be centrally allocated and
moved between subsidiaries’ (Whitley, 1999: 143). The Chaebol are in fact managed as
cohesive economic entities with a unified group culture focused on the owner.
Whitley goes on, saying that ‘These strong owner-controlled large groups of firms are
highly diversified, both vertically and horizontally. According to Hamilton and Feenstra,
most are vertically integrated, with many individual Chaebol business units themselves
being quite integrated and the network of firms increasing this even more so’ (Whitley,
1999: 143). Horizontal diversification is considerable, with the average Chaebol operating
in five different manufacturing industries. For example, Samsung’s 55 firms were active in
textiles, electronics, fibre optics, detergents, petrochemicals, shipbuilding, property devel-
Source: Whitley (1999: 140).
Table 4.4 The postwar business systems of Korea and Taiwan
Business system features Korea Taiwan
Ownership coordination
Owner control
Ownership vertical integration
Ownership horizontal integration
direct
high
high
direct
low except in intermediate sector
high in business groups, low
elsewhere
Non-ownership coordination
Alliance-based vertical integration
Alliance-based horizontal integration
Competitor collaboration
low
low
low
low
limited
low
Employment relations and work management
Employer–employee interdependence
Worker discretion
low except
for some
managers
low
low except for personal
connections
low
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opment, construction, insurance, mass media, healthcare and higher education in the
early 1990s.
The Chaebol have grown extremely fast since the 1950s, with high growth at the
expense of profitability. Detailed analysis of the Chaebol suggests that the objective of the
firms of the large Chaebol is not to maximize profits but to maximize sales. Ownership
rights are held for control purposes more than for income, and, as indicated, growth has
been financed by state-provided and subsidized credit, rather than from retained profits.
Non-ownership coordination
Whitley explains that ‘the large size and self-sufficiency of the Korean Chaebol mean that
they exhibit low interdependence with suppliers and customers and are able to dominate
small and medium-sized firms. Typically, their relations with subcontractors are preda-
tory. As Fields comments: “Core firms are able to increase their working capital by
squeezing the subcontractors associated with the Chaebol . . . the Chaebol are able to keep
the small and medium-sized contractors under their thumbs, pass recessionary shocks on
to them, or even merge with them if it suits their plans.” . . . Relations between the
Chaebol, and between ownership units in general in Korea, tend to be adversarial, with
considerable reluctance to cooperate over joint projects, such as complementary R & D
programmes. . . . New industries especially are often the site of intense competition for
dominance, and the major driving force behind many new investments often appears to
be corporate rivalry for the leading position in them’ (Whitely, 1999: 144–5). In general,
markets are not organized around the long-term mutual obligations that characterize the
postwar Japanese economy, but rather are characterized by predominantly short-term,
single-transaction relationships. ‘These sometimes develop from personal contacts, as
when subcontracting firms are set up by ex-employees. Where cooperation does occur
between firms, direct personal ties between chief executives are usually crucial to
reaching agreements. Alliance-based modes of integration, then, are weak in the post-
war Korean business system’ (Whitley, 1999: 145).
Whitley states that ‘the high degree of competition between the leading Chaebol,
which has been fuelled by the state’s policy of selecting entrants to new industries and
opportunities on the basis of competitive success, has severely limited the development of
independent sector-based organizations in Korea. . . . In the 1980s and 1990s, however,
the umbrella organization, the Federation of Korean Industries, together with a few other
associations, attempted to diverge from and publicly influence state policies’ (Whitley,
1999: 145).
Employment policies and labour management
Whitley’s explanation of employment policies states that ‘In most Chaebol the level of
employer–employee commitment is limited for manual workers. Although seniority does
appear to be important in affecting wage rates, and employers do provide accommodation
and other fringe benefits in the newer capital intensive industries, most notably perhaps
at the Pohang Iron and Steel Company, Korean firms are reluctant to make the sorts of
long-term commitments to their workforce that many large Japanese ones do. Mobility
between firms, both enforced and voluntary, has been considerably greater for manual
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workers – and some non-manual – than is common in the large firm sector in Japan.
Annual labour turnover rates of between 52 per cent and 72 per cent were quite usual in
the 1970s in Korea and were especially high in manufacturing industries. Additionally,
leading firms in Korea sometimes poach skilled workers from competitors rather than
invest in training programs. . . . White-collar employees are more favoured and tend more
to remain with large employers, not least because their pay and conditions are usually
substantially better than they could obtain by moving’ (Whitley, 1999: 145–46).
The centralized and personal nature of authority relations in the Chaebol is accompa-
nied by a largely authoritarian, not to say militaristic, management style. As Whitley
discovered, ‘According to the Japanese managers involved in joint ventures with Korean
firms interviewed by Liebenberg, the Korean management style is characterized by top-
down decision-making, enforcement of vertical hierarchical relationships, low levels of
consultation with subordinates, and low levels of trust, both horizontally and vertically.
Superiors tend to be seen as remote and uninterested in subordinates’ concerns or their
ability to contribute more than obedience. . . . This authoritarian management style
encourages close supervision of task performance’ (Whitley, 1999: 146). In order to
facilitate supervision, the physical layout of offices is arranged in a specific way and tasks
are usually described carefully. Because of the importance of personal authority in the
Korean Chaebol, jobs and responsibilities are determined more by supervisors’ wishes than
by formal rules. ‘Such strong supervision of task performance was allied to considerable
specialization of roles for manual workers. . . . Unskilled workers continue to carry out
relatively narrow tasks without much movement between jobs and skill categories.
However, non-manual workers do appear to be moved between tasks and sections, and
sometimes develop more varied skills, in the larger and more diversified Chaebol ’ (Whitley,
1999: 146). Managers in particular are often transferred across subsidiaries and have
more fluid roles and responsibilities.
Institutional influences on the Korean business system
The dominant institutions structuring the postwar Korean business system stem from
both pre-industrial Korean society and the period of Japanese colonial rule, as well as the
Korean war and the post-1961 period of military-supported rule (Table 4.5). The domi-
nant and risk-sharing nature of the Korean state can be traced back to the period between
1392 and 1910, when Korea was ruled by the Yi, or Chosun dynasty. This dynasty
entrenched Confucianism as the official ideology. This ideology is based on the idea that
the stability of society is based on unequal relationships between people. The Confucian
heritage in Korea helps to explain the population’s respect for hierarchy. During the Yi
period, ‘political power was highly centralized by the pseudo-bureaucratic elite, who
claimed moral superiority over the population on the basis of examination successes’
(Whitley, 1999: 152). The elite were awarded official posts by the king, and access to
examinations for the leading posts was restricted to those of aristocratic status. In
addition, because the possibility of obtaining a state office was always present for the
Korean aristocracy, they were discouraged from developing non-official corporate interest
groups at the local level. As Whitley states, ‘Military institutions had little prestige in the
Confucian-dominated political culture; equally Korea lacked a strong commercial class’.
The merchant class was subjected to strict surveillance. ‘In both preindustrial China and
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