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2020s

2023 working papers

WP538: A Brief Note On Social Mobility and Income Distribution

Robert Rowthorn

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Using a simple model based on Gibrat’s Law of Proportionate Effect, this note demonstrates formally how, in a dynamic setting, earnings inequality is generated. The distribution of earnings in each generation is determined by parental earnings in the previous generation and by random effects uncorrelated with parental earnings. The asymptotic distribution of earnings is log-normal. The paper concludes with a comparison of Sweden and the USA. This comparison suggests that random effects are more important than intergenerational transmission in explaining why earnings inequality is much greater in the USA than in Sweden.


WP537: Partial Observability Estimates of Supply and Demand for Trademarks of Start-Ups

Bernadette Power and Gavin C. Reid

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This paper estimates simultaneously the supply and the demand determinants of the trademark adoption decision made by startups. We use a partial observability econometric model, as non-adoption is unobserved. Estimation is by maximum likelihood using the partial observability bivariate probit (POBP) model. This is run on a large (N > 13k) representative unbalanced longitudinal panel of surviving startups, derived from the Kauffman Foundation start-up dataset (2004-2011) for the USA. Our model is shown to provide a good explanation of supply and demand determinants of trademark adoption, in terms of signs of key variables, and statistical significance. For example, size, incorporation, and expenditure on R&D are important on the supply-side; and copyrights, licensing out, and being in a high knowledge information sector, are important on the demand-side. Policy implications are considered, focusing on marginal and elasticity effects.


WP536: Investigating the Fiduciary Using Social Positioning Theory: An In-depth Analysis

Helen Mussell

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The legal concept of the fiduciary is used extensively in both financial and non-financial organisational contexts. It refers to the situation where one party – the Trustee – is entrusted with serving the best interests of another party – the beneficiary. Because of its wide-ranging use, studies of this concept feature in diverse literature, including legal studies, finance, business ethics, healthcare ethics, and social care. This paper delivers a novel analysis of this concept using social ontological theory – specifically Tony Lawson’s social positioning theory (SPT) – to examine the organisational structure and power embedded in fiduciary relations. It does so for two reasons. Firstly, by theorising the fiduciary from a social ontological perspective we can better understand its structure, the effect of structure on agency, how and why it has evolved, and be clearer on potential for future development. Secondly, equipped with this social ontological analysis, we can explain identified contemporary phenomena which seemingly challenges and contests the power relations embedded in the fiduciary’s organisational structure within the context of financial fiduciary relations. The paper concludes by drawing on the emancipatory potential of SPT as outlined by Lawson, but by applying this potential to considering how financial fiduciary relations can be developed in light of the findings of the SPT analysis.

2022 working papers

WP535: Rudimentary Inflation Conflict Models: A Note

Bill Martin

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Using the most rudimentary models, this note explains how the pursuit by workers and firms of collectively unobtainable goals for real wages and real profits can lead not simply to a higher rate of inflation but to an explosive inflation. The rudimentary nature of the models allows a clear link to be forged between these conflicting aspirations and the distribution of national income. The models exclude any notion that workers or firms form, or act upon, expectations about future inflation but can generate the equivalent of a non-accelerating inflation rate of unemployment, a concept absent from many complex conflict models. Out of academic fashion since the ‘defeat of inflation’, conflict models may now enjoy a revival of interest from policy makers should the British economy suffer a period of ‘stagflation’. If so, solutions proposed by British academics who developed the inflation conflict approach in the 1970s and 1980s would warrant their own revival.


2021 working papers

WP534: Reclaiming the Relational Ontology of the Fiduciary and Exploring Relational Ethics

Helen Mussell

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Despite the omnipresence of the fiduciary in organisations, there is an omission of contemporary theorisations of this legal concept within the organisational theory literature. This is particularly surprising given the situation that the presence of ethics within the fiduciary is increasingly contested ground, with clear implications for managerial practice. This article addresses the lacuna by theorising the fiduciary using an original ontological analysis, alongside identifying a suitable ethical framework. It argues on two grounds that the ontology of the fiduciary is inherently relational. The fiduciary’s process-oriented focus is shown to indicate an open, emergent, and relational ontology at work. Secondly, historical investigation of the development of the fiduciary highlights its core relationship structure, and the interdependency and power dynamic embedded in the fiduciary are revealed. The argument is advanced that by bringing this inherent relational ontology to the fore, we can see how a relational ethical framework – the Ethics of Care – is best placed to explicate the ethics at work. The article concludes with a discussion outlining how the ontological theorisation offers utility in steering future practice of the fiduciary.


WP533: Exploring Epistemic Vices in the Fiduciary: Injustice and Beyond

Helen Mussell

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The paper investigates epistemic vices in the fiduciary. Building on existing work exploring the presence of epistemic injustice embedded in the fiduciary, the paper examines the presence of another vice – epistemic hubris – and suggests how epistemic injustice acts as a capital vice within the context of the fiduciary, facilitating hubris to flourish. Three interrelated arguments are advanced. The first focuses on how the asymmetrical leader-follower dynamic within the fiduciary results in hubris. The second builds on this exploring how the lack of consultation with the beneficiary alongside deployment of specific economic epistemic goods to interpret the fiduciary results in additional hubris. The third draws the two together, arguing that as epistemic injustice creates conditions for both examples of hubris to flourish, it serves as a capital vice within the context of the fiduciary. Finally, safeguarding suggestions are outlined for how these epistemic vices could be avoided. 


WP532: Legal Perception and Finance: The Case of IPO Firm Value

Gerhard Schnyder, Anna Grosman, Kun Fu, Mathias Siems and Ruth V. Aguilera

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In this paper, we contribute to the literature on institutional determinants of IPO valuation. We introduce the concept of ‘legal signaling,’ which focuses on the perception of the quality of law and thus complements the existing institutional approaches to IPO valuation which consider the quality of the positive law (‘standard view’) and firm-level corporate governance practices (‘firm signaling view’). Our approach explicitly models the difference between the effect of the positive law and the effect of the perception of law on IPO value. Based on a worldwide longitudinal dataset of IPO performance across a large number of countries, we find strong support for the claim that the perception of the quality of law is more important than its actual quality to explain post-IPO firm value. This effect holds regardless of whether the law’s quality is correctly perceived or misperceived. Overall, our findings underscore the need for a more sophisticated theorisation of the ways in which law affects entrepreneurial finance.


WP531: What is a Firm? A Reply to Jean-Philippe Robé

Simon Deakin, David Gindis and Geoffrey M. Hodgson

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In his recent book on Property, Power and Politics, Jean-Philippe Robé makes a strong case for the need to understand the legal foundations of modern capitalism. He also insists that it is important to distinguish between firms and corporations. We agree. But Robé criticises our definition of firms in terms of legally recognised capacities on the grounds that it does not take the distinction seriously enough. He argues that firms are not legally recognised as such, as the law only knows corporations. This argument, which is capable of different interpretations, leads to the bizarre result that corporations are not firms. Using etymological and other evidence, we show that firms are treated as legally constituted business entities in both common parlance and legal discourse. The way the law defines firms and corporations, while the product of a discourse which is in many ways distinct from everyday language, has such profound implications for the way firms operate in practice that no institutional theory of the firm worthy of the name can afford to ignore it.


WP530: Premature Deindustrialization Inter-sectoral Employment Shifts, and Accelerated Servicization

Kazunori Fujimoto and Hugh Whittaker

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Concern about the implications of ‘premature deindustrialisation’ for economic growth of developing countries has evolved into investigation over whether parts of the service sector can play a propulsive role similar to that played by manufacturing previously. Such investigation is hampered by coarse and changing service sector classifications, but it does appear that some service sectors play such a role. In this paper we take the incremental but important step of identifying whether employment growth in certain service sectors corresponds with employment loss in manufacturing through ‘premature deindustrialisation,’ deploying the counter-concept of ‘accelerated servicisation.’ Investigating employment growth in key service sectors which are more finely classified than those used in the previous studies, we find that: (1) of five broadly classified service sectors, only that encompassing ‘FIRE (finance, insurance and real estate) and business services’ demonstrates accelerated servicisation, and (2) this is attributable to the component sectors of ‘information services’ and ‘business support,’ but not FIRE. In fact FIRE exhibits a distinctive pattern, warranting the label ‘quasi service.’


WP529: A Two-Stage Model of Decision-Making over Financial Reporting Regimes and Techniques: Analysis and UK Case Studies

Yu-Lin Hsu and Gavin C. Reid

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This paper develops a new two-stage decision model to explain the choices of financial reporting regimes (e.g. IFRS or UK GAAP) and techniques (e.g. valuing intangibles, by cost, income, or market methods) for UK companies. The theoretical framework is based on the choice theory of orderings (Lex and CoLex) and is expressed in decision trees which capture firms’ actions, based on calibrated benefits and costs. The decision-making processes are examined through three UK empirical case studies (one private and two public firms), that expound their decision trees, and explain their decisions. We probe the rationale of their decisions using field-work investigation methods, through which we develop a ‘stated preference’ metric of choice, which allows us to interpret how decisions are made, and how they differ: over time (notably when regime changes are being implemented e.g. the emergence of New UK GAAP post-2015); and across firms (where factors like ease of execution and the quality and quantity of information needed for decisions, are shown to play a large part).


WP528: A Social Recovery, Workplace Democracy and Security: COVID-19 and Labour Law

Ewan McGaughey

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The COVID-19 pandemic has shown the painful consequences of poor job security and workplace democracy. The UK government’s initial flirt with ‘herd immunity’, the delay in lockdown, and the absence of a work strategy that prioritised safety after the summer of 2020, caused among the most appalling death rates in the world, worse than Trump’s America. However, a swift change in the job security policy stemmed mass unemployment, after initial reports of 2.1 million people claiming unemployment benefits. The ‘Coronavirus Job Retention Scheme’ eventually meant that the unemployment statistics (as opposed to claimant count) showed only a modest jobless rise. Comparison with the US where there are effectively no rights, and other countries with strong rights, shows that universal social security and workplace democracy are at the core of successful economic performance. This paper explains the UK’s health and safety rights, how the job retention scheme was unfurled with extension to employed and self-employed, and the connection between votes at work and employment. It shows how reality discredits the minority views of economic theorists who oppose labour rights, and suggests the legal reforms we can undertake to achieve a social recovery.


WP527: The Future of Democracy and Work: The Vote in our Economic Constitution

Ewan McGaughey

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What should be the future of democracy? COVID-19 has exposed a desperate need, not just for a green recovery, and a social recovery, but a political recovery, to remake our institutions for the future, for justice on living planet. Today we are seeing that the vote, ‘a most transcendent thing’, is becoming an essential part of our economic constitution: votes at work, votes in capital and votes in public services. This is already practised, however imperfectly, however forgotten, in universities like Toronto, Cambridge, Oxford or Harvard, and the movement is growing, as it should. The evidence shows we are more productive, innovative, happy, and less unequal, when we have voice. Having moved ‘from status to contract’ in the industrial revolution, the future of work involves a move ‘from contract to membership’. The ‘right to take part in the government’ of our societies is depending less and less on holding money, or ‘other people’s money’, but is becoming universal. The days where shareholders monopolise the votes in the economy, and asset managers or banks monopolise votes on shares, are numbered. The true investors in the wealth of nations, people at work, savers for retirement, and all members of our society, are the future of democracy.


WP526: From ‘Capital and Ideology’ to ‘Democracy and Evidence’: A Review of Thomas Piketty

Ewan McGaughey

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Thomas Piketty’s Capital and Ideology (2020) is a major, encyclopaedic and data-driven contribution to the effort of constructing a better human civilisation. This review summarises the main argument: a positive thesis that in every society, ideology feeds laws and institutions that create inequality, and inequality then bolsters ideology; a normative thesis that we need a better ideology, including ‘participatory socialism’, to solve our biggest challenges. The review then complements and critiques three central issues in the argument, that (1) the true concentration of economic power, the votes in the economy, is even more extreme than inequality of wealth and income, (2) the legal construction of markets, through property, contract, corporate, or human rights law, can ‘pre-distribute’ income and wealth to a vast extent before tax, and (3) social justice means expanding (not merely correcting or re-distributing) everyone’s opportunity, creative capacity, and human potential, and helps everyone to develop their personality to the fullest. Social justice is an unparalleled force, and is still the best answer to far-right, authoritarian or other failed ideologies, which have escalated inequality and driven climate damage. Perhaps the greatest achievement of Piketty’s work could be to bring economics firmly back to the values in the Universal Declaration of Human Rights.


WP525: Decoding Employment Status

Simon Deakin

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There is much at stake in the classification of work relations: on the one hand, the stability of the tax base and the capacity of the state to deliver public goods; on the other, the structure of enterprise and the rights of workers in the ‘gig’ economy and beyond. Classification decisions, however, are made using legal concepts which many view as artificial and manipulable, to the point where it is hard to discern the considerations which are actually guiding decisions. Decomposing the ‘employment’ concept reveals something of the implicit ‘weighting’ of tests and indicators which underlies judicial and administrative determinations. Viewed in this light, statutory reformulations such as the ‘ABC’ test can play a role in ‘reweighting’ the classification process, extending the protective coverage of labour laws and resisting fiscal erosion.


WP524: The Governance of COVID-19: Anthropogenic Risk, Evolutionary Learning, and the Future of the Social State

Simon Deakin and Gaofeng Meng

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We consider the implications of the COVID-19 crisis for the theory and practice of governance. We define ‘governance’ as the process through which, in the case of a given entity or polity, resources are allocated, decisions made and policies implemented, with a view to ensuring the effectiveness of its operations in the face of risks in its environment. Core to this, we argue, is the organisation of knowledge through public institutions, including the legal system. COVID-19 poses a particular type of ‘anthropogenic’ risk which arises when organised human activity triggers feedback effects from the natural environment. As such it requires the concerted mobilisation of knowledge and a directed response from governments and international agencies. In this context, neoliberal theories and practices, which emphasise the self-adjusting properties of systems of governance in response to external shocks, are going to be put to the test. In states’ varied responses to COVID-19 to date it is already possible to observe some trends. One of them is the widespread mischaracterisation of the measures taken to address the epidemic at the point of its emergence in the Chinese city of Wuhan in January and February 2020. Public health measures of this kind, rather than constituting a ‘state of exception’ in which legality is set aside, are informed by practices which originated in the welfare or social states of industrialised countries, and which were successful in achieving a ‘mortality revolution’ in the course of the nineteenth and twentieth centuries. Relearning this history would seem to be essential for the future control of pandemics and other Anthropogenic risks.


WP523: The Impact of Intellectual Property Types on the Performance of Business Start-ups in the USA

Bernadette Power and Gavin C Reid

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Using a large, longitudinal panel (2004-2011) of USA start-ups this paper shows the extent to which IP types (e.g. trademarks, patents, copyrights, outward licensing) enhance multidimensional performance. An ordered probit analysis (with random effects), corrected for sample selection bias, estimates performance to derive the following conclusions. First, trademarks and out-licensing IP types increase a firm’s chances of being a high performer, confirming the importance of certain forms of IP protection for start-ups. Second, patenting significantly reduces the chances of being a high performer, suggesting patenting has limited performance benefits for start-ups. Third, few performance synergies exist in the joint use of IP types, suggesting that strong complementarities among IP types are limited. While out-licensing patents and out-licensing copyrights certainly increase performance, out-licensing patents and out-licensing trademarks actually diminish it. Further, registering more trademarks and outlicensing more trademarks also diminishes performance, suggesting start-up firms should keep trademarks in-house.

2020 working papers

WP522: Shorter Working Week and Workers’ Well-being and Mental Health

Daiga Kamerāde, Ursula Balderson, Brendan Burchell, Senhu Wang and Adam Coutts

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In this working paper we discuss the implication of working shorter hours for workers’ well-being and mental health, drawing on the findings from the Employment Dosage Project. Using longitudinal data, we found that even one day a week generates significant mental health and well-being benefits for previously unemployed or economically inactive individuals. There is no single optimum number of working hours at which well-being and mental health are at their highest. What matters most for mental health once individuals are employed is not the number of hours worked, but job quality especially intrinsically meaningful work, lower intensity work and favourable social environment. We also found that unemployed women derive similar mental health benefits from participating in active labour market policies (ALMPs) as in employment. Unemployed men also benefit from ALMPs but obtain significantly more health benefits from formal employment. Moreover, during interviews with 40 people who chose to work considerably less than full-time (but not mainly for child care), we found that decisions to work shorter hours were influenced by both negative work experiences pushing people away from work and positive experiences outside work pulling people towards other activities. These people use their time out of work in a way that boosts productivity and promotes social cohesion, including voluntary work, exercise, caring for friends and relatives and rest and recovery. The desire for more freedom and autonomy was a key framing device in explanations and justifications of short hours working. These findings provide important and timely empirical evidence for future of work planning, shorter working week policies and beyond. We conclude by discussing the implication of the findings for the debates about the future of work, public health, climate change and gender equality.


WP521: Cut Hours, Not People: No Work, Furlough, Short Hours and Mental Health During the COVID-19 Pandemic in the UK

Brendan Burchell, Senhu Wang, Daiga Kamerāde, Ioulia Bessa and Jill Rubery

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The unprecedented shock to the UK economy inflicted by government measures to contain the Coronavirus (COVID-19) risked plunging millions of workers into unemployment as businesses were forced to close or scale back activity. To avoid that cliff edge, and the predictable damage to both workers mental health and to the viability of the closed down businesses, the government also introduced the Coronavirus Job Retention Scheme (CJRS) that allowed for the furloughing of workers. Even so the number of people claiming benefits as unemployed has soared above two million for the first time since 1996 and others have been working significantly reduced working hours. The first and second waves of Understanding Society COVID-19 Study provide an early opportunity to examine how far these changes in employment status, work hours and involvement in furlough job retention scheme are related to the likelihood of having mental health problems, measured by 12-item General Health Questionnaire. Our findings confirm that leaving paid work is significantly related to poorer mental health, even after controlling for the household income and other factors. In contrast having some paid work and/or some continued connection to a job is better for mental health than not having any work at all. Those who remain part-time employed before and during the COVID-19, those who are involved in furlough job retention scheme or transition from full-time to part-time employment are all found to have similar levels of mental health as those who continued to work full-time. Results also show that overall women’s mental health has deteriorated much more than men’s when compared to Wave 9 (2017-2019) of Understanding Society.

Both short working hours and furlough job retention schemes can thus be seen to be effective protective factors against worsening mental health. However, the key issue is now how to move beyond the furlough scheme. A v-shaped bounce back is not on the horizon and many sectors will at most move into partial activity. So, the need to avoid a huge further leap in unemployment is just as vital with all the risk to mental health that that would entail. These findings point to the need to move towards sharing work around more equitably, including introducing a shorter working week for all (except in those sectors under extreme pressure) in order to minimize the risk to mental health and wellbeing if those on furlough are now pushed into unemployment.


WP520: Shareholder Value or Public Purpose? From John Maynard Keynes and Adolf Berle to the Modern Debate

Suzanne J Konzelmann, Victoria Chick and Marc Fovargue-Davies

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The debate about corporate purpose is a recurring one that has re-emerged today. What should be the guiding principles of business: the pursuit of profit or a contribution to public well-being? We trace key elements in this debate in the UK and the US from the interwar years, when John Maynard Keynes and Adolf Berle made important contributions, to the present. Both the earlier and the current debates are centred around whether we see business institutions as strictly private entities, transacting with their suppliers, workers and customers on terms agreed with or imposed upon these groups, or as part of society at large and therefore expected to contribute to what society deems to be its interests. Whether current developments will ultimately produce a shift in corporate purpose akin to the one that followed the Second World War remains to be seen. But the parallels to the interwar debates, and the uncertain economic, political and social environment in which they took place, are striking. Our objective is to see what might be learned from the past to inform the current direction of thought concerning capitalism and corporate purpose.


WP519: Resurrecting the UK Corporate Sector Accounts

Bill Martin

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This paper develops what is believed to be a novel method of resurrecting UK national accounts corporate sector data before 1987, the date prior to which fully comprehensive sectoral data are not provided by the Office for National Statistics. A distinction is drawn between the sectors comprising private non-financial corporations (PNFC), on the one hand, and financial corporations, which include some state-controlled enterprises, on the other hand. The resurrected PNFC dataset runs in detail from 1960. A much more limited set of reconstructed data is available for financial corporations. The resurrected data include the savings – broadly speaking, the “retained profits” – and the financial balances – the difference between retained profits and capital spending – of both corporate sectors.

Economists collaborating with the UK Economic Statistics Centre of Excellence describe an exercise of this kind as “especially difficult”. My method of reconstruction relies on archived, out-of-date, too frequently unreliable national accounts datasets, the scrutiny of those data to remove mistakes, and a detailed examination of a subset of an otherwise overwhelming number of national accounts revisions confined to those having a material and enduring impact in the historic period before 1987.

This “bottom-up” method of data reconstruction differs from the “top-down” method of resurrecting the accounts of the public, the rest-of-the-world and the “private” sectors, and the separation of the household sector from the aggregate corporate sector, described in a previous paper: Martin (2019). The combination of the two methods, one bottom-up, the other largely top-down, risks the creation of a dustbin into which data inconsistencies are unwittingly poured. A number of robustness tests provides reassurance that the differently derived historic data for sectoral saving make sense. Comparable tests of household and corporate sectors’ financial balance data are not possible, but the hypothesis that different vintages of PNFC financial balance data are isomorphic representations of the same economic variable is not rejected. The combination of the two methods has allowed improvements to be made to the resurrected household sector series that begin in 1946.

Subject to the resolution of outstanding problems with official national accounts data, notably for gross fixed capital formation before 1960, and additional scrutiny and comment, it is the intention to make the complete resurrected sectoral dataset publicly available.


WP518: Labour Laws, Informality, and Development: Comparing India and China

Simon Deakin, Shelley Marshall and Sanjay Pinto

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This paper explores trends in the formalisation and informalisation of work, focusing on the world’s two largest labour markets, India and China. A first task in is to define what is meant by informal work. The definitions used by international agencies are not uniform and different countries have distinct approaches. There are numerous dimensions to informality that are not fully captured in statistical data. There is a trend towards formal employment and away from own-account work and self-employment in many regions of the world, particularly in East Asia where the proportion of the labour force in waged employment has doubled over the past three decades. The paper will look more closely at the contrasting cases of India (where formal work has increased recently, but to a very small extent) and China (where a variant of the standard employment contract may be emerging), discuss reasons for the divergence between them, and consider the relationship between formality and developmental outcomes in the two countries.


WP517: Taking a Horse to Water? Prospects for the Japanese Corporate Governance Code

John Buchanan, Dominic Chai and Simon Deakin

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In 2014-15 Japan implemented a series of reforms to its corporate governance regime. The principal measures adopted were the country’s first Corporate Governance Code, revisions to its Companies Law, and a Stewardship Code, together with a report (the Itō Review) on corporate competitiveness and incentives for growth. In this paper we analyse the objectives of these reforms and make an assessment of their likely success, drawing on interviews with key actors in Japanese government, finance and industry. We firstly frame our analysis by a consideration of what institutional theory has to say about the relationship between formal and informal norms and practices, and about the feasibility of using regulatory mechanisms of different types to alter embedded routines. We then consider the historical evolution of Japanese corporate governance since the early 20th century and explore the causes of its current embeddedness and apparent resistance to change, noting pressures in the past which in some cases have changed it greatly while in others have had little effect. We then examine the manner in which the current reforms were devised and implemented, their content, and the influences that shaped them. We then discuss the methods used to conduct our primary interview research, which was carried out in 2016-17 with policy makers, corporate managers, investors and other interested parties. We use our interviews to identify how the reforms were formulated and how they have been received. We then present our assessment. We suggest that despite a pattern of embedded institutions resisting regulatory pressures for change in recent years, Japanese corporate governance may now have reached one of its historical turning points. The introduction into Japan of the ‘comply or explain’ approach, the major innovation that distinguishes this reform exercise, is a significant moment. The existence of a corporate ‘compliance machine’ of administrative officers below board level, whose role is to interpret regulation and present it in executable form to their boards of directors, improves the Code’s chances of implementation at large, listed companies. The Stewardship Code, meanwhile, has the potential to co-opt institutional investors’ interests to the economic reform agenda of the political class. These politicians have shown an unusual degree of commitment to the reform process and continue to give it their strong support. At the same time, there are potential obstacles to unqualified adoption of the Corporate Governance Code, especially for smaller companies that lack administrative resources, and the 2018 revision of the Code has introduced some doctrinaire elements which seem at odds with the realities of governance in most Japanese companies. Moreover, some doubt remains regarding the ability of corporate governance reforms to deliver the kind of economic revival that politicians are seeking, at least in the short to medium term. Thus the question of whether the Corporate Governance Code will bring about lasting change in Japanese corporate practice remains an open one. The Code has clear advantages over previous attempts at reform but we compare this process to the proverbial ‘taking a horse to water’, because no amount of formal exhortation will succeed if the horse chooses not to drink.

2010s

2019 working papers

WP516: Elucidating Limited Shareholder Engagement: Identifying Ethical and Epistemological Factors in the Fiduciary

Helen Mussell

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The legal concept of fiduciary, from the Latin fiducia meaning trust, plays a fundamental role in all financial and business organisations: it acts as a moral safeguard of the relationship between trustee and beneficiary, ensuring that the beneficiaries’ best interests are met. It is often referred to as a duty of care. This paper focuses on the ethics of the fiduciary, but from a unique and historical perspective, going back to the original formulation of the fiduciary within a familial context, to reveal not only why care plays a central role in the fiduciary, but to also uncover key foundational presuppositions regarding agential capabilities embedded in the trustee-beneficiary relationship. In doing so, the paper uncovers ethical issues of an epistemological kind at the core of the fiduciary. By using Miranda Fricker’s theory of pre-emptive testimonial injustice, the analysis helps shed light on shareholder activism and explains limited engagement to date.


WP515: Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services

Paul M Guest and Marco Nerino

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This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of –1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.


WP514: Resurrecting the UK Sector National Accounts after 1945

Bill Martin

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Building on the methodology explained in Martin (2009), this paper sets itself the task of backcasting the UK national sectoral accounts before 1987, the date prior to which fully comprehensive data are not provided by the Office for National Statistics. Backcast data cover the private, government and overseas sectors. Innovations compared with the earlier paper include the extension of the dataset to begin in 1946 rather than 1948, and, more importantly, an attempt to backcast financial balances for the household and corporate sectors. This attempt involves the backcasting of pension saving before 1963 and of major components of the household and corporate capital account before 1987. The household and corporate sector data are likely subject to greater measurement error than estimates for more aggregate sector balances, as shown in Martin (2009) and provisionally upheld in this paper by simple tests of stability across different data vintages. Subject to further verification and improvements, now in prospect, in official historic data, the derived postwar sectoral estimates may nevertheless enable more robust testing of a variety of long-run macroeconomic hypotheses.


WP513: Fiscal Policy in a Depressed Economy: A Comment

Robert Rowthorn

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In an influential article, Delong and Summers (2012) consider the implications of hysteresis for government debt. They derive an upper limit for the after-tax real interest rate. If the interest rate is below this limit, the debt incurred during a one-off fiscal stimulus will be automatically repaid without the need for higher taxes. Their analysis assumes that a one-off stimulus leaves an infinite legacy of future benefits (hysteresis effects) that increase through time. This note extends their analysis to situations where hysteresis effects remain constant or decay in the course of time. By highlighting the hysteresis time profile, it provides a more transparent treatment of debt dynamics.


WP512: Keynesian Economics – Back from the Dead? The Godley-Tobin Lecture

Robert Rowthorn

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This paper surveys some the main developments in macroeconomics since the anti-Keynesian counter-revolution 40 years ago. It covers both mainstream and heterodox economics. Amongst the topics discussed are: New Keynesian economics, Modern Monetary Theory (MMT), expansionary fiscal contraction, unconventional monetary policy, the Phillips curve, and hysteresis. The conclusion is that Keynesian economics is alive and well, and that there has been a degree of convergence between heterodox and mainstream economics.


WP511: Fiduciary – Asymmetrical Power, Asymmetrical Care

Helen Mussell

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The legal concept of fiduciary plays a fundamental role in all financial and business organisations. It acts as a moral safeguard of the relationship between trustee and beneficiary, ensuring that the beneficiaries’ best interests are met. It is often referred to as a duty of care. Originally formulated within familial law to protect property put into Trust, beneficiaries were women and children, allocated passive and subordinated roles. This paper investigates two aspects of the asymmetrical power relations central to the fiduciary. Firstly it reveals the gendered presuppositions regarding male and female agential capabilities on which the fiduciary is premised, drawing out the origins of the authority differential in the trustee-beneficiary relationship. Secondly, the paper engages with the ethical nature of the fiduciary relationship, arguing that Care Ethics offers a robust framework for explicating the history of the relationship, alongside delivering a morally-enhanced and future-fit fiduciary free of damaging gendered stereotypes.

2018 working papers

WP510: The Depths of The Cuts: The Uneven Geography of Local Government Austerity

Mia Gray and Anna Barford

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Austerity, the sustained and widespread cuts to government budgets, has characterised Britain’s public policy since 2010. The local state has undergone substantial restructuring, driven by major budget reductions from central government. Hitherto, few studies of austerity in the UK have considered the interplay of national and local policies. We contribute a fine-grained spatial analysis of local authority budgets, highlighting their socioeconomically- and geographically-uneven impacts. We identify substantial variations between authorities in terms of funding, local tax-base, fiscal resources, assets, political control, service-need and demographics. We argue that austerity has actively reshaped the relationship between central and local government in Britain, shrinking the capacity of the local state, increasing inequality between local governments, and exacerbating territorial injustice.


WP509: Shareholder Protection, Stock Markets and Cross-Border Mergers

Frederick S Ahiabor, Gregory A James, Frank O Kwabi and Mathias M Siems

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This paper is the first one that uses a panel data of different types of shareholder protection in order to examine (i) the effect of such laws on stock market development and (ii) the convergence of shareholder protection laws through cross-border mergers and acquisitions. We find significant results for enabling laws but less so for paternalistic ones.


WP508: Blockchain Technology and International Relations: Decetralised Solutions To Foster Cooperation in an Anarchic World?

Bernhard Reinsberg

Available in hard copy only.

Blockchain technology enables ‘trustless’ interactions among individuals by replacing centralised enforcement with distributed consensus. It therefore has been used for commercial applications, including transfer of cryptocurrency, digital file storage, digital identity services, and supply-chain management. This article probes the potential of blockchain technology to foster international cooperation among states – given the lack of a world government to enforce their mutual commitments. The article outlines four facilitators of blockchain-based global governance systems, including the need for credible commitment, the availability of resourceful non-state actors, verification needs that can be addressed through ‘oracles’, and routine interactions. These facilitators are further illustrated for the case of climate governance. Overall, the discussion suggests that blockchains – if appropriately designed to address the underlying cooperation problems – hold significant promise. Their key strength is to enable states to design ‘smart contracts’ that execute automatically when agreed conditions are fulfilled. To some extent, blockchain technology thus challenges the primacy of international organizations. However, even with blockchain technology, international organisations continue to play a role with regard to pre-agreement policy deliberation, validating real-world events, and providing technical assistance for policy implementation.


WP507: The Double Crisis: In What Sense A Regional Problem?

Betsy Donald and Mia Gray

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We are now facing Sayer’s ‘diabolical double crisis’ – which encompasses both a deep financial crisis and an environmental one. The scale, scope and nature of this double-crisis is downplayed in the regional studies literature, much of which still focuses on innovative growth models often divorced from broader social and ecological contexts. To help solve both crises we call for regional studies to explore new models that allow us to focus on the most important issues of our time. We illustrate this by focusing on the contradictions in the waste produced by contemporary regional economies – waste of abundance, labour, and resources.


WP506: Institutional Complementarities Between Labour Laws and Innovation

Filippo Belloc

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We analyse how institutional complementarities between employee representation laws and dismissal restrictions influence aggregate innovation outcomes. We argue that greater employee voice, due to improved employee representation legislations, may spur innovative effort by employees only when shareholders cannot renegotiate ex-ante agreements with workers over revenue sharing, by threatening dismissal. We perform a panel regression analysis, exploiting country-sector panel data over the 1977-2005 period, and find that stronger employee representation laws in the presence of stricter firing restrictions are in fact associated with higher patenting activity. Consistently with our theoretical argument, the magnitude of this empirical relationship is seen to be relatively larger in those sectors where the human capital contribution to production is higher. Implications for the analysis of economic institutions and for legal policy-making are proposed.


WP505: Blockchain Technology and the Governance of Foreign Aid

Bernhard Reinsberg

Available in hard copy only.

Blockchain technology has been considered a vehicle to foster development in poor countries by promoting applications such as secure delivery of humanitarian aid, digital identity services, and proof of provenance. This article examines whether (and if so how) blockchain technology – if appropriately designed – can enhance the effectiveness (and efficiency) of foreign aid governance, thereby moving beyond completely anonymous contexts. Foreign aid governance is plagued by lack of credible commitments among states which are further exacerbated by information asymmetries and which often undermine aid effectiveness. In this context, blockchain technology holds two promises. First, through guaranteed enforcement of smart contracts, it can strengthen the credibility of state commitments, for example collective burden-sharing rules among a group of donors or recipient-country compliance with policy conditionality in return for aid. Second, through leveraging prediction markets, blockchain technology can allay information problems related to the verification of real-world events along the entire aid delivery chain. Overall, the article shows that blockchain technology can be understood as a mechanism with institution-like features, with significant potential to complement real-existing institutions. The article also suggests that deploying blockchain technology in semi-trusted environments and at the international level avoids many of its well-known disadvantages.


WP504: The Law-Technology Cycle & the Future of Work

Simon Deakin and Christopher Markou

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Features of the ‘fourth industrial revolution’, such as platforms, AI and machine learning, pose challenges for the application of regulatory rules, in the area of labour law as elsewhere. However, today’s digital technologies have their origins in earlier phases of industrialisation, and do not, in themselves, mark a step change in the evolution of capitalism, which was, and is, characterised by successive waves of creative destruction. The law does not simply respond to technological change; it also facilitates and mediates it. Digitalisation, by permitting the appropriation of collective knowledge, has the capacity to undermine existing forms of regulation, while creating the space for new ones. It may erode the position of some professions while enabling others, complementary to new technologies, to emerge. It is unlikely to bring about the redundancy of forms of labour law regulation centred on the employment relationship. We appear to reaching a point in the law-technology cycle where push-back against regulatory arbitrage can be expected.


WP503: The World System & the Hollowing-out of State Capacity: How Structural Adjustment Programs Impact Bureaucratic Quality in Developing Countries

Bernhard Reinsberg, Alexander Kentikelenis, Thomas Stubbs and Lawrence King

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The administrative ability of the state to deliver effective policy is essential for economic development. While sociologists have long devoted attention to domestic forces underpinning state capacity, we focus on world system pressures from Western-dominated international organisations. Scrutinising policy reforms mandated by the International Monetary Fund (IMF), we argue that ‘structural conditions’ exert deleterious effects on bureaucratic quality by increasing the risk of bureaucrats falling prey to special interests and narrowing potential policy instruments available to them. We test these arguments using a new dataset on IMF conditionality from 1985-2014. Our analysis shows that structural conditions – especially conditions on privatisation, price deregulation, and public-sector employment – reduce bureaucratic quality. Using instrumentation techniques, we also discount the possibility that the relationship is driven by the IMF imposing structural conditions precisely in countries with low bureaucratic quality. A careful reconsideration of IMF policy reforms is therefore required to avoid undermining local institutions.


WP502: Investigating New Types of ‘Decoupling’: Minority Shareholder Protection in the Law & Corporate Practice

Gerhard Schnyder

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The study of decoupling – i.e. the discrepancies between formal policies and actual practices and outcomes – has seen a remarkable revival. Importantly, a distinction between policy-practice and means-ends decoupling has become widely-used. We argue that the decoupling literature still neglects a key feature of decoupling, namely that it is inherently a multi-level concept. Distinguishing explicitly the macro- (country) and the micro- (organisation) levels, we develop a more fine-grained typology of policy–practice and means–ends decoupling. We hypothesise that differences in the macro-environment may influence the type and extent of decoupling that prevails in a given country. We test our hypotheses in the context of the adoption of legal minority shareholder protection in four European countries. We go beyond previous studies that have investigated policy–practice and means-end decoupling in the same context by using a unique dataset for firm-level corporate governance practices that allows us to investigate the multi-level nature of decoupling more directly. Our findings suggest that that decoupling is context specific and the extent to which policy-practice decoupling occurs may depend on a country’s legal style.


WP501: Twenty Years of ‘Law & Finance’: Time to Take Law Seriously

Gerhard Schnyder, Mathias Siems and Ruth Aguilera

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The Law and Finance School (LFS) has become an important stream of re-search in management and socio-economic studies. This paper provides the first comprehensive discussion of the first 20 years of LFS literature. Draw-ing on legal theory, we show that, despite the centrality of law to the LFS, the LFS is based on a surprisingly ‘thin’ theory of law. It does not provide a coherent definition of what primary function law plays in the economy, what criterion makes law ‘valid’ law, and what mechanism links law to ac-tors’ behaviours. Therefore, contrary to existing criticisms of the LFS, we argue that the main issue is not that the LFS overstates the importance of law, but rather that it does not take law seriously enough. We propose ways in which future research could develop a more solid conceptual framework to empirically investigate the impact of law on economic and social outcomes.


WP500: The Economic Significance of Laws Relating to Employment Protection & Different Forms of Employment: Analysis of a Panel of 117 Countries, 1990-2013

Zoe Adams, Louise Bishop, Simon Deakin, Colin Fenwick, Sara Martinsson Garzelli and Giudy Rusconi

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This paper presents findings from analysis of a dataset of labour laws, based on the Centre for Business Research Labour Regulation Index (CBR-LRI), which has recently been extended to cover 117 countries and the period from 1970 to 2013. The dataset shows that laws regulating different forms of employment (DFE), including part-time work, fixed-term employment and agency work, have become significantly more protective over time, in particular since the late 1990s. Employment protection laws (EPL), covering individual dismissal, collective consultation and codetermination rights, have become steadily more protective since the 1970s. Europe has seen a decline in the level of EPL since the onset of the sovereign debt crisis in 2008, but this trend is small, on average, by comparison to earlier increases in protection beginning in the 1970s, and has not been replicated in other regions. Time-series econometric analysis using non-stationary panel data methods suggests that strengthening worker protection in relation to DFE and EPL is associated with an increase in labour’s share of national income, rising labour force participation, rising employment, and falling unemployment, although the observed magnitudes are small when set against wider economic trends.


WP499: ‘Wage’, ‘Salary’ & ‘Remuneration’: A Genealogical Exploration of Juridical Terms & Their Significance for the Employer’s Power to Make Deductions from Wages

Zoe Adams

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The Supreme Court in Hartley v King Edwards VI College (2017) has confirmed that an employee who refuses to work in accordance with his contract forfeits his right to be paid for the duration of the breach. The decision extends to professional employees paid a periodic salary the principle established in Miles v Wakefield MDC (1987). The present article sheds new light on these decisions by situating them within a broader debate concerning the function of the wage and the proper relationship between work and payment. Drawing on insights from economic theory, and engaging in a genealogical analysis of legal concepts, the article shows how this debate has, over time, conditioned the use of concepts such as the ‘wage’, ‘the salary’ and ‘remuneration’ in legislation and case law concerning deductions. It shows that the legal concept of the ‘wage’ is closely related to the economic idea of the wage as the price of a commodity, while the legal concepts of ‘salary’ and ‘remuneration’ are more closely analogous to the economic idea of the wage as the cost of subsistence. The courts’ tendency to confuse these concepts, and to analyse the employer’s power to deduct as a right to withhold wages for non-performance of the contract, tells us much about the implicit assumptions underpinning cases such as Miles and Hartley, and how they have shaped the path of the law.


WP498: A Comment on Oulton, “The UK Productivity Puzzle: Does Arthur Lewis Hold the Key?”

Bill Martin

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In Version One of his new paper, Oulton merges supply-side and demand-side theoretical models as a means better to understand why, since the financial crisis that broke in 2007, the UK’s productivity growth has not only been negligible but also a very poor outlier judged by international experience. Drawing on Arthur Lewis’s famous model of development, Oulton concludes, “rapid rates of immigration in conjunction with low rates of growth of export demand in the aftermath of the Great Recession can explain the UK productivity puzzle”. According to Oulton, the UK’s relatively poor productivity performance is attributable to a combination of the export demand constraint and of the continued growth of labour supply, which led to capital shallowing – a reduction in the rate of growth of capital services per hour worked. Bill Martin concludes, alas, that Arthur Lewis does not hold the key. The dominant, proximate “explanation” of the UK’s relatively poor performance is relatively weak Total Factor Productivity (TFP), not relatively weak capital intensity. Moreover, the UK was not relatively more exposed to export demand shocks but delivered relatively worse output growth outcomes. Oulton nevertheless articulates the profound idea that full-employment capacity has adjusted to weak effective demand arising from adverse global developments. If this deep insight is correct, TFP would be a “measure of our ignorance” of the mechanisms that drove productive capacity to align with low aggregate demand.


WP497: A Human Is Not a Resource

Ewan McGaughey

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The language of “human resource management” treats people as a means to an end. Three core tenets of human resource literature are that it is desirable to have (1) labour “flexibility” and “mobility” in a peripheral workforce, (2) individual (not social) responsibility for employment searching, and (3) a manager’s right to manage, without collective accountability. This article explores the cutting edge evidence, which show human resource theory harms productivity and human development. It explores the effects of “HR” in the UK, EU and international regulation on atypical work, full employment, and union voice. Where human resource beliefs have pervaded the most, the outcomes are the worst: lower productivity, higher unemployment, more inequality, less growth. To advance prosperity, economic risks must be distributed to the organisations best placed to bear them, people must have security to plan for the future, and people must have real votes at work through collective bargaining and corporate governance. Many people who themselves work in “HR” strongly disagree with the essential elements of their discipline. They support equality, security and democracy at work. Just as international law once affirmed that “labour is not a commodity”, for social justice in the 21st century there must be a conviction that a human is not a resource. “HR” must change in name and substance, to advance human development and human rights.


WP496: Will Robots Automate Your Job Away? Full Employment, Basic Income, and Economic Democracy

Ewan McGaughey

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Will the internet, robotics and artificial intelligence mean a ‘jobless future’? A recent narrative says tomorrow’s technology will fundamentally differ from cotton mills, steam engines, or washing machines. Automation will be less like post-WW2 demobilisation for soldiers, and more like the car for horses. Driverless vehicles will oust truckers and taxi drivers. Hyper-intelligent clouds will oust financial advisers, doctors, and journalists. We face more ‘natural’ or ‘technological’ unemployment than ever. Government, it is said, must enact a basic income, because so many jobs will vanish. Also, maybe robots should become ‘electronic persons’, the subjects of rights and duties, so they can be taxed. This narrative is endorsed by prominent tech-billionaires, but it is flawed. Everything depends on social policy. Instead of mass unemployment and a basic income, the law can achieve full employment and fair incomes. This article explains three views of the causes of unemployment: as ‘natural’, as stemming from irrationality or technology, or as caused by laws that let people restrict the supply of capital to the job market. Only the third view has any credible evidence to support it. After WW2, 42% of UK jobs were redundant (actually, not hypothetically) but social policy maintained full employment, and it can be done again. Unemployment is driven by inequality of wealth and of votes in the economy. Democratic governments should reprogramme the law: for full employment and universal fair incomes. The owners of the robots will not automate your job away, if we defend economic democracy.


WP495: The Use of Quantitative Methods in Labour Law Research: An Assessment and Reformulation

Simon Deakin

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This paper considers the potential and limits of quantitative approaches to labour law research. It explores the methods used to construct and validate indicators of labour regulation (‘leximetrics’) and those used in the econometric analysis of the effects of labour law rules on employment, productivity and inequality. It is argued that while there is a risk of the misuse and misappropriation of legal indicators, they can provide new evidence on the nature and effects of labour law rules, and thereby contribute to labour law theory as well as to the resolution of some practical issues of regulatory policy.


WP494: Unexpected Corporate Outcomes from Hedge Find Activism in Japan

John Buchanan, Dominic H Chai and Simon Deakin

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Hedge fund activism has been identified in the USA as a driver of enduring corporate governance change and market perception. We investigate this claim in an empirical study to see whether activism produced similar results in Japan in four representative areas: management effectiveness, managerial decisions, labour management, and market perception. Experience from the USA would predict positive changes at Japanese target companies in these four areas. However, analysis of financial data shows that no enduring changes were apparent in the first three areas, and that market perception was consistently unfavourable. Our findings demonstrate that the same pressures need not produce the same results in different markets. Moreover, while the effects of the global financial crisis should not be ignored, we conclude that the country-level differences in corporate governance identified in the varieties of capitalism literature are robust, at least in the short term.


WP493: How the Economics Profession Got It Wrong on Brexit

Ken Coutts, Graham Gudgin and Jordan Buchanan

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A wide range of reports from official bodies and academics have estimated the impact of Brexit. These influenced the outcome of the Brexit referendum and remain influential in informing views on the potential long-term consequences of a range of Brexit trade arrangements. This paper builds on a previous CBR working paper in examining the most influential of these reports, from HM Treasury, and the OECD. In this paper the work of the LSE’s Centre for Economic Performance is also included. Each of these reports base their analyses either on gravity models or a computable general equilibrium models. The addition in this paper a review of the link between trade and productivity, which plays an important role in these reports. We also examine three reports which take a direct approach to measuring the impact by assessing the likely prices increases across a large range of commodities due to the imposition of tariff and non-tariff barriers, and using elasticities to estimate the potential changes in the volume of trade. We find important flaws in both the application of gravity model results to a Brexit context, and in the knock-on impacts from trade to productivity. The flaws always have the result of exaggerating the negative impact of Brexit. The direct approaches involve partial rather than full equilibrium models but provide an important check on results from more complex models. However, the choice of elasticities can result in widely different results from ostensibly similar approaches. The paper starts by looking at the view, supported in the academic literature and widely repeated in the financial media, that accession to the EEC in 1973 improved the economic growth performance of the UK. The evidence suggests that this view is incorrect.

2017 working papers

WP492: Is There a Relationship between Shareholder Protection & Stock Market Development?

Simon Deakin, Prabirjit Sarkar and Mathias Siems

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We use recently created datasets measuring legal change over time in a sample of 28 developed and emerging economies to test whether the strengthening of shareholder rights in the course of the mid-1990s and 2000s promoted stock market development in those countries. We find only weak and equivocal evidence of a positive effect of shareholder protection on market capitalisation, the value of stock trading, and the turnover ratio, and a negative impact on the number of listed companies. There is stronger evidence of reverse causality, in the sense of stock market development at country level generating changes in shareholder protection law. We conclude, firstly, that legal reforms were at least in part an endogenous response to stock market development and not simply a reaction to the generation of global standards; but, secondly, that the laws passed in response to the demand for shareholder empowerment did not consistently have the expected impact on financial markets, and may have had some negative and perverse results.


WP491: Tony Lawson’s Theory of the Corporation: Towards a Social Ontology of Law

Simon Deakin

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In his account of the corporation as a ‘community’, Tony Lawson advances a materialist theory of social reality to argue for the existence of emergent social structures based on collective practices and behaviours, distinguishing his position from John Searle’s theory of social reality as consisting of declarative speech acts. Lawson’s and Searle’s accounts are examined for what they imply about the relationship between social structures and legal concepts. It is argued that legal concepts are themselves a feature of social reality and that a consequence of the law’s recognition of the ‘reality’ of the corporation is to open up the activities of business firm to a distinct form of normative ordering.


WP490: The Role of Gravity Models in Estimating the Economic Impact of Brexit

Graham Gudgin, Ken Coutts, Neil Gibson and Jordan Buchanan

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The predictions of the Treasury, OECD and IMF for the long-term impact of Brexit remain influential. They provide an important context for the Brexit negotiations and underpin the belief of Scottish and Irish nationalists that Brexit strengthens their case for independence or Irish unity. Because these predictions have received limited scrutiny they are examined in detail in this paper. The bases of the predictions are similar for each of the three organisations. In each case estimates are made of the impact of Brexit on trade and on foreign direct investment. This is followed by an estimate of the knock-on effect on productivity. The OECD and IMF also include an assessment of the impact of lower migration. The aggregate impact of these factors is then fed into a macro-economic model to obtain a forecast for GDP. Much of the final impact depends on the estimate for trade which, in each case, is assessed using a ‘gravity model’. Because gravity models are inaccessible to the general public, they are explained here in comprehensible terms. In addition the Treasury’s gravity model results are replicated and examined in detail. Our conclusion is that different versions of the model give a range of results and that most versions give a smaller trade impact than that reported by the Treasury, OECD or IMF. In particular, equations which estimate the average impact of EU membership on exports of goods tend to over-predict UK exports to the EU. This implies that the average impact of EU membership applies less to the UK than to the other EU member states. The further implication is that these official predictions of the impact of Brexit are overly pessimistic.


WP489: The CBR-LRI Dataset: Methods, Properties & Potential of Leximetric Coding of Labour Laws

Zoe Adams, Parisa Bastani, Louise Bishop and Simon Deakin

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Leximetric data coding techniques aim to measure cross-national and inter-temporal variations in the content of legal rules, thereby facilitating statistical analysis of legal systems and their social and economic impacts. In this paper we explain how leximetric methods were used to create the CBR Labour Index (CBR-LRI), an index and related dataset of labour laws from around the world spanning the period from 1970 to 2013. Datasets of this kind must, we suggest, observe certain conventions of transparency and validity if they are to be usable in statistical analysis. The theoretical framework informing the construction of the dataset and the types of questions which it is are designed to answer should be made explicit. Then the choices involved in the selection of indicators, the definition of coding algorithms, and the aggregation and weighting of data to create composite measures, must be spelled out. In addition, primary legal sources should be referenced, and it should be clear how they were used to generate reported values. With these points in mind we provide an overview of the CBR-LRI dataset’s main features and structure, discuss issues of weighting, and present some initial findings on what it reveals of global trends in labour regulation.


WP488: Time to Stop Playing Games with Industrial Policy? What Government & Business Might Learn from Team GB

Sue Konzelmann and Marc Fovargue-Davies

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This paper investigates the degree to which the British elite sport policy model might inform a strategy for building international competiveness in UK industry. The methodology is qualitative, based on in-depth interviews with key figures in the British elite sport system, including UK Sport’s CEO, Performance Directors of National Sport Governing Bodies whose athletes competed in London 2012 and Rio 2016 and Olympic athletes. The analysis also draws upon detailed case studies of sectors that are currently competing successfully in international markets – despite decades of ill-informed industrial policy, if not neglect. Areas standing out as key to the UK elite sport policy model’s success include: an institutional structure to provide strategic leadership, identify talent and support the development of internationally competitive athletes and teams, whilst at the same time insulating them from interference by short-term political (and sporting) interests; an enabling competitive environment with access to a reliable source of finance; and an institutional system that encourages learning, innovation and responsiveness to opportunities and constraints. Taken together, these – if available to British businesses, clusters and sectors – would likely facilitate improvement in the UK’s industrial performance. The significance of the elite sport case is that not only was it developed and successfully implemented in the British cultural, institutional and political context, in many respects elite sport can be considered a high performance industrial sector. It therefore offers a starting point for evolving strategy for building international competitiveness in comparable sectors of British industry.


WP487: Votes at Work in Britain: Shareholder Monopolisation and the ‘Single Channel’

Ewan McGaughey

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Why do shareholders monopolise voting rights in UK companies, and are trade unions the only way to get meaningful workplace representation? In 1967 a Labour Party policy document first coined the phrase that collective bargaining was – and should be – the ‘single channel’ of representation. Since then, it has been said the labour movement embraced an ‘adversarial’ rather than a ‘constitutional’ conception of corporations, neglecting legal rights to worker voice in enterprise governance. This article shows that matters were not so simple. It explains the substantial history of legal rights to vote in British workplaces, and the competition from the rival constitutional conception: employee share schemes. The UK has the oldest corporations – namely universities – which have consistently embedded worker participation rights in law. Britain has among the world’s most sophisticated ‘second channel’ participation rights in pension board governance. Developing with collective bargaining, it had the world’s first private corporations with legal participation rights. Although major plans in the 1920s for codetermination in rail and coal fell through, it maintained a ‘third channel’ of worker representatives on boards during the 20th century in numerous sectors, including ports, gas, post, steel, and buses. At different points every major political party had general proposals for votes at work. The narrative of the ‘single channel’ of workplace representation, and an ‘adversarial’ conception of the company contains some truth, but there has never been one size of regulation for all forms of enterprise.

2016 working papers

WP486: Takeover Law to Protect Shareholders: Increasing Efficiency or Merely Redistributing Gains?

Ying Wang and Henry Lahr

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We construct a dynamic takeover law index using hand-collected data on legal provisions and empirically examine the effect of takeover regulation to protect shareholders on shareholder wealth for bidders and targets in a multi-country setting. We find that a stricter takeover law increases combined wealth for bidders and targets, which suggests that stronger shareholder protection in the takeover bid process increases the efficiency of the takeover market. Contrary to our hypothesis, results show that stricter takeover law does not hurt bidders. Its effect on target announcement returns and takeover premiums is significantly positive and economically large. Our findings suggest that the mandatory bid rule and ownership disclosure increase synergistic gains in takeovers, whilst the fair-price rule and squeeze-out rights may reduce combined gains. Further results show that increased overall gains can be explained by greater competition in the market for corporate control and a shorter time to successful completion of a takeover under stricter takeover law.


WP485: Law, Trust & Institutional Change in China: Evidence from Qualitative Fieldwork

Ding Chen, Simon Deakin, Mathias Siems and Boya Wang

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China’s rapid growth in the absence of autonomous legal institutions of the kind found in the west appears to pose a problem for theories which stress the importance of law for economic development. In this paper we draw on interviews with lawyers, entrepreneurs and financial market actors to illustrate the complexity of attitudes to law and economic growth in contemporary China. In the case of product markets, business relations are increasingly characterised by a mix of trust-based transacting and legal formality which is not fundamentally different from practice in the west. Financial markets are less like their western counterparts, thanks to the preponderant role of government in asset allocation, and a lack of transparency in market pricing. However, in both sets of markets we find evidence of a transition from inter-personal trust (guanxi) to impersonal transacting, and of growing demands from business and legal groups for the impartial application of legal rules and market regulations. China’s experience does not suggest that law is irrelevant or unrelated to growth, but that legal and economic institutions coevolve in the transition from central planning to a market economy.


WP484: Ownership, Institutions & Firm Value: Cross-Provincial Evidence from China

Boya Wang

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The distinctive political-economic setups of emerging economies engender special corporate governance issues that warrant added attention to the broader institutional environments. Using a unique provincial firm-level dataset, we investigate how control natures, ownership concentration, and provincial differences in government quality and financial deregulation jointly affect the market value of Chinese listed companies. Firstly, the presence of a central government controller is generally associated with higher Tobin’s Q, while a negative premium is found for firms ultimately controlled by local governments. We then use alternative concentration measures and an instrumental variable approach to confirm a nonlinear relationship between blockholder ownership and Tobin’s Q, implying that firm value first decreases and then increases as blockholders own more shares. Further analysis reveals that government quality has a significant, positive moderating effect on the relationship between different control natures and firm value, while the valuation effect of ownership concentration also depends on regional financial development.


WP483: The Macro-Economic Impact of Brexit: Using the CBR Macro-Economic Model of the UK Economy (UKMOD)

Graham Gudgin, Ken Coutts, Neil Gibson and Jordan Buchanan

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This working paper uses the new CBR macro-economic model of the UK economy to investigate possible futures following the referendum decision to leave the EU. The paper briefly explains why we felt the necessity to build a new model and describes some of its key features. Since Brexit is a unique event with no precedent it is not possible to do a normal forecast in which a few assumptions are made about a limited range of exogenous variables. The best that can be done is to construct scenarios and two are presented here. The difficult part is to decide what scale of adjustment is needed to reflect the likely realities of Brexit. Analysis by HM Treasury of the potential impact of various outcomes for trade outside the EU is examined and found wanting. Instead the actual experience of UK export performance is examined for a long period including both pre- and post- accession years. This suggests a more limited impact of EU membership. While we include a scenario based on Treasury assumptions, a more realistic, although in our view still pessimistic, scenario assumes half of the trade loss of the Treasury. The results are presented through comparing these scenarios with a pre-referendum forecast. In the milder Brexit scenario there is a 2% loss of GDP by 2025 but little loss of per capita GDP, less unemployment but more inflation. In the more severe, Treasury-based scenario the loss of GDP is nearer 5% (2% for per capita GDP), inflation is higher and the advantage in unemployment less.


WP482: How UK Banks are Changing Their Corporate Culture & Practice Following the Financial Crisis of 2007-08

Ian W Jones and Michael G Pollitt

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This paper looks at positive case studies of organisational change at significant UK banks in response to the financial crisis. We present examples of good practice, which specifically address the identified need to change the culture and practice of UK banking. Our aim is to identify cases that can be of value in teaching. Our research complements the existing research on ethical banking and on culture change in UK banking. We begin by reviewing some of the literature on the crisis as it relates to the culture of banking in the UK. We go on to document three case studies from each of five banks with a significant retail business in the UK – Barclays, Lloyds, TSB, Santander and Hoare. We finish with a conclusion that draws out some over-arching lessons on culture change in UK banking from our case studies.


WP481: Co-operation in Production, the Organization of Industry & Productive Systems: A Critical Survey of the ‘District’ Form of Industrial Organisation & Development

Sue Konzelmann and Frank Wilkinson

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Liberal economics has traditionally put strong emphasis on individualisation and specialisation – and has struggled with the notion of co-operation. Thus, Alfred Marshall’s pioneering work on the English industrial districts of his day posed a significant challenge to the conventional wisdom, which embraced laissez-faire markets and Adam Smith’s claim that improvements in efficiency depend upon the increased division of labour within firms competing in them. Marshall found that an important determinant of the competitive success of industrial districts was effective co-operation within and between firms, supported by a dense network of institutions, and markets regulated by agreed rules, norms and standards. He theorised that these generate external economies of scale and scope that enable the district and its constituent small firms to successfully compete with large, vertically integrated firms. From the mid-1920s, however, with the emergence and growth of very large, highly successful firms, the conventional wisdom shifted to suppose that the historical tendency in capitalist development was towards large firm dominance; and the small firm sector was progressively reduced to a residuum. However, the rediscovery of the industrial district by Italian scholars during the 1960s revived interest in Marshall’s notion of localised productive systems and attracted considerable attention to this form of industrial organisation. This paper traces themes within this literature, from the earliest theorising by the Classical Political Economists to the present, focusing on the role of co-operation in production, the relationship between the organisation of production and markets, and the nature and functioning of productive systems.


WP480: State and Knowledge Production: Industrial Relations Scholarship under Chinese Capitalism

Enying Zheng and Simon Deakin

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We use the evolution of industrial relations scholarship in China to study the role of the state in the process of knowledge production. In the course of the last decade the policy of the Chinese state has shifted from promoting a flexible labour market as part of an export-led growth strategy, to addressing problems of growing labour unrest. This shift has, however, yet to be reflected in research and teaching of industrial relations. Drawing on an archive of over 7,000 articles published in Chinese-language journals, we show that the industrial relations field has failed to cohere in China as it did in North America and Western Europe in response to similar pressures in the middle decades of the twentieth century. Chinese research on labour issues is divided between a practice-orientated human resource management literature and a sociological approach which is isolated from practice and policy. We explain this pattern in terms of the distinctive nature of Chinese capitalism, which manages to be simultaneously state-encompassed yet individualistic, leaving little space for the collective institutions of civil society which have been the focus of industrial relations research in the West.


WP479: Pricing Labour Capacity: The Unexpected Effects of Formalizing Employment Contracts in China

Enying Zheng and Simon Deakin

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This paper analyses the effects of recent laws formalising employment contracts in China, part of a wider policy to normalise features of an emerging market economy. Using a unique hand-collected dataset of 294 industrial injury claims handled by a labour dispute arbitration commission in 2010, we study the impact of having a formal contract on the amount of compensation paid to victims of workplace accidents. An inherent feature of the employment contract under a market economy is its incompleteness: because work-effort bargain and labour capacity cannot be accurately specified ex ante, the employer can expropriate the surplus from production ex post. The legally-driven formalisation of employment contracts is intended to redress this effect by holding the employer to the terms of the parties’ agreement and proving for third party enforcement. Our empirical analysis shows that having a written employment contract makes an injury claim more than twice likely to be arbitrated than mediated, in line with the intended effect of the law, but that it also leads to a reduction of around half in the amount of compensation awarded. Formalisation of employment contracts may reduce employer discretion during the course of the employment relationship, but it also makes it difficult for workers to invoke actual or customary wage levels for the purposes of putting a value on an accident compensation claim, in the face of the formal wage stated in the contract. Formalisation ends up reinforcing the hierarchical power of the employer which is a feature of capitalist work relations.


WP478: The Contribution of Labour Law to Economic Development & Growth

Simon Deakin

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A review of theoretical, historical and quantitative empirical research on the economic effects of labour laws suggests that worker-protective labour regulation generates net positive outcomes for development and growth. Labour law should be seen as a developmental institution which has a symbiotic relationship to the rise of capitalism in the global north and is part of the transition to a market economy being experienced by today’s low- and middle-income countries. Claims made for the desuetude of labour law’s core mechanisms, including the standard employment relationship, are not borne about by recent evidence. The complex role played by labour regulation in the dynamics of capitalism would repay further investigation.


WP477: What’s Happening to Our Universities?

Ben R Martin

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In recent decades, many universities have been moving in the direction of a more hierarchical and centralised structure, with top-down planning and reduced local autonomy for departments. Yet the management literature over this period has stressed the numerous benefits of flatter organisational structures, decentralisation and local autonomy for sections or departments. What might explain this paradox? And why have academics remained strangely quiet about this, meekly accepting their fate? The paper critically examines the dangers of centralised top-down management, increasingly bureaucratic procedures, teaching to a prescribed formula, and research driven by assessment and performance targets, illustrating these with a number of specific examples. It discusses a number of possible driving forces of these worrying developments, and concludes by asking whether academics may be in danger of suffering the fate of the boiled frog.

2015 working papers

WP476: R&D Policy Instruments: A Critical Review of What We Do & Don’t Know

Ben R Martin

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In recent years, the term ‘policy instrument’ has been used more frequently with regard to R&D policy and innovation policy. What does this term mean? Where did it come from? What do we know about it, both with regard to the general field of policy studies but also in the specific context of R&D policy? This article examines the development of the notion of policy instruments as part of a body of research known as ‘policy design’. Over the last 50 years, there has been substantial progress in setting policy design on a more systematic basis, with the development of established concepts and analytical frameworks, including various taxonomies of policy instruments. However, with just a few exceptions, this body of research seems to have had little impact in the world of R&D policy. The paper reviews the literature on R&D policy instruments. It identifies a number of challenges for R&D policy instruments in the light of four transitions – the shift from linear to systemic thinking about R&D and innovation, the shift from national governments to multi-level governance, the shift from individual actors to collaborations and networks, and the shift from individual policies to policy mixes. It sets out a research agenda for the study of R&D policy instruments, before ending with a number of conclusions. 


WP475: Twenty Challenges for Innovation Studies

Ben R Martin

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With the field of innovation studies now half a century old, the occasion has been marked by several studies looking back to identify the main advances made over its lifetime. Starting from a list of 20 advances over the field’s history, this discussion paper sets out 20 challenges for coming decades. The intention is to prompt a debate within the innovation studies community on what are, or should be, the key challenges for us to take up, and more generally on what sort of field we aspire to be. It is argued that the empirical focus of our studies has failed to keep pace with the fast changing world and economy, especially the shift from manufacturing to services and the increasingly urgent need for sustainability. Moreover, the very way we conceptualise, define, operationalise and analyse ‘innovation’ seems somewhat rooted in the past, leaving us less able to grapple with other less visible or ‘dark’ forms of innovation.


WP474: Strong State, Weak Managers: How Firms Cope with Autocracy in Hungary

Dorottya Sallai and Gerhard Schnyder

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This paper investigates how companies manage risk associated with political ties in the context of the ‘return of state capitalism’. We show that findings from previous studies of firms’ copying strategies under autocratic regimes are of limited relevance in the context of Hungary, because they lack a sophisticated, theoretically underpinned conceptualisation of ‘the state’. We develop a more fine-grained analysis of the role of the state in emerging markets. We then show that the type of ‘state capitalism’ that is emerging in Hungary poses unique challenges to companies with implications for existing theories of companies’ political ‘buffering strategies’. Based on interviews with business leaders in Hungary, we identify two coping strategies: responsiveness –whereby firms accommodate state pressures by giving in to them – and a non-responsive strategy of ‘dormancy’, which consists in firms putting forward-looking activities on hold and focussing on survival. We discuss implications for theories of corporate political risk management.


WP473: Varieties of Creditor Protection: Insolvency Law Reform & Credit Expansion in Developed Market Economies

Simon Deakin, Viviana Mollica and Prabirjit Sarkar

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We examine the relationship between creditor protection, law reform and credit expansion using longitudinal data for four developed market economies between 1970 and 2005. By decomposing the different elements of creditor protection, we show that civil law countries (France and Germany) have developed a high level of protection for creditors in the form of controls over the management of debtor firms, while common law countries (UK and USA) have arrived at a high degree of protection in relation to secured creditors’ contractual rights over firms’ assets. Using panel causality tests and dynamic panel data modelling, we show that laws strengthening creditors’ control over debtor firms in these four countries had a long-term positive effect on credit expansion, while reforms increasing secured creditors’ rights had a negative effect. We explore the implications of our findings for legal origin theory and the varieties of capitalism approach.


WP472: The CBR Macro-Economic Model of the UK Economy (UKMOD)

Graham Gudgin, Ken Coutts and Neil Gibson

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This working paper provides a detailed exposition of the assumptions, structure and statistical evidence that support a new macroeconomic forecasting and simulation model of the UK economy. The model is based on an annual dataset that produces conditional forecasts or simulations over a five to ten year horizon. The model enables us to discuss issues of policy in quantitative terms so that the orders of magnitude of the economic consequences can be assessed. Readers of our forecast reports will find in this paper the information that justifies the modelling methodology and the empirical evidence supporting the key behavioural relationships of the model.


WP471: Russia’s Legal Transitions: Marxist Theory, Neoclassical Economics and the Rule of Law

John Hamilton and Simon Deakin

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We review the role of economic theory in shaping the process of legal change in Russia during the two transitions it experienced during the course of the twentieth century: the transition to a socialist economy organised along the lines of state ownership of the means of production in the 1920s, and the transition to a market economy which occurred after the fall of the Soviet Union in the 1990s. Despite differences in methodology and in policy implications, Marxist theory, dominant in the 1920s, and neoclassical economics, dominant in the 1990s, offered a similarly reductive account of law as subservient to wider economic forces. In both cases, the subordinate place accorded to law undermined the transition process. Although path dependence and history are frequently invoked to explain the limited development of the rule of law in Russia during the 1990s, policy choices driven by a deterministic conception of law and economics also played a role.


WP470: Law as Evolution, Evolution as Social Order: Common Law Method Reconsidered

Simon Deakin

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Building on systems theory and the economics of law, this paper argues that evolutionary models can explain certain features of common law reasoning, in particular the way that the doctrine of precedent operates to combine stability with change. The common law can be modelled as an adaptive system which coevolves with its environment, which in this context consists of the political and economic systems of a given society. The common law responds to signals from the economy and from politics (‘cognitive openness’), while retaining its distinct mode of operation (‘operative closure’). A version of the variation, selection, retention algorithm operates at the level of legal decision-making. Theories of legal evolution which stress selection and variation at the expense of inheritance describe only part of the process of legal change and are prone to teleological accounts of evolution to efficiency. Focusing on inheritance or retention helps us to see that the common law can only be qualifiedly adaptive, at best, and that many inefficient rules will persist and survive even in the face of selective pressures. The relevance of this approach is illustrated by an examination of the leading decision in the English (and Scottish) law of tort (or delict), Donoghue v. Stevenson, and its implications for some influential accounts of legal evolution, including legal origin theory, are explored.


WP469: How Should India Reforms Its Labour Laws?

Simon Deakin and Antara Haldar

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We examine the current policy debate around the reform of labour laws in India, which has been stimulated in part by the success of the Gujarat model of economic development. Gujarat’s deregulatory reforms have included changes to the legal regime governing employment terminations, which could form a basis for a change in national-level labour laws. Evidence linking labour law deregulation to growth, however, is weak, whether the focus is on India or the experience of other countries. Building labour market institutions is a long-term process which requires investment in state capacity for the management of risks associated with the transition to a formal economy.


WP468: Legal Institutionalism: Capitalism & the Constitutive Role of Law

Simon Deakin, David Gindis, Geoffrey M Hodgson, Kainan Huang and Katharina Pistor

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Social scientists have paid insufficient attention to the role of law in constituting the economic institutions of capitalism. Part of this neglect emanates from inadequate conceptions of the nature of law itself. Spontaneous conceptions of law and property rights that downplay the role of the state are criticized here, because they typically assume relatively small numbers of agents and underplay the complexity and uncertainty in developed capitalist systems. In developed capitalist economies, law is sustained through interaction between private agents, courts and the legislative apparatus. Law is also a key institution for overcoming contracting uncertainties. It is furthermore a part of the power structure of society, and a major means by which power is exercised. This argument is illustrated by considering institutions such as property and the firm. Complex systems of law have played a crucial role in capitalist development and are also vital for developing economies.


WP467: Disappearing Paradigms in Shareholder Protection: Leximetric Evidence for 30 Countries, 1990-2013

Dionysia Katelouzou and Mathias Siems

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Scholars frequently claim that path dependency of the law, the influence of the US model of corporate governance, and the role of legal origin and the stage of legal development are key for a comparative understanding of shareholder protection. This article, however, suggests that these paradigms of comparative company law gradually seem to disappear. The basis for our assessment is an original leximetric dataset that measures the development of shareholder protection for 30 countries over the last 24 years. Using tools of descriptive statistics, time series and cluster analysis, our main findings are that all legal origins have now in average about the same level of shareholder protection, that paternalistic tools have overtaken enabling tools of protection, and that after the global financial crisis this area has become a less frequent object of law reforms.

2014 working papers

WP466: Are Litigation & Collective Bargaining Complements or Substitutes for Achieving Gender Equality? A Study of the British Equal Pay Act

Simon Deakin, Sarah Fraser Butlin, Colm McLaughlin and Aleksandra Polanska

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We present a socio-legal case study of the recent equal pay litigation wave in Britain, which saw an unprecedented increase in the number of claims, triggered in part by the entry of no-win, no-fee law firms into this part of the legal services market. Although the rise in litigation led to greater adversarialism in pay bargaining, litigation and collective bargaining mostly operated as complementary mechanisms in advancing an equality agenda. Litigation may be a more potent agent for social change than some recent analyses, which stress the limits of the law in the face of organisational pressures to canalise and diffuse human rights, have suggested.


WP465: Corporate Governance, Legal Origin & the Persistence of Profits

Dominic Chai, Simon Deakin, Prabirjit Sarkar and Ajit Singh

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The persistence of abnormal profits can be interpreted as evidence of the presence of firms which are successful over time in capturing rents from product or process innovation. Using a large sample of manufacturing firms in 18 developed and developing countries, we estimate the impact of laws governing shareholder rights on the persistence of firm-level profits. We find that higher shareholder protection reduces the persistence of profits in common law countries and increases it in civil law countries. Because shareholder protection is higher, on average, in common law countries, this finding is consistent with the view that increases in legally mandated or encouraged shareholder protection beyond a certain point have a negative impact on firm-level innovation.


WP464: On Heaven’s Lathe: State, Rule of Law, & Economic Development

Ding Chen and Simon Deakin

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We propose a theoretical framework for understanding the evolution of the rule of law state, which is conceived as the equilibrium of a societal game in which actors accept the legitimacy of publicly enunciated legal rules. A meta-norm of respect for the sovereign legal power of the state is not self-forming on the basis of private conduct, but requires the coevolution of impersonal market exchange with effective state capacity to constitute and regulate markets. A functioning legal system must acquire the means not just to control private power but to constrain other organs of government. The emergence of such a ‘self-limiting state’ is an historical process which, while complementary to a market order, is also contingent and path-dependent, and is not preordained. Illustrating our argument with empirical cases drawn from the contemporary experience of middle income countries, we argue that alternatives to the rule of law state, including interpersonal trust, closed networks and authoritarian political control, can only achieve limited scale and scope effects, and are prone to high deadweight costs arising from corruption and the capture of the public sphere by private interests. We also discuss the potential of transplants of legal rules and institutions to catalyse the transition to impersonal trade based on the rule of law, and present evidence, from time-series econometric analysis, that the diffusion of shareholder protection laws has the potential to support financial development in emerging markets. Evolution towards the rule of law state is, we conclude, one possible developmental path for middle income countries.


WP463: Institutional Solutions to Precariousness & Inequality in Labour Markets

Zoe Adams and Simon Deakin

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It has become widely assumed that the standard employment relationship (SER) is in irreversible decline in industrialised societies. However, non-standard and precarious work relationships often complement the SER via labour market transitions, and are not displacing it as the focal point of labour market regulation. The coordination and risk management functions of the SER continue to be relevant in market economies, and the SER is adjusting to new conditions. The SER has a complex and evolving relationship to gender and to social stratification. In the European context where the SER originated and achieved its clearest legal expression, institutional solutions to precariousness and inequality are being developed, the most innovative of which avoid simple deregulation in favour of integrated policy responses involving a range of complementary regulatory mechanisms.


WP462: A Note on Piketty’s Capital in the Twenty-First Century

Robert Rowthorn

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Thomas Piketty’s Capital documents long-term trends in income and wealth in advanced economies. It also provides a theoretical framework for analysing the past and projecting the future. Piketty argues that the ratio of wealth to national income is on an upward trend and that this is responsible for the rising income share of wealth-owners. This paper accepts Piketty’s main empirical findings, but questions his interpretation. The rising income share of wealth-owners is not due to the over-accumulation of capital, as he claims, but just the opposite. There has been too little real investment. The paper also considers the long-term dynamics of Piketty’s model and explores the effect of modifying his assumptions about savings behaviour. Finally, it considers the implications of rising asset prices, which are documented by Piketty but are not adequately taken into account in his theoretical analysis or projection of future trends.


WP461: New Developments in the World Economy: A Tough Agenda for MICs (Middle Income Countries)?

Ajit Singh

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We are living through extraordinary times. During the first 12 years of the new millennium, unusually, developing countries (DCs) expanded faster than advanced countries (ACs). IMF suggests that the improvement in DCs during this crisis is due to their ability to absorb shocks. In the most recent period, there has been a reduction in growth rates in most middle-income countries (MICs) as well as in advanced countries. The paper’s second part examines the epic story of South Korean industrialisation. A fundamental argument here is that developing countries have much to learn from each other. This brief presentation ends on an important point that the South-South cooperation is not intended to replace North-South cooperation but rather to supplement it.


WP460: Competition, Competition Policy, Competitiveness, Globalisation & Development

Ajit Singh

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This paper explores the relationship between globalisation, competition, competition policy and competitiveness. It is important to note that although these notions are related, they are conceptually different. This paper contributes by providing a theoretical framework for the main issues which arise in the modern discussion of competition and competition policies in economic development. It also contributes by its extensive treatment of the international dimensions of the subject. Importantly, this paper puts economic development at the centre stage for competition and related policies. It provides a proposal for the establishment of a development-oriented international competition authority. This authority would attempt to limit growth by merger by large multinationals under its purview. They would be allowed to merge provided they divest themselves of a subsidiary of equal value. This would mean that multinationals would not be prohibited to grow by mergers, but they could expand through organic growth or greenfield investment. It would also not stop them from taking over other firms subject to divestiture as outlined. A large body of research on mergers indicates that mega-mergers have the potential of increasing market dominance and reducing contestability. Discouraging such mergers would therefore enhance global contestability, competition, and economic efficiency, while at the same time being distributionally more equitable.


WP459: The Deindustrial Revolution: The Rise & Fall of UK Manufacturing, 1870-2010

Michael Kitson and Jonathan Michie

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This paper considers the evolution of the manufacturing sector in the UK since 1870. It analyses the contribution of manufacturing to national income, employment and trade. From 1870 to 1960, manufacturing played a key role in the development of the economy, undergirding success in other sectors of the economy and securing rising living standards. The subsequent fifty years, from 1960, have witnessed a relative decline of the UK manufacturing sector – relative to other sectors of the economy, and relative to the manufacturing sectors in other countries. The paper considers the thesis that the relative decline of manufacturing is a natural outcome of the development of advanced economies, and the counter-arguments suggesting that decline of UK manufacturing reflected economic weaknesses and structural imbalances. We argue that in the case of the UK, the relative decline of manufacturing has indeed reflected deep-rooted structural problems. In particular there has been a chronic failure to invest in manufacturing, with the UK economy and investment being instead skewed towards short-term returns and the interests of the ‘City’. A stronger manufacturing sector would help to rebalance the UK economy away from an over-reliance on the banking sector and would help rebalance the UK economy and society in regional terms. To achieve such a rebalancing requires active government policies to help increase investment in education, skills and innovation.


WP458: Labour Law and Inclusive Development

Simon Deakin

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This paper, based on the V.V. Giri Memorial Lecture for 2013, argues that labour law should be seen as a developmental institution, capable of promoting both equality and efficiency, and hence inclusive development. Labour law rules, precisely because they redress the inequality of bargaining power inherent in the employment relationship, may promote economic efficiency, since they counteract the effects of contractual incompleteness, while mitigating labour market risks. The World Bank view that laws designed to help workers often harm them is neither theoretically well informed nor empirically supported. There is a need for new thinking to escape the intellectual rigidities currently afflicting labour law.


WP457: Short-Termism, Impatient Capital and Finance for Manufacturing Innovation in the UK

Alan Hughes

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This paper analyses the links between financial market structures, governance systems and investment behaviour in the UK focusing in particular on investment in R&D. It assesses the extent to which business decision taking in the UK is as a consequence affected by ‘short-termism’. Taken together, the qualitative and quantitative literature reviewed in this report provide substantial evidence for both absolute short-termism in UK financial markets and relatively higher short-termist attitudes compared to other countries. This would imply a bias against long-term innovation intensive investment in manufacturing in the UK liberal market economy.


WP456: Almost Steady East Asian Rise: Implications for Labour Markets and Income Distribution

Ajit Singh and Gurmail Singh

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The extraordinary growth of the East Asian economies during the last 50 years has drawn attention of the economists worldwide. This paper provides a commentary on this epic story. This paper explores the reasons for the extraordinary growth and analysis specific changes which have occurred in income inequality and labour market institutions during this time span. One main conclusion of the paper that contrary to commonly held belief that the globalisation and nature of technological progress has been the main cause of increased income inequality in the period after East Asian crises. We conclude that country specific factors were at least as important, if not more so, in this respect. Analysis shows that in addition to varying pattern of income inequality which has not been observed by other commentators have also been major changes in labour market indicators, including unionisation and collective bargaining, employment protection, and minimum and real wages. The last part of the paper discusses policy implications.

2013 working papers

WP455: Industrial Policy for the Medium to Long-term

Nicholas Crafts and Alan Hughes

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This paper reviews the market failure and systems failure rationales for industrial policy and assesses the evidence on past experience of industrial policy in the UK. In the light of this, it reviews options for reshaping the design and delivery of industrial policy towards UK manufacturing. These options are intended to encourage a medium- to long-term perspective across government departments and to integrate science, innovation and industrial policy.


WP454: Re-industrialisation – A Commentary

Ken Coutts and Robert Rowthorn

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The share of manufacturing in UK employment and value-added at current prices (“value-added” for short) has fallen dramatically in recent years. This commentary investigates the feasibility of reversing this decline. The paper explores the implications of four scenarios over the next twenty-five years. These scenarios generate very different trajectories for the share of manufacturing in value-added. A stronger manufacturing sector would grow faster and generate more net exports. However, the share of manufacturing in employment or value-added would be unlikely to increase. Rapid labour-saving productivity growth in the manufacturing sector would limit the growth of employment in this sector despite rising output. It would also drive down the relative price of manufactured goods, thereby holding down the share of the fast growing manufacturing sector in value-added.


WP453: De-industrialisation & the Balance of Payments in Advanced Economies

Ken Coutts and Robert Rowthorn

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This paper defines de-industrialisation as a secular decline in the share of manufacturing in national employment. De-industrialisation, in this sense, has been a universal feature of economic growth in advanced economies in recent decades. The paper considers briefly what explains this development and quantifies some of the factors responsible. It then examines the experience of Britain and America, which are two countries that prior to the 2008 financial crisis combined rapid de-industrialisation with a strong overall economic performance. The paper considers both the domestic situation and foreign trade performance of manufacturing industry in these countries. It concludes by examining in detail the British balance of payments, and documenting how improvements in the non-manufacturing sphere have helped offset a worsening performance in manufacturing trade.


WP452: Update of Prospects for the UK Balance of Payments

Ken Coutts and Robert Rowthorn

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The paper discusses the enormous structural changes in trade and income flows that have occurred in Britain over the past sixty years. In 1950, Britain was a leading industrial power with a trade surplus in manufactured goods equal to 10% of GDP. There is now a trade deficit in manufactures of 4% of GDP. Over the same period, trade in services has moved into substantial surplus exceeding 4% of GDP. No other large industrialised country has experienced such a large shift in the structure of its trade. The paper uses a small model of the balance of payments to project the main components of the current account consisting of visible trade, invisibles (services), current transfers and net investment income. Various scenarios are considered. Under the most pessimistic scenario, there is a persistent current account deficit of around 5% of GDP. A deficit of this magnitude is not sustainable over the long-run.


WP451: Knowledge Spillovers & Sources of Knowledge in the Manufacturing Sector: Literature Review & Empirical Evidence for the UK

Elif Bascavusoglu-Moreau and Qian Cher Li

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This report provides a review of knowledge spillovers and sources of knowledge in the manufacturing sector. The literature reviewed indicates the importance of intangible investments in firms’ internal knowledge assets. The weight of evidence also emphasises the importance of firms’ absorptive capacity in increasing internal capabilities and in benefiting from external knowledge sources. We also highlight the importance of external knowledge and knowledge-assets (i.e., knowledge spillovers) in determining productivity and competitiveness, as well as the spatial dimension of knowledge flows in particular knowledge clusters. Our study subsequently provides an empirical analysis of firms’ knowledge sourcing and cooperation behaviour for innovation activities in the UK manufacturing sector, using establishment-level data from recent four waves of the UK Innovation Survey covering the 2002-2010 period. Following the approach developed in Harris and Li (2009), we have constructed an empirical multi-index of absorptive capacity to measure a firm’s ability to internalise and appropriate external knowledge for innovation activities. Our results show substantial heterogeneity across sectors; and overall, manufacturing (especially higher tech or advanced) makes the strongest use of knowledge sources and is associated with highest levels of absorptive capacity followed by Knowledge-Intensive Services (KIS), where the UK has a strong comparative advantage. There is evidence that manufacturers responded to external market conditions in their utilisation of knowledge sources and more specifically, firms were making greater use of knowledge sources in response to the recent economic recession.


WP450: International Industrial Policy Experiences & the Lessons for the UK

Ha-Joon Chang, Antonio Andreoni and Ming Leong Kuan

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The present study reviews a diverse set of countries with the most successful industrial policy experiences since the Second World War – namely, the US, Germany, Japan, Italy, Finland, (South) Korea, Singapore, China, and Brazil – with a view to deriving lessons for the UK. In Section 1 an industrial competitiveness benchmarking analysis opens by tracking long term countries’ trajectories and revealing the current alarming state of UK’s manufacturing. Section 2 discusses some of the key theoretical issues in the debate on industrial policy, namely: (a) different definitions of industrial policy and problems related to the standard distinction between ‘horizontal’ and ‘vertical’ measures; (b) the special role of the manufacturing sector in the overall economy, especially as the source of productivity growth, innovation, learning, and resilience; (c) main theoretical justifications for certain widely adopted industrial policy tools and institutions. Section 3, then, reviews the industrial policy experiences of the nine comparator countries. While historical material dating back from the 18th century is covered when appropriate, the focus is more on the recent period, since the 1980s or the 1990s. In Section 4, we draw lessons for the UK’s industrial policy from the nine country experiences that we review in Section 3, filtered through the theoretical discussions provided in Section 2. We draw the lessons along several dimensions: (a) the role of ‘vision’; (b) institutional settings and policy coordination; (c) finance and corporate governance; (d) promotion of innovation; (e) management of transnational corporations; (f) support for SMEs; (g) skills and training. Finally, section 5 looks ahead for the future of the UK’s manufacturing sector and policies, taking into account our theoretical discussions, country case reviews, and the lessons we have drawn from those discussions.


WP449: The Legal Framework Governing Business Firms & its Implications for Manufacturing Scale & Performance: The UK Experience in International Perspective

Simon Deakin

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This paper reviews empirical studies examining the economic effects of laws governing the formation, financing and organisation of business firms with the aim of putting the UK experience in a comparative perspective. The literature identifies two models of legal support for manufacturing which imply different directions for policy: on the one hand, the Silicon Valley model of venture capital funded growth which depends on liquid capital markets and flexible labour markets, and the northern European and Japanese model which is based on long-term innovation, stable ownership, and institutionalised worker-management cooperation. The UK has some of the legal features of the Silicon Valley model, but important parts are missing: for example, the Californian rule under which post-employment restraints (‘restrictive covenants’) are void on the grounds of their anti-competitive effects has no equivalent in the UK. Conversely, although the UK has certain elements of the northern European or east Asian model of institutionalised corporate governance, it is unlikely to be able to replicate the ‘productive coalition’ approach of these countries as long as the legal framework prioritises shareholder rights and the market for corporate control, and provides limited encouragement for job security. The Silicon Valley and ‘productive coalition’ models are ideal types which can distract from the fact that most countries, the UK included, are hybrid systems with some of the characteristics of each model. Rather than designing laws and policies exclusively with one model or the other in mind, it may be preferable to consider specific laws and policies on their own merits, while bearing in mind that a given legal rule or policy does not operate in isolation from others and that there may be some ‘network effects’ in operation due to the way that particular rules interact.


WP448: Agency Theory in Practice: A Qualitative Study of Hedge Fund Activism in Japan

John Buchanan, Dominic Heesang Chai and Simon Deakin

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We look at the reaction to hedge fund activism of managers and shareholders in Japanese firms and explore the implications of our findings for agency theory. We use a qualitative research design which treats the standard agency-theoretical model of the firm as only one possible approach to understanding corporate governance, to be tested through empirical research, rather than as an assumption built into the analysis. We find that Japanese managers do not generally regard themselves as the shareholders’ agents and that, conversely, shareholders in Japanese firms do not generally behave as principals. Our findings suggest that the standard principal-agent model may be a weak fit for firms in certain national contexts.


WP447: Labour Law & Inclusive Development: the Economic Effects of Industrial Relations Laws in Middle-Income Countries

Simon Deakin, Colin Fenwick and Prabirjit Sarkar

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We use leximetric data coding techniques and panel data econometrics to test for the economic effects of laws governing worker representation and industrial action in the large middle-income countries of Brazil, China, India, Russia and South Africa. We find that more worker-protective laws on employee representation tend to be correlated with higher scores on the Human Development Index. By contrast, in the case of laws on industrial action, some negative effects on human development indicators are reported. Our findings imply that laws supporting employee voice and collective bargaining may have beneficial social effects in middle-income countries. We find no rise in unemployment due to more protective labour laws.


WP446: Addressing Labour Market Segmentation: The Role of Labour Law

Simon Deakin

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Labour market segmentation is problematic because of its links to poor job quality, inequality and discrimination, on the one hand, and inefficiency in resource allocations, on the other. Segmentation is the result of contractual ordering which is often privately efficient but socially sub-optimal. The law largely reflects the economics forces and social norms which give rise to segmentation, but can amplify and perpetuate its effects. The rise of atypical employment in some contexts and of informal employment in others is at least in part a response to the emergence of the standard employment relationship or SER as a legal model and normative benchmark for certain aspect of labour law, in particular employment protection legislation. Attempts to counter segmentation and informality by extending the scope of the SER, on the one hand, and by accepting atypical forms but aligning them more closely with the SER, on the other, have met with limited success. The most successful strategies for labour law reform are those based on an integrated policy approach in which some flexibilisation of employment protection rules is combined with complementary mechanisms for mutualising labour market risks, including collective bargaining, workplace social dialogue, work-life balance laws, work sharing arrangements, targeted fiscal reforms, and active labour market policy.


WP445: Empirical Analysis of Legal Institutions and Institutional Change: Multiple-Methods Approaches and their Application to Corporate Governance Research

John Buchanan, Dominic Heesang Chai and Simon Deakin

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The claim that institutions matter for economic growth and development has so far received a more extensive theoretical treatment than an empirical or methodological one. Basing our approach on a coevolutionary conception of relations between law and the economy, we link theory to method and explore three techniques for analysing legal institutions empirically: ‘leximetric’ measurement of legal rules, time-series econometrics, and interview-based fieldwork. We argue that while robust measurement of institutions is possible, quantitative techniques have their limits, and should be combined with fieldwork in a multiple-methods approach.


WP444: Absorptive Capacity: The Role of Communities of Practice

Simon Turner

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Using a ‘process’ based conception of absorptive capacity, this paper reports the findings from an ethnography of organizational learning conducted within the marketing department of the UK’s postal provider, Royal Mail. Through vignettes of two contrasting marketing projects undertaken in conjunction with external partners, the results show that interorganizational learning is supported by informal practices enacted through communities of practice. This highlights the relatively neglected role of social and material practices in the generation of absorptive capacity, but also shows that the learning produced by communities is mediated by relations of power among these groups. This paper develops the theory of absorptive capacity by shifting attention away from ‘prior knowledge’ in supporting learning and turning towards the role of everyday interaction and power relations in producing knowledge in practice.


WP443: Twenty Challenges for Innovation Studies

Please note Working Paper 443 has now been superseded by Working Paper 475.

Ben R Martin

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With the field of innovation studies now half a century old, the occasion has been marked by several studies looking back to identify the main advances made over its lifetime. Starting from a list of 20 advances over the field’s history, this discussion paper sets out 20 challenges for coming decades. At a conference in 1900, David Hilbert put forward a list of 23 unsolved mathematical problems that were to have a profound influence on the work of mathematicians during the 20th Century. The intention here is to prompt a debate within the innovation studies community on what are, or should be, the key challenges for us to take up, and more generally on what sort of field we aspire to be. It is argued that the empirical focus of our studies has not kept pace with the fast changing world and economy, especially the shift from manufacturing to services and the growing need for sustainability. Moreover, the very way we conceptualise, define, operationalise and analyse ‘innovation’ seems rooted in the past, leaving us less able to grapple with other less visible or ‘dark’ forms of innovation.


WP442: Do Labour Laws Increase Equality at the Expense of Higher Unemployment? The Experience of Six OECD Countries, 1970-2010

Simon Deakin, Jonas Malmberg and Prabirjit Sarkar

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Using longitudinal data on labour law in France, Germany, Japan, Sweden, the UK and the USA for the four decades after 1970, we estimate the impact of labour regulation on unemployment and equality, using labour’s share of national income as a proxy for the latter. We employ a dynamic panel data analysis which distinguishes between short-run and long-run effects of legal change. We find that worker-protective labour laws in general have no consistent relationship to unemployment but are positively correlated with equality. Laws relating to working time and employee representation are found to have beneficial impacts on both efficiency and distribution.


WP441: ‘Picking Winners’ in a Liberal Market Economy: Modern Day Heresy – or Essential Strategy for Competitive Success?

Sue Konzelmann and Marc Fovargue-Davies

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This paper explores the current debate about industrial strategy and the UK’s hesitant acceptance of a possible role for the state in addressing the challenges confronting British industry in the wake of the 2007/8 financial crisis. In this context – and following the 2012 London Summer Games – political leaders have been pointing to the strategy that succeeded in reversing the British Olymic team’s fortunes following its nadir at the 1996 Atlanta Summer Games; and they are suggesting that there may be lessons for industry. However, the political rhetoric has yet to be translated into action. Analysis of the elite sport strategy, in the light of the evolving literature on industrial strategy and policy suggests that although there are details that are specific to sport, there are also aspects of the general strategic approach that can be used to inform the design and implementation of a strategy aimed at developing and improving the international competitive performance of UK industrial sectors and manufacturers. The significance of the UK elite sport strategy is that it was evolved and successfully implemented in the British social, political and economic context, building on and improving existing institutional capabilities.


WP440: India and the Eurozone: A Commentary on the Political Economy of Adjustment and Correction

Shailaja Fennell, Amandeep Kaur and Ajit Singh

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This commentary focuses on the interaction between Eurozone and India with a particular focus on the relationship between changes and economic conditions in these two jurisdictions. In the pre liberalization world, India and the Eurozone were regarded a priori as having little interaction with each other. This story changes with globalization and relatively free capital movements. We highlight some of the important changes which have occurred in the Eurozone and Indian economies and discuss the implications for other regions and countries. The commentary sets out a number of hypotheses and uses broad- brush data to provide the intellectual foundations for our analysis.


WP439: The Limits of Flexible Regulation: Managers’ Perceptions of Corporate Governance Codes and ‘Comply-or-Explain’

Paul Sanderson, David Seidl and John Roberts

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Over the past few years regulatory regimes have become more flexible, adopting risk-based approaches and shifting from rules to principles where regulatees are given a degree of discretion in how they comply. In this way ‘one size fits all’. Flexibility such as this is however under threat. The current financial crisis has given rise to calls for more and stronger regulation. Policymakers have to respond but are well aware there are limits – lack of flexibility can hinder innovation and economic growth. So, when does flexible regulation work and when does it not? In what circumstances are regulatees likely to strive to comply with underlying regulatory principles and when are they not? What factors affect regulatee ‘buy-in?’ To address these questions we examined the use of comply-or-explain in corporate governance. This mechanism can be considered the ultimate in flexible regulation. It allows noncompliance, but only where regulatees provide a convincing explanation acceptable to shareholders. Previously we analysed the compliance records of 260 of the largest UK and German companies (Seidl et al. 2012). For this paper we analyse the accompanying interviews with selected senior managers and directors. We conclude the lessons for policymakers are that successful application of flexible regulation mechanisms such as this is contingent on the presence of powerful and influential monitors and that regulatee buy-in to flexible regulation depends primarily on the extent to which (i) ‘soft’ regulation is understood as a traditional means of control and, (ii) regulatees are involved in the design, implementation and evaluation of regulation. However, whatever the conditions or circumstances, large companies tend to believe they are under considerable pressure to be seen to fully comply which may ultimately render any in-built operational flexibility redundant. This is more likely to be the case under conditions of uncertainty.

2012 working papers

WP438: Measuring Corporate Governance: Lessons from the ‘Bundles Approach’

Gerhard Schnyder

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This paper reviews recent studies that analyse and criticise existing academic and commercial corporate governance (CG) indices. Most of these ‘rating the ratings’ papers reach the conclusion that encompassing composite measures of CG are ineffective and suggest therefore to return to simpler measures. This paper draws on the ‘configurational-‘ or ‘bundles approach’ to CG and argues that, while the criticisms made by the ‘rating the ratings’ papers are justified, their recommendations are misguided. Based on four central insights derived from the ‘bundles approach’, the paper shows that reverting to simpler measures of firm-level CG practices is a step in the wrong direction, in that it eliminates information about interactions between different corporate governance mechanisms. This is particularly consequential for comparative CG research that aims to identify differences in country-specific CG systems. Alternative solutions are developed to improve corporate governance measures, which take into account insights from the ‘bundles approach’.


WP437: Enhancing Islamic Finance: Establishing an Islamic Stock Market that Overcomes Problems of the Existing Stock Market

Andrew Sheng and Ajit Singh

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This contribution is concerned with the desirability and feasibility of establishing Islamic stock markets within the current global context. There is at present deep disaffection with stock markets in advanced countries. A central contention of this paper is that the proponents of Islamic stock market will find it easier than their UK counterparts to implement an ethically based programme which is regarded as essential for successful reform. Stronger ethical underpinnings of the Islamic stock market will give it a decisive edge in world markets. The time for Islamic stock markets has therefore come.


WP436: Governing Externalities: The Potential of Reflexive Corporate Social Responsibility

Andrew Johnston

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Externalities occur where an economic actor takes a decision which results in actions that affect other parties without their consent. In most cases, the creator of the externality will be a corporation because they are the most important actors in modern economies. There is a market failure as the corporation obtains all the benefits of the activity but does not bear all the costs.

Since Ronald Coase’s seminal work, economists have generally argued that externalities should be dealt with either by instrumental regulation or by bargaining between the creator and victim. The regulator should choose between these two options on the basis of cost-benefit analysis. In particular, the costs associated with government intervention should be compared with the transaction costs confronting parties where they attempt to deal with the externality by means of a contract. Most economists assume regulatory costs (including the costs of producing and enforcing regulation and the distortions of economic activity to which it gives rise) will be very high, so the ‘cure’ of regulation will normally be worse than the ‘disease’ of externalities, making government intervention undesirable from an efficiency standpoint. This makes them sanguine about leaving many, or even most, externalities to the market, even though its failure led to the externality in the first place. They then assume that if the parties fail to reach agreement on a solution to a particular externality, this will be for transaction costs reasons, so leaving the externality where it falls is the most efficient outcome in the circumstances. This paper argues that neither of these methods offers a wholly adequate way of dealing with externalities in a globalised economy characterised by factually and technologically complex chains of causation. As is widely recognised by sociologists as well as economists, instrumental regulation faces massive difficulties in dealing with externalities. It can also be argued that transaction costs are not the only barrier to bargaining. The result is that many externalities go uncorrected, and it cannot simply be assumed that this is an efficient outcome. The paper then argues that this governance ‘gap’ could be filled by the doctrine of Corporate Social Responsibility (CSR), but only if two conditions are met. First, CSR must be understood as corporations voluntarily taking responsibility for, or internalising, the externalities their operations create. This requires corporate decision-makers to change the frames they use so as to take account of the costs their activities create. Second, corporations must be steered towards a socially adequate identification and internalisation of those costs by the careful use of procedural, or reflexive, regulation. A reflexive regulatory approach to CSR would require corporations to meet with those who consider themselves affected in order to construct the ‘facts’ about the externality, and then require corporate decision-makers to internalise that externality in a manner which is acceptable to all concerned. This would arguably result in many externalities being identified and corrected in a cost-effective way, and should be considered as an alternative or complement to other methods of governing externalities.


WP435: Pathways to Impact & the Strategic Role of Universities

Alan Hughes and Michael Kitson

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There has been an increasing focus on the strategic role of universities in stimulating innovation and economic growth, primarily though the transfer of technology. This paper interrogates some of the key aspects of much of the conventional wisdom concerning the transfer of technology and the knowledge exchange process in general. It analyses the results from two unique surveys: a survey of the UK academic community which generated more than 22,000 responses; and stratified survey of businesses which generated more than 2500 responses. The paper shows that there are many knowledge exchange mechanisms used by academics – these include commercialisation processes but also many other ‘hidden’ connections. It also shows that knowledge exchange involves academics from all disciplines – not just those from science and engineering – and involves partners from the public and third (not for profit) sectors as well as private sector businesses. Furthermore, it shows that the main constraints that hinder or limit the knowledge exchange process include a lack of time, insufficient internal capability to manage relationships; and insufficient information to identify partners. Problems concerning cultural differences between academics and business and disputes concerning intellectual property are not prominent. Overall, the paper suggests that the notion of an academic ‘ivory tower’ seems to be a myth as far as the UK is concerned. It also suggests that a strategic focus on strengthening connections between academia and the rest of society may generate long-term benefits but it will also face challenges and should not distort or divert from the foundations of scholarship on which the success of universities are built.


WP434: The Economics of Austerity

Sue Konzelmann

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The 2007/8 financial crisis has reignited the debate about austerity economics and revealed that it is a highly contested yet poorly understood idea. This article locates the debate in its historical context, tracing it from the early 18th and 19th century Classical debates, which focused mainly on the means by which fiscal deficits should be financed. As capitalism evolved, so did ideas and theories about the economics of austerity. Following World War One, concerns about high levels of government debt produced the 1920s ‘Treasury view’ – that government deficits are economically damaging and austerity is required to rein them in. During the 1930s Great Depression, when unemployment was the main concern, this perspective was challenged by the ‘Keynesian view’ – that government deficits could be economically beneficial during the slump, when the private sector was unable to generate sufficient effective demand to pull the economy out of depression. From this perspective, austerity was the policy prescription for the top of the business cycle, to prevent the economy from over-heating and igniting inflation. The ‘stagflationary’ crises of the 1970s challenged this view; and during the decades preceding the 2007/8 crisis, austerity was considered to be a policy for the bottom of the business cycle, when the excesses of a bubble-inflated boom had been revealed by its collapse. In the aftermath of the 2007/8 financial crisis, however, austerity no longer has the economic objective of macroeconomic stabilisation. Instead, it has become the objective itself – demanded by actors in the international financial markets as evidence that governments are serious about managing their deficits and paying back their debts, thereby protecting the financial interests of investors in sovereign debt. However, if austerity undermines economic growth – as it is doing at present – markets are unlikely to remain loyal to those countries suffering the effect. It is therefore important that policy-makers and political leaders learn the lessons of the 2007/8 financial crisis with regard to the economics of austerity – before it is too late.


WP433: A Different Path to Growth? Service Innovation & Performance amongst UK Manufacturers

Bruce Tether and Elif Bascavusoglu-Moreau

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Introducing and innovating services is advocated as a means by which manufacturing firms in advanced economies can retain or enhance their competitiveness. But little is known about how manufacturers innovate services, nor about the impact of service innovation on manufacturers’ performance. Using two consecutive waves of the UK Innovation Survey, this paper first examines how manufacturers innovate services, comparing this with how they innovate goods (i.e., material products) and production processes. We find that manufacturers tend to innovate services differently: R&D is found to be unimportant, whilst investments in marketing and training are found to be related to service innovation. The paper then examines the impact of service innovation on performance, in terms of innovative sales per employee and total sales per employee. We find that service innovation does not increase innovative sales but is associated with higher total sales per employee.


WP432: The Evolution of Science Policy & Innovation Studies

Ben R Martin

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This paper examines the origins and evolution of the field of science policy and innovation studies (SPIS). In particular, it seeks to identify the key intellectual developments in the field over the last 50 years by analysing the publications that have been highly cited by other researchers. Along with other studies reported in this Special issue, it represents one of the first and most systematic attempts to identify and analyse the most influential contributions to an emerging field on the basis of highly cited books and articles. The analysis reveals how the emerging field of SPIS drew upon a growing range of disciplines in the late 1950s and 1960s, and how the relationship with these disciplines evolved over time. Around the mid-1980s, SPIS started to become a more coherent field centred on the adoption of an evolutionary (or neo-Schumpeterian) economics framework, and an interactive model of the innovation process, and (a little later) the concept of ‘systems of innovation’ and the resource-based view of the firm. The article concludes with a discussion of whether SPIS is perhaps in the early stages of becoming a discipline.


WP431: Variety of Search & Innovation: A Comparative Study of US Manufacturing & Knowledge Intensive Business Services Sectors

Andy Cosh and Joanne Zhang

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Whilst the variety of search activities promotes innovation, there is a central tension between a firm’s potential benefits from wide and diverse search activities and its ability to reap these potential benefits. In this paper, we argue that the potential and realised benefits from a firm’ search activities are influenced not only by its resources and capabilities, but also by the nature of innovation activities at sector level. Drawing upon a statistical analysis of a large scale survey conducted in the US, we examine the impact of a firm’s external search strategy along two dimensions (search intensity and direction) on its innovative performance. Our findings suggest that manufacturing firms tend to benefit from wide and diversified search activities whereas knowledge intensive business services (KIBS) firms tend to benefit from narrow and specialised search activities. Furthermore, when taking account of firm size and absorptive capacity, a more nuanced picture emerges. Implications and contributions to the innovation search literature are discussed.


WP430: Islamic Finance Revisited: Conceptual & Analytical Issues from the Perspective of Conventional Economics

Andrew Sheng and Ajit Singh

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After a brief recent empirical sketch of Islamic finance, the paper turns to its main theoretical and conceptual purpose. It seeks to relate the concepts of Islamic and conventional finance, and to examine certain important questions which arise from the interaction between these systems. The paper is written from the perspective of conventional modern economics, as the authors are students of the latter. The paper discusses the main tenets of Islamic finance, as well as those of modern economics, including the implications of zero interest rates and those of Modigliani and Miller theorems. The most notable finding of this paper is that John Maynard Keynes’ analysis of employment, interest and money provides, inadvertently, the best rationale for some of the basic precepts of Islamic finance. The paper concludes that there is no inevitable conflict between the two systems and cooperation between them is eminently desirable and feasible.

2011 working papers

WP429: Capability Theory, Employee Voice & Corporate Restructuring: Evidence from UK Case Studies

Simon Deakin and Aristea Koukiadaki

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We examine the relationship between capability for voice and corporate restructuring through an empirical study of the operation of the UK’s Information and Consultation (I&C) Regulations of 2004. These Regulations, implementing an EU Directive, introduced elements of the continental European codetermination model into UK law, while allowing for flexibility and experimentation in forms of employee representation. Although the absence of a preferred role for trade unions in the establishment of I&C arrangements limited the scope for interaction with existing structures of collective bargaining, there is evidence that unions were able to use the new arrangements to extend their influence in some contexts. We also report evidence of deliberation mitigating the impact of restructurings on workforce morale and contributing to a longer-term perspective on skills in some firms. We conclude that the I&C model has unfulfilled potential in the UK context.


WP428: Indian Labour Law & Its Impact on Unemployment, 1970-2006: A Leximetric Study

Simon Deakin and Prabirjit Sarkar

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We analyse a recently developed leximetric dataset on Indian labour law over the period 1970 to 2006. Indian labour law is seen to be highly protective of workers’ interests by international standards, particularly in the area of dismissal regulation. We undertake a time-series econometric analysis to estimate the impact of the strengthening of labour laws on unemployment and industrial output in the formal economy. We find no evidence that pro-worker labour legislation leads to unemployment or industrial stagnation. Rather, pro-worker labour laws are associated with low unemployment, with the direction of causality running from unemployment and output to labour regulation.


WP427: Science & Technology Studies: Exploring the Knowledge Base

Ben R Martin, Paul Nightingale and Alfredo Yegros-Yegros

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Science and Technology Studies (STS) is one of a number of new research fields to emerge over the last four or five decades. This paper attempts to identify its core academic contributions using the methodology developed by Fagerberg et al. (2011) in their parallel study of Innovation Studies. The paper uses the references cited by the authors of chapters in a number of authoritative ‘handbooks’, based on the assumption that those authors will collectively have been reasonably comprehensive in identifying the core contributions to the field. The study analyses the publications most highly cited by the handbook authors, in particular examining their content and what they reveal about the various phases in the development of STS. The second part of the study analyses the ‘users’ of the STS core contributions who have cited these contributions in their own work, exploring their research fields, journals, and geographical location. The paper concludes with some comparisons between STS and the fields of Innovation Studies and Entrepreneurship, in particular with regard to the role of ‘institution builders’ in helping to develop a new research field.


WP426: Gender Inequality & Reflexive Law: The Potential of Different Regulatory Mechanisms for Making Employment Rights Effective

Simon Deakin, Colm McLaughlin and Dominic Heesang Chai

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We review the different regulatory mechanisms which have been used in the UK context to promote gender equality in employment over the past decade, including legal enforcement based on claimant-led litigation, collective bargaining, pay audits, and shareholder pressure. Evidence is drawn from case studies examining the effects of these different mechanisms on organisations in the public and private sectors, and from econometric analysis of the impact of stock market pressures on firms’ human resource practices. We argue that there is scope for reflexive solutions to improve the effectiveness in practice of UK equality law, by inducing efficient disclosure by employers, setting default rules, and encouraging bargaining in the shadow of the law.


WP425: Open Innovation, the Haldane Principle & the New Production of Knowledge: Science Policy & University-Industry Links in the UK after the Financial Crisis

Alan Hughes

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This paper analyses science policy resource allocation in the light of a comparison of the open innovation and Mode 2 new production of knowledge conceptual frameworks. It provides a brief historical review of the evolution of science funding and the application of the Haldane principle in the UK. The core of the paper analyses academic and business attitudes to university-industry links using two recent large scale surveys and argues that there is a largely false dichotomy drawn between applied and basic research. University-industry links are already extensive and encompass a wide range of interactions than those captured by the usual debate over science engineering and narrow conceptions of commercialisation based on patenting and spin-outs.


WP424: Legal Evolution: Integrating Economic & Systemic Approaches

Simon Deakin

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This paper explores the scope for synthesis between economic and systemic approaches to the understanding of legal evolution. The evolutionary and epistemic branches of game theory predict that stable norms will emerge when agents share common beliefs concerning future states of the world. Systems theory see the legal order as a social system which reproduces itself by recursive acts of legal communication, thereby giving rise to self-reference and operational closure. At the same time, the legal system is cognitively open, that is to say, indirectly influenced by other social systems in its environment. This gives rise to the possibility of coevolution of law and the economy. It will be argued that systems theory, by developing the idea of law as an adaptive system with cognitive properties, provides a missing link in the evolutionary theory of norms. Recent game theoretical models imply that common knowledge is not entirely endogenous to agents’ interactions, but depends to a certain extent on emergent normative structures. These include the public representations of common knowledge which are provided by the legal system. The paper will explore the implications of this idea, argue for an integrated economic and systemic analysis of legal evolution, and consider some of the theoretical and methodological implications of such a step.


WP423: An End to Consensus? The Selective Impact of Corporate Law Reform on Financial Development

Simon Deakin, Prabirjit Sarkar and Ajit Singh

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Legal origins theory suggests that law reform, strengthening shareholder and creditor rights, should enhance financial development. We use recently created datasets measuring legal change over time in a sample of 25 developing, developed and transition countries to test this claim. We find that increases in shareholder protection contribute to stock market growth in the common law world and in developing countries, but not in the civil law world. We also find evidence of reverse causation, with financial development triggering legal changes in the developing world. We consider a number of reasons for the selective impact of law reform, focusing on the endogeneity of the legal system to its economic context, and on resulting complementarities between legal and financial institutions.


WP422: Anglo-Saxon Capitalism in Crisis? Models of Liberal Capitalism & the Preconditions for Financial Stability

Sue Konzelman and Marc Fovargue-Davies

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The return to economic liberalism in the Anglo-Saxon world was motivated by the apparent failure of Keynesian economic management to control the stagflation of the 1970s and early 1980s. In this context, the theories of economic liberalism, championed by Friederich von Hayek, Milton Friedman and the Chicago School economists, provided an alternative. However, the divergent experience of the US, UK, Canada and Australia reveals two distinct ‘varieties’ of economic liberalism: the ‘neo-classical’ incarnation, which describes American and British liberal capitalism, and the more ‘balanced’ economic liberalism that evolved in Canada and Australia. In large part, these were a product of the way that liberal economic theory was understood and translated into policy, which in turn shaped the evolving relationship between the state and the private sector and the relative position of the financial sector within the broader economic system. Together, these determined the nature and extent of financial market regulation and the system’s relative stability during the 2008 crisis.


WP421: Financial Globalisation & Human Development

Ajit Singh

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This paper is concerned essentially with the question, how does financial globalisation affect welfare? Orthodox theory suggests that because of greater risk-sharing between countries that financial liberalisation entails, there should be no welfare losses. Greater risk sharing should lead to greater smoothing of consumption and/or growth trajectories for developing countries. Yet there is widespread evidence of crises following liberalisation. Apart from these international macro-economic issues, it is argued here that financial globalisation changes the very nature of capitalism from managerial to finance capitalism. This profoundly affects at the micro-economic level corporate governance, corporate finance and income distribution. Both macro- and micro-economic factors outlined here influence human development.


WP420: Equality Law & the Limits of the ‘Business Case’ for Addressing Gender Inequalities

Colm McLaughlin and Simon Deakin

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The ‘business case’ for gender equality rests on the claim that organisations can improve their competitiveness through improved diversity management, in particular by reducing turnover and training costs and minimising reputational and litigation risks arising from potentially discriminatory behaviour. It is also argued that through the mechanism of socially responsible investment (SRI), shareholders can put pressure on the management of listed companies to take gender issues more seriously. We assess these claims through an empirical study which draws on interviews with institutional investors engaged in SRI and with managers in a range of organisations in both the private and public sector. We find that organisations are increasingly responding to the argument that persistent gender inequalities represent a form of mismanagement of human resources, with negative implications for the delivery of services, in the public sector, and for the efficiency of the firm, in the private sector. Shareholder engagement, however, has so far had very little impact in this area. We discuss regulatory reforms, including tighter rules on firm-level disclosure of gender policies and practices, which could address these issues.


WP419: Global Imbalances, Under-Consumption & Over-Borrowing: The State of the World Economy & Future Policies

Francis Cripps, Alex Izurieta and Ajit Singh

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This paper addresses the question of whether growth convergence can be sustained in the global economy without compromising welfare and without causing major crises. It employs a simplified stock-flow analytical framework to examine the proposition that the pace and pattern of global growth is conditioned by ‘under-consumption’ in some regions of the world and ‘over-borrowing’ in other regions. A baseline projection using the Cambridge-Alphametrics model (CAM) illustrates consequences of resumed global imbalances after the 2008-2009 crisis. An alternative scenario exemplifies the case in which China and India shift towards internal income redistribution and domestic demand orientated policies and suggests that this will not be sufficient to correct global imbalances or induce improved growth rates in other developing regions. Finally a more ambitious development perspective is simulated. Such a scenario requires internationally-coordinated policy efforts, with greater role for governments in the management of demand, income distribution and environmental sustainability, as well as measures to reduce instability of exchange rate and commodity markets.


WP418: Comparative Advantage, Industrial Policy & the World Bank: Back to First Principles

Ajit Singh

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This paper provides a critical analysis of the World Bank’s new thinking on industrial policy. After outlining the changing perspectives on industrial policy put forward by the World Bank over the last three decades, we argue that the bank’s economists have taken one step forward (the approval for the enhanced role of the state) but also one if not two steps backward (by strong encouragement to countries to seek their current comparative advantage in pursuing industrial policy). We argue that a critical analysis of the World Bank’s policy stance on industrial policy as on other main issues is essential because of the institution’s hegemony in policy analysis of economic development as well as its conditionality, which may now well include what this paper regards as its inappropriate industrial policy. The analysis in the paper combines classical contributions on international trade and the world economy, relevant economic history, as well as Krugman’s comments on these issues in terms of modern economic analysis. The paper concludes with reflections on the appropriate industrial policy for developing countries that the World Bank should support.

2010 working papers

WP417: Corporate Governance & Financial Crisis in the Long Run

Simon Deakin

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Prior to the global financial crisis which began in 2007, corporate governance reforms of the preceding thirty years had promoted a shareholder-value based model of management for which there was little historical precedent. The underlying legal model of the firm retained a vestigial sense of the corporate form as a mechanism for promoting group cooperation, but it became increasingly ill suited to achieving this end in a period of hyper-liquidity in capital and credit markets. The destabilising effects of the shareholder value norm included growing income inequality for which asset price inflation in the Anglo-American economies served as partial compensation, thereby helping to create the conditions which led to the global financial crisis. The failure of individual financial institutions cannot plausibly be ascribed to poor governance practices in those firms; there were more immediate factors at play, including ineffective regulation. However, the general trend towards shareholder value since the 1980s was implicated in a wider, systemic failure of the corporate governance system, of which the banking crisis was simply the most visible manifestation. Under these circumstances, a reassessment of the shareholder value based approach to the governance and management of large corporations is urgently required.


WP416: Employee Ownership in the European Company: Reflexive Law, Reincorporation & Escaping Codetermination

Wanjiru Njoya

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This article assesses the effects of reincorporation on codetermination, focusing on the scope for escaping codetermination by restructuring under the European Company (SE). This is usually associated with the prospect of corporate flight from codetermined jurisdictions. The article presents an alternative possibility, arguing that because the self-regulatory framework of employee participation in the SE encourages diversity and experimentation, it does not inevitably erode the institution of codetermination. Viewed within a framework of reflexive harmonisation, the effects on codetermination are better understood as part of an open-ended process of evolution in the ownership and control structures of the firm. This points to the potential for codetermination to become more, rather than less, integrated as part of the ownership landscape of European firms.


WP415: The Global Economic & Financial Crisis: A Review & Commentary

Ajit Singh and Ann Zammit

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This paper provides a review and commentary on the current financial and economic crisis. It considers important analytical and policy issues from a global and North-South perspective. The analytical questions cover issues such as the better than expected performance of the world economy, the role of global financial imbalances, and whether or not economic theory has been helpful. It is argued that close international cooperation and policy coordination are essential to recovery and an improved distribution of the fruits of growth. Cooperation and financial regulation are particularly necessary in order to prevent international contagion and cascading sovereign debt defaults.


WP414: Globalisation, Structural Adjustment & African Agriculture: Analysis & Evidence

Deborah Bryceson, Prabirjit Sarkar, Shailaja Fennell and Ajit Singh

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A major purpose of this paper is to examine the effects of poor governance or ‘state fragility’ in African countries on their overall economic and agrarian performance. The results of our econometric analysis show that a higher level of public security is conducive to lower levels of conflict, whether of an ethnic, religious and regional nature. It also corresponds with greater agricultural value-added per capita. The analysis further indicates that trade openness and aid do not have a substantial impact on agricultural development. Our institutional and historical examination of the structural adjustment programmes in African countries suggest that African agriculture’s poor performance is not necessarily due to the negative influence of African governments, but could also, in large part, be attributed to the policies advocated by the international financial institutions and donor countries. The resolution of the problems associated with these policies lies in improving the ability of African farmers to benefit from new agrarian technologies that raise staple food productivity and thereby enhance food security and national stability. The paper also provides, inter alia, a nuanced analytical description, based upon available aggregate statistics, of the short- and long-term performance of African economies and their agricultural sectors during the last 25 years.


WP413: Turning Digital: Diversification in UK Design Consultancy Services

Karl Wennberg, Bruce Tether, Cher Li and Andrea Mina

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Why do small firms in emerging industries choose to diversify? Theories of strategic management suggest that diversification is driven by search for exogenous market opportunities, deployment of slack resources, or the exploitation of current knowledge. Institutional organisation theory suggests that firms may diversify for reasons unrelated to performance, such as by mimicking similar firms. We analyse the diversification of small UK design consultancies into the field of digital design between 1996 and 2009, a period characterised by the dot-com ‘boom’, ‘bust’ and recovery. Panel data analyses reveal that financial performance had little causal impact upon diversification. Instead, most firms diversified into digital design triggered by internal growth aspirations or by the following of similar firms. We contribute to the literature on small firm growth and diversification by highlighting the interactive nature of strategic and institutional drivers to diversification, and their relationship with firms’ internal growth aspirations.


WP412: Knowledge & the Evolving Economy

Andrea Mina

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This paper addresses the problem of knowledge and the far-reaching implications it bears upon innovation and the functioning of economic systems. It develops a stylised analysis of the micro-dynamics of knowledge generation, exchange and absorption.It discusses the properties of knowledge accumulation as a complex process: adaptive, path-dependent, context-dependent, open-ended and creative in the sense that it always entails the potential to endogenously generate radical novelty, in line with theory and evidence from the economics of innovation, but fundamentally at odds with a number of important tenets of equilibrium economics.


WP411: The Impact of the Patent System on SMEs

Alan Hughes and Andrea Mina

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The authors consider the theory and evidence on the propensity of small and medium-sized enterprises (SMEs) to patent their innovations.Drawing on UK, European and US literature and data sources, they show that small firms are less likely to use patents as a means of protecting their investment than other means such as confidentiality, secrecy or time to market. SMEs are also less likely than larger firms to use others’ patents as a source of information for their own innovation activities, preferring customers, suppliers and trade fairs. Conversely, smaller firms are more likely than larger firms to put their patents to productive use or to licence out their technology, a pattern that is likely to reflect relatively higher cost and capacity pressures. Among the emerging trends, of particular interest for high tech SMEs is the role of patents as an increasingly important factor in obtaining financial backing by venture capitalists. A survey of UK and US small businesses conducted jointly by the Centre for Business Research (CBR) at Cambridge and the Industrial Performance Unit at the Massachusetts Institute of Technology provides data for further analyses which reveal that small firms in the United States are twice as likely as those in the UK to patent innovations, but are still much less likely to patent than larger US firms. The authors conclude with a general discussion of main findings from a UK and European perspective.


WP410: The Mechanism of Voting Efficiency

Michael C Schouten

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In the wake of the financial crisis, shareholders are increasingly relied upon to monitor directors. But while much has been written about directors’ flawed judgments, remarkably little is known about shareholders’ ability to make accurate judgments. What determines whether shareholders make the right decision when asked to vote on, say, a merger? This paper takes a novel approach to this question by drawing an analogy between corporate voting and another system to aggregate information on estimated values: stock trading. Using insights on stock market efficiency, the paper makes three contributions to our understanding of voting efficiency. First, the paper identifies four key mechanisms of voting efficiency: (1) informed voting, which implies that shareholders have some information to base their voting decision on; (2) rational voting, which implies that such information is processed in a rational, unbiased way; (3) independent voting, which implies that each shareholder arrives at a judgment by making use of his or her personal cognitive skills, and (4) sincere voting, which implies that shareholders vote with a view to furthering the common interest of maximising shareholder value rather than their own private interest. The paper explores the operation of each mechanism, and demonstrates that the mechanisms interact in unexpected ways. Second, the paper shows that share trading, proxy solicitation and vote buying can usefully be viewed as arbitrage techniques that reallocate voting power in the hands of shareholders with superior information and processing skills, and with appropriate incentives. By reducing information asymmetry, arbitrage techniques potentially play an important role in improving voting efficiency. In practice, however, they are subject to cost constraints as well as legal constraints. The limits of voting arbitrage are significant, and affect voting efficiency much in the same way as limits of securities arbitrage affect market efficiency. Third and finally, the paper analyses two issues that are currently being studied by the U.S. Securities Exchange Commission and policymakers around the world: voting without corresponding financial interest (’empty voting’) and the major influence of proxy advisers. By showing that these issues each involve a trade off between the various mechanisms of voting efficiency, their costs and benefits are brought into sharper focus. Several policy options are then presented to mitigate the costs while fostering the benefits.


WP409: Autopoetic Social Systems Theory: The Co-evolution of Law & the Economy

Ana Lourenço

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This paper explores the relationship between regulation and contracts from the point of view of autopoietic social systems theory. Building on the notions of contract as a structure of governance, and of regulation as a system of rules intended to govern the behaviour of its subjects that involves standard setting, monitoring and enforcement, the paper discusses the contributions of Teubner (1993), Collins (1999) and Deakin (2002) for understanding the relationship between the legal and the economic subsystems in society. The paper argues that regulation and contracts co-evolve: the influence of regulation upon contracts is mediated by the system of shared meanings that the contract develops and, reciprocally, the influence of contracts on regulation depends on each regulatory element’s own network of communications. The paper concludes that reflexive regulatory strategies, by facilitating the emergence of shared meanings, may be more successful in governing the behaviour of economic actors. However, given the disturbances involved in the process of co-evolution, this is not straightforward.


WP408: Competition & Public Service Broadcasting: Stimulating Creativity or Servicing Capital?

Simon Turner and Ana Lourenço

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In UK public service broadcasting, recent regulatory change has increased the role of the private sector in television production, culminating in the BBC’s recent introduction of ‘creative competition’ between in-house and independent television producers. Using the concept of ‘cognitive distance’, this paper focuses on the increasing role of the independent sector as a source of creativity and innovation in the delivery of programming for the BBC. The paper shows that the intended benefits of introducing new competencies into public service broadcasting have been thwarted by, on the one hand, a high level of cognitive proximity between in-house and external producers and, on the other, a conflict in values between the BBC and the independent sector, with the latter responding to a commercial imperative that encourages creativity in profitable genres, leaving gaps in other areas of provision. While recent regulatory reform appears to have had a limited impact on the diversity of programming, it does suggest a closer alignment of programme content with the imperatives of capital. Implications for the literature on communities of practice are noted.


WP407: Flexible or Not? The Comply-or-Explain Principle in UK & German Corporate Governance

Paul Sanderson, David Seidl, John Roberts and Bernhard Krieger

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The current financial crisis has given rise to calls to toughen considerably the codes of corporate governance put in place in many countries to regulate corporate behaviour (e.g. the UK Combined Code). These codes vary slightly in form but tend to contain a mix of non-discretionary regulations and discretionary guidance and information. Almost all such codes embody some variation or other of the comply-or-explain principle. Companies should comply with the rules or explain why they do not. In this way the code framers avoid, or perhaps enable, a one-size-fits-all approach. It is this discretion that governments are under pressure to limit, but little is known about how it is used, in what circumstances, and to what effect? In this paper we report the findings of research carried out in the UK and Germany to investigate the extent to which large public companies comply with the rules, and the attitudes of company directors and legal counsel to using comply-or-explain. We find that positive conformance with codes depends on factors such as the extent to which regulatees are engaged in the formation and revision of the code, and thus feel a sense of ownership; the existence of interested and relevant monitors; and the extent to which soft regulation is a traditional means of control in a domain. We also found that pressure, both internal and external, both real and imagined, can lead to the establishment of a norm of full compliance, with perhaps perverse outcomes, and that in any event the majority of the contents of codes become akin to hard law, where deviation is not considered acceptable. There are however a very small number of rules where temporary deviation may be unavoidable from time to time and where non-compliance accompanied by a valid explanation is accepted.


WP406: Varieties of Insider Corporate Governance: Centre-Right Preferences & the Determinants of Reform in the Netherlands, Sweden & Switzerland

Gerhard Schnyder

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The impact of centre-left political parties’ preferences on a given country’s corporate governance system has been widely debated and empirically investigated. Comparatively few efforts have been made to analyse the preferences of centre-right parties and to link these to the ’employer side’ of the corporate governance equation. Recent scholarship sought to explain centre-right preferences in corporate governance reforms by electoral strategies that appeal to the median voter, arguing that the aggregate ownership structure that prevails in a country is the main determinant of the politics of corporate governance reforms. In this paper, I challenge this electoral strategy explanation by opposing it to an interest group power explanation of centre-right preferences. Based on the cases of the Netherlands, Sweden and Switzerland I show that the ownership patterns do not explain political preferences. Instead, opening up the black box of insider-orientated corporate governance systems is necessary in order to explain why centre-right parties’ preferences concerning shareholder primacy vary from one country to the other. My findings suggest that the extent to which insider control relies on control enhancing mechanisms (CEMs) and the importance of the financial sector in a given economy strongly influence centre-right preferences in the political struggles over corporate governance.


WP405: Financial Globalisation & Crisis, Institutional Transformation & Equity

Philip Arestis and Ajit Singh

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This paper comprises the long introduction to the symposium of five papers on financial globalisation published in the Cambridge Journal of Economics, volume 34, no 2. The paper discusses the impact of financial globalisation in a variety of spheres and shows how the five papers link together to provide a coherent view of the current economic and financial crisis. In this paper we also examine the globalisation of finance more broadly both in historical terms as well as in relation to the current widespread failure in the financial markets. We take up the policy question of how the interests of the poor in particular, and developing countries in general, could be safeguarded from the vagaries of financial globalisation, questioning how much choice communities and countries have and what can the international community do to extend these choices?


WP404: Globalisation, Openness & Economic Nationalism: Conceptual Issues & Asian Practice

Ajit Singh

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This paper considers the question of economic nationalism through the lens of economic openness. Complete economic openness, which connotes close or total integration of a country with that of the world economy, is the antonym of economic nationalism. The paper argues that economic openness is a multi-dimensional concept. A country can be open, or not so open to all or some of the following: trade, exports, imports, finance, science, culture and education, migration, foreign investment, investment by its citizens and companies abroad, among other things. There is no economic theory that suggests that a country has to be open in all dimensions simultaneously. Given its economic and geo-political situation, a country may choose to be open in some areas and not in others. The paper examines the analytical question: what is the optimum degree of openness for an economy? This theoretical framework is used to illustrate and explain the Asian experience, specifically of Japan and Korea. The implications for policy for these and other national economies as well as those for the global economy are outlined. The main policy message of the paper is that countries should seek, whenever they can, ‘strategic’ rather than close integration with the international economy. In that sense economic nationalism, notwithstanding globalisation is still the order of the day in many Asian countries. They need to maintain national control over volatile capital movements and prudently regulate the financial sector in the national interest.


WP403: Varieties of Liberalism: Anglo-Saxon Capitalism in Crisis?

Sue Konzelmann, Marc Fovargue-Davies and Gerhard Schnyder

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‘Global financial crisis’ is an inaccurate description of the current upheaval in the world’s financial markets. The initial banking crisis did not affect all countries to the same degree. Notably, while the US and UK banking systems were badly hit, those of the other two major Anglo-Saxon economies, Canada and Australia, remain largely unscathed and have even gained in terms of global market share. The national business systems and comparative corporate governance literatures underscore the similarities among these four ‘liberal market economies’ (LMEs) and would predict similar trajectories. This paper investigates the reasons behind the differing performance of the Anglo-Saxon banking systems, which defy a verdict of failure of the LME variety of capitalism as such.


WP402: The Impact of Foreign Corporate Ownership on Downsizing & Labour Cost

Dominic Heesang Chai

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This study examines the impact of foreign ownership on the firm’s labour cost using a panel data of 496 publicly traded Korean companies during the post Asian financial crisis period of 1998-2003. It shows that foreign ownership is positively related to labour cost but this positive effect is significantly weaker for firms with weak financial performance than those with strong financial performance. These results provide support to the view that foreign investors take both monitoring and disciplinary roles for publicly traded firms.


WP401: Foreign Corporate Ownership & Dividends

Dominic Heesang Chai

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This paper investigates the relatively unexplored relationship between dividends and ownership structure in an emerging market setting. Using a unique panel dataset of foreign ownership and firm attributes of listed Korean firms, we first characterise foreign ownership after the full capital market liberalisation in 1998. Foreign investors in Korea tend to overweight larger and profitable firms with large export sales and underweight highly leveraged firms with low market-to-book ratio. Then we explore the effects of the rise in foreign ownership on dividend policies in Korea. Firms make higher dividend payouts as the shareholdings of foreigners increase. This result is consistent with the agency theory view of dividends, i.e. dividends can substitute for direct monitoring of firms by large external shareholders.


WP400: Firm Ownership & Philanthropy

Dominic Heesang Chai

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This paper empirically examines the relationship between firm ownership structure and corporate charitable donations. Using a panel data set of 1,017 listed Korean firms, we find that larger firms with higher advertising intensity and lower export intensity ‘give’ relatively more, suggesting that charitable donations are both strategic and discretionary corporate expenditures. In addition, the study explores the effects of ownership structure on corporate philanthropy. We find a positive relationship between charitable donations and foreign ownership. However, we do not find a significant effect of corporate philanthropy on financial performance, indicating that donations appear to be “revenue” neutral.


WP399: Law & Financial Development: What We Are Learning from Time-Series Evidence

John Armour, Simon Deakin, Viviana Mollica and Mathias M Siems

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The legal origins hypothesis is one of the most important and influential ideas to emerge in the social sciences in the past decade. However, the empirical base of the legal origins claim has always been contestable, as it largely consists of cross-sectional datasets which provide evidence on the state of the law only at limited points in time. There is now a growing body of data derived from techniques for coding cross-national legal variation over time. This time-series evidence is reviewed here and is shown to cast new light on some of the central claims of legal origins theory. Legal origins are shown to be of little help in explaining trends in the law relating to shareholder protection, although the classification of legal systems into English-, French- and German-origin ‘families’ has greater explanatory force in the context of creditor rights. The widely-held view that increases in shareholder rights foster financial development is not supported by time-series analyses. More generally, the new evidence casts doubt on the suggestion that legal origins operate as an ‘exogenous’ force, independently shaping both the content of laws and economic outcomes. It is more plausible to see legal systems as evolving in parallel with changes in economic conditions and political structures at national level.


WP398: Green Values in Communities: How & Why to Engage Individuals with Decarbonisation Targets

Michael Pollitt

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We suggest that engaging individuals and changing norms of behaviour will be crucial if substantial decarbonisation is to be achieved and if the full costs of climate change and related development challenges are to be willingly met by societies around the world. Engaging individuals and changing norms fundamentally relate to individual moral values. This brings us to a consideration of how organised religion can play a role in providing the moral basis for individual action in this area. We also suggest implications for how business will need to engage with the challenges posed by decarbonisation. Our discussion links the underlying ethical issues raised by The Economics of Climate Change (Stern, 2007) with Vandenbergh’s (2005) emphasis on the need for ‘personal norm activation’ to engage individuals in protecting the environment.

2000s

2009 working papers

WP397: Systems Thinking, Market Failure & the Development of Innovation Policy: The Case of Australia

Marc Dodgson, John Foster, Alan Hughes and J S Metcalfe

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Innovation policy is increasingly informed from the perspective of a national innovation system (NIS), but, despite the fact that research findings emphasise the importance of national differences in the framing conditions for innovation, policy prescriptions tend to be uniform. Justifications for innovation policy by organisations such as the OECD generally relate to notions of market failure, and the USA, with its focus on the commercialisation of public sector research and entrepreneurship, is commonly portrayed as the best model for international emulation. In this paper we develop a broad framework for NIS analysis, involving free market, coordination and complex-evolutionary system approaches. We argue that empirical evidence supporting the hypothesis that the ‘free market’ can be relied upon to promote innovation is limited, even in the USA, and the global financial crisis provides us with new opportunities to consider alternatives. The case of Australia is particularly interesting: a successful economy, but one that faces continuing productivity and innovation challenges. Drawing on information and analysis collected for a major review of Australia’s NIS, and the government’s 10-year plan in response to it, we show how the free market trajectory of policy-making of past decades is being extended, complemented and refocused by new approaches to coordination and complex-evolutionary system thinking. These approaches are shown to emphasise the importance of systemic connectivity, evolving institutions and organisational capabilities. Nonetheless, despite the fact that there has been much progress in this direction in the Australian debate, the predominant logic behind policy choices still remains one of addressing market failure, and the primary focus of policy attention continues to be science and research rather than demand-led approaches. We discuss how the development and elaboration of notions of systems failure, rather than just market failure, can further improve policy-making in the future.


WP396: Models of Technology Development in Intermediate Research Organisations

Andrea Mina, David Connell and Alan Hughes

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The development and exploitation of new scientific and technological know-how is a prime engine of economic growth. Different innovation systems have developed different approaches to this problem and have built upon varying combinations of public and private support for R&D over time. In this context, research and technology intermediaries play an important brokering and entrepreneurial role. This paper contains a comparative institutional analysis of the policy and business models of the Fraunhofer Society (Germany), IMEC (Belgium), the Holst Centre (the Netherlands), ITRI (Taiwan) and ETRI (South Korea). It includes an investigation and discussion of their main features, modus operandi, opportunities/risks and trade-offs. The study responds to the need to gain better understanding of possible ways to strengthen the capacity of the UK economy to generate value from its science and technology base. The case studies presented in this paper offer a number of useful lessons for the development of new innovation policy instruments of great potential benefit to the UK plc.


WP395: University & Business Relations: Connecting the Knowledge Economy

J Stanley Metcalfe

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The old question ‘How is wealth created from knowledge?’ captures with great force and clarity one of the most important problems in any economy, but it subsumes a far more particular and very modern instantiation, a simpler and more direct question, ‘How should universities interact with business in the promotion of economic progress?’ Like many seemingly simple questions they preclude any simple answers, yet it turns out that by focusing on the role of universities in the innovation process we can identify some of the deeper complexities of our knowledge based economies. In so doing, we may better understand the design of university-business relationships in pursuit of economic progress and provide surer guidance for policy initiatives in this area. The discussion is centred on three interrelated ideas: the division of labour in the production and use of knowledge; processes of knowledge accumulation; and, innovation systems. We conclude that, critics of the role of universities and firms in respect to their performance in supporting wealth creation should reflect first on the fact that the division of labour between profit seeking business corporations and universities reflects both the quite distinct roles that these organisations fulfil, and, the complementarity between those roles. We can all understand that it would be as unwise to expect firms to behave like universities as it would be to expect universities to behave like firms. The division of labour is there for a purpose, it should be respected.


WP394: Prospects for the UK Balance of Payments

Ken Coutts and Bob Rowthorn

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This paper presents disaggregated projections for the UK balance of payments up to 2020. Under conservative assumptions about underlying trends it is projected that the current account deficit will increase from 2% of GDP in 2009 to almost 5% of GDP by the end of the period. Empirical evidence indicates that a deficit of this magnitude is not sustainable and, if unchecked, will lead to a painful adjustment involving lost output and higher unemployment. The paper calls for industrial and other policies to improve UK trade performance, above all in manufacturing, but also in knowledge-intensive services (communications, consultancy, R&D, media etc). It also points out the need to safeguard London’s role as a global financial centre.


WP393: The Evolution of Ownership Disclosure Rules across Countries

Mathias M Siems and Michael C Schouten

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Over recent years, a number of regulators have launched proposals to expand the obligation to disclose major share ownership in listed companies. This article shows that these are not stand-alone developments. Using a unique dataset comprising data from 25 countries over 11 years (1995-2005) and collected by the Centre for Business Research of the University of Cambridge, we empirically study the evolution of ownership disclosure rules across countries. The analysis demonstrates that these rules have become more stringent over time, in the sense that disclosure thresholds have been lowered, and that there has been convergence. A breakdown of the results suggests that the degree of countries’ economic development is a relevant factor in explaining the differences between countries. The analysis also suggests a positive correlation between ownership disclosure and other variables that protect minority shareholders, as well as a positive correlation between the stringency of countries’ ownership disclosure rules and the degree of dispersed ownership. In the article, we offer various possible explanations for these results. Going forward, while it appears unlikely that disclosure thresholds will be lowered much further, ownership disclosure rules can be expected to continue to evolve in other dimensions. Regulators are likely to broaden the definition of the stake that triggers disclosure, so as to ensure that the ultimate owner is reached. In addition, regulators may require more information be disclosed when the notification is made, so as to enable other investors and issuers to adequately assess the implications of major share ownership.


WP392: Governance, Regulation & Financial Market Instability: The Implications for Policy

Sue Konzelmann, Frank Wilkinson, Marc Fovargue-Davies and Duncan Sankey

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Just as the 1929 Stock Market Crash discredited Classical economic theory and policy and opened the way for Keynesianism, a consequence of the collapse of confidence in financial markets and the banking system – and the effect that this has had on the global macro economy – is currently discrediting the ‘conventional wisdom’ of neo-liberalism. This paper argues that at the heart of the crisis is a breakdown in governance that has its roots in the co-evolution of political and economic developments and of economic theory and policy since the 1929 Stock Market Crash and the Great Depression that followed. However, while many are looking back to the Great Depression and to the theories and policies that seemed to contribute to recovery during the first part of the twentieth century, we argue that the current context is different from the earlier one; and there are more recent events that may provide better insight into the causes and contributing factors giving rise to the present crisis and to the implications for theory and policy that follow.


WP391: System & Evolution in Corporate Governance

Simon Deakin and Fabio Carvalho

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We explore the relevance of systems theory for an understanding of legal evolution, with specific reference to the law and practice of corporate governance. The legal system can be understood as a cognitive resource which, by stabilising normative expectations, reduces transaction costs and enhances contractual cooperation. However, the cognitive capacity of the legal system is not simply a function of its adaptability to external economic conditions. Because of the need to ensure legal continuity and certainty, there is a trade-off between innovation and stabilisation in the production of legal rules. Legal change is discontinuous, asynchronic, and imperfectly matched with developments in the economy. We discuss the relevance of this model for understanding and evaluating corporate governance default rules.


WP390: Acquisition, Insolvency & Managers in UK Small Companies

Natalia Isachenkova and Melvyn Weeks

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This paper investigates the importance of managerial capital to involuntary insolvency and acquisition in UK small and medium-sized companies. Given that small businesses are informationally opaque and lack detailed financial data, the role of non-financial factors such as managerial capital has been emphasised. Although the role of managers in determining small firms’ longevity has received considerable attention, much of what has been written is concerned with businesses trading as either sole proprietors or partnerships. In this study we draw attention to the effect of managerial human capital and whether these findings generalise to incorporated small firms. In addition, we examine whether the determinants of exit exhibit significant differences across acquisition and insolvency. Using data from the survey database of the ESRC CBR at the University of Cambridge our results indicate that firms run by managers with higher human capital and intentions to pursue a strategy of growth have greater survival prospects and are less likely to be forced into insolvency or become acquired. In addition, the relevance to exit of firm age, firm size, and financial variables is confirmed.


WP389: Applying ‘Comply-or-Explain’: Conformance with Codes of Corporate Governance in the UK & Germany

David Seidl, Paul Sanderson and John Roberts

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The comply-or-explain principle is a central element of most codes of corporate governance. Originally put forward by the Cadbury Committee in the UK as a practical means of establishing a code of corporate governance whilst avoiding an inflexible ‘one size fits all’ approach, it has since been incorporated into code regimes around the world. Despite its wide application very little is known about the ways in which managers apply the principle – in particular, how they make use of the option to ‘explain’ deviations. To address this we analysed the compliance statements and reports of 257 listed companies in the UK and Germany, producing some 708 records of deviations, which we used to generate our empirically derived taxonomy of forms of ‘explanation’. We find these varied forms of ‘explanation’ are based in part on different logics of argumentation. This leads to a broader use of the option to ‘explain’ than envisaged by the Cadbury Committee. In addition our country comparison shows significant divergence in compliance patterns in the UK and Germany which may be explained by differences in experience, culture and legal system.


WP388: How a Social Capital Approach Can Help Multinationals Show Ethical Leadership

Peter Heslam, Ian Jones and Michael Pollitt

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In this paper we explore how social capital concepts can guide multinational firms’ decision making in developing countries. From a survey of recent research, we identify four types of social capital: institutional, relational, moral and spiritual. Because these capitals overlap and yet are distinctive, they are individually and collectively useful in assessing how firms contribute to society beyond the generation and accumulation of financial capital. In each case we discuss examples of how particular multinationals have sought to build the different elements of social capital. Our examples include Intel, Anglo American, Merck and ServiceMaster. We suggest that a consideration of the impact of decisions on each of these elements of social capital provides an important ‘moral compass’ for these firms. We also suggest further work that needs to be done in understanding the impact that multinationals have on the social capital of the countries in which they operate.


WP387: Law, Finance & Development Further Analyses of Longitudinal Data

Prabirjit Sarkar and Ajit Singh

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This paper analyses a longitudinal dataset on legal protection of shareholders over a 36 year period, 1970-2005 for four advanced countries, UK, France, Germany and the US. It examines two aspects of the legal origin hypothesis – whether shareholder protection is higher in the common law countries (UK and USA) than in the civil law countries (France and Germany) and whether shareholder protection matters for stock market development in the short and long runs. It also examines the ‘causation’ issue and the ‘endogeneity’ problem- whether greater shareholder protection leads to stock market development or whether stock market development leads to changes in law. The paper casts serious doubt on the validity of the basic theses of the Anglo Saxon legal and developmental model.


WP386: Networks of Learning within the English Wine Industry: Communitarian, Distanciated, Organisational & Redundant

Simon Turner

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The literature on industrial districts (also referred to as business clusters) has grown out of recognition that spatial proximity among firms supports the formation and exchange of knowledge within an industry and is therefore a source of competitive advantage. While such a ‘territorial’ perspective on interfirm relationships is valuable in highlighting the informal means through which firms can gain access to innovative knowledge, localised perspectives have received criticism from a number of quarters. This paper aims to evaluate the relevance of ‘territorial’ processes – untraded, informal, and localised relationships – for producing learning in industrial districts, when situated within a ‘relational’ perspective that also recognises the role of firm-specific strategies in shaping the learning practices that take place within industrial districts. The research explores the role of both territorial and non-territorial interfirm relationships within industrial districts using empirical evidence drawn from interviews with small enterprises working within the English wine industry of southern England. The findings suggest that the development of non-local knowledge links and formal interfirm arrangements by leading firms within the industrial district are starting to displace the extant communitarian logic of learning within the English wine industry


WP385: A Third Way: Regional Restructuring & the Societas Europaea

Jodie A Kirshner

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The Societas Europaea (SE) harmonised minimal amounts of company law and assigned employee representation to a supplementary negotiation process. Commentators predicted that it would introduce cross-border regulatory competition within the EU. Others suggested that companies would choose the SE over other national corporate structures, in order to mitigate the requirements of mandatory codetermination. This paper reports case-study evidence to argue that companies are utilising the SE in a third, more significant way: to facilitate within-group restructurings that enable them to submit to a simplified, integrated regulation at the level of the parent company. This generates pressure for the unification of additional areas of law and more national-level regulation. Empowering the SE therefore represents a first step towards streamlining the regulation of European companies.


WP384: An Augmented UK Private Expenditure Function

Bill Martin

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This paper re-examines the UK private sector expenditure function invented in the 1970s by the ‘New Cambridge’ School of economists led by Wynne Godley. Evidence is found that helps to justify the New Cambridge focus on a private sector aggregate. More problematic is the School’s basic axiom that posits a simple long-run target norm for private financial wealth in relation to income. The wealth to income ratio is instead subject to shifting trends and persistent oscillations.


WP383: Horse, Cow, Sheep, or ‘Thing-in-Itself’? The Cognitive Origins of Corporate Governance in Switzerland, Germany & the US, 1910s-1930s

Martin Lüpold and Gerhard Schnyder

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This paper investigates the origins of the shareholder-orientated corporate governance (CG) model of the US and the stakeholder-orientated model prevailing in continental Europe (exemplified by Switzerland and Germany) for most of the 20th century. We reject the most common theories, which explain cross-national differences in CG models either as the result of a natural evolution, different legal origins, social democratic political power, or openness to trade. We show instead that – starting from fairly similar corporate governance structures in the US and continental European countries during the late 19th century – the crucial period for the emergence of two different corporate governance models was the period from the 1910s to the 1930s. We stress in particular the importance that legal experts and the ideas that they produced played in this process. In fact, during this period, the increasing size of firms and the professionalisation of their management led to new problems, which increasingly challenged existing corporate governance structures and the related individualistic theory of the firm. The diagnoses of this situation and possible remedies formulated by legal scholars informed political decision-makers in times of uncertainty and contributed, in important ways to shaping the different ‘paths’, which the different countries went down subsequently. While the scholarly debates in all three countries were surprisingly similar, different solutions were finally institutionalised due to differences in the political context.


WP382: How Do Legal Roles Evolve? Evidence from a Cross-country Comparison of Shareholder, Creditor & Worker Protection

John Armour, Simon Deakin, Priya Lele and Mathias M Siems

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Much attention has been devoted in recent literature to the claim that a country’s ‘legal origin’ may make a difference to its pattern of financial development and more generally to its economic growth path. Proponents of this view assert that the ‘family’ within which a country’s legal system originated-be it common law, or one of the varieties of civil law-has a significant impact upon the quality of its legal protection of shareholders, which in turn impacts upon economic growth, through the channel of firms’ access to external finance. Complementary studies of creditors’ rights and labour regulation have buttressed the core claim that different legal families have different dynamic properties. Specifically, common law systems are thought to be better able to respond to the changing needs of a market economy than are civilian systems. This literature has, however, largely been based upon cross-sectional studies of the quality of corporate, insolvency and labour law at particular points in the late 1990s. In this paper, we report findings based on newly constructed indices which track legal change over time in the areas of shareholder, creditor and worker protection. The indices cover five systems for the period 1970-2005: three ‘parent’ systems, the UK, France and Germany; the world’s most developed economy, the US; and its largest democracy, India. The results cast doubt on the legal origin hypothesis in so far as they show that civil law systems have seen substantial increases in shareholder protection over the period in question. The pattern of change differs depending on the area which is being examined, with the law on creditor and worker protection demonstrating more divergence and heterogeneity than that relation to shareholders. The results for worker protection are more consistent with the legal origin claim than in the other two cases, but this overall result conceals significant diversity within the two ‘legal families’, with different countries relying on different institutional mechanisms to regulate labour. Until the late 1980s the law of the five countries was diverging, but in the last 10-15 years there has been some convergence, particularly in relation to shareholder protection.


WP381: Shareholder, Creditor & Worker Protection: Time Series Evidence about the Differences between French, German, Indian, UK & US Law

Mathias M Siems

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This paper uses a new quantitative methodology (“numerical comparative law”, “leximetrics”) in order to answer the questions whether there has been convergence, divergence or persistence of legal rules, and how this relates to the Common Law/Civil Law distinction. It is based on indices for shareholder, creditor, and worker protection which code the legal development of France, Germany, India, the UK and the US from 1970 to 2005. The main result is that one has to distinguish between different areas of law: the laws have converged in shareholder protection, they have diverged in worker protection and in creditor protection converging and diverging trends even out. These results do not depend on the distinction between Civil Law and Common Law countries because there have been a number of instances where countries of different legal families have converged and countries of the same legal family have diverged.


WP380: New Business Formation: An Important Element of Ireland’s Rapid Growth Experience?

Michael Anyadike-Danes, Helena Lenihan and Mike Hart

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The extraordinary growth of the Irish economy – the ‘Celtic Tiger’ – since the mid-1990s has attracted a great deal of interest, commentary and research. Indeed, many countries are now looking to Ireland as an economic development role model, and The Sapir Report (2003) has suggested that Ireland should be seen as providing key lessons for other EU countries with regards to realising the objectives set out in the Lisbon Agenda.

2008 working papers

WP379: Better to Be Rough & Relevant than to Be Precise & Irrelevant: Reddaway’s Legacy to Economics

Ajit Singh

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W.B. Reddaway has been a highly influential figure in Cambridge economics during the second half of the 20th Century. His method and style of doing economics – called the Reddaway-type economics – were quite distinct. The present paper explains Reddaway’s methodology by examining his most important research contributions. The title of this essay conveys his distance from mainstream economists. His essential substantive difference with the latter concerned inferential econometrics. He subscribed to Keynes’ critique of Timburgen’s methodology. In summary, Reddaway regarded economics as an empirical, evidence-based subject which, through economic policy, should help improve the world. In his view mathematics could sometimes help, but, more often than not, it obfuscated economic reality. Currently the academic economics profession is dominated by a priori theorising and deductive modelling. Greater attention to Reddaway’s legacy to economics, to its research methods and to teaching, would very much help to rebalance the subject.


WP378: Does Fast Growth in India & China Harm US Workers? Insights from Simulation Evidence

Alex Izurieta and Ajit Singh

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A major political and policy issue today is whether globalisation and rapid economic growth in India and China would have an adverse affect on labour markets in the U.S. and other advanced countries. Some leading economists have argued that even though the recent integration of India and China with the liberalised global economy has not so far had a serious negative impact on wages and employment in advanced countries, it is most likely to do so in the future in view of the growing technological and scientific capabilities in the two developing countries. This is also because it is suggested that this integration represents a sudden doubling of the world labour force without a concomitant increase in capital. The present paper argues against this plausible thesis, essentially on two grounds: (a) it does not take into account the demand side effects of fast growth in India and China; and (b) it abstracts from the dynamism of the U.S. real economy and its innovative large corporations. However, simulations of different scenarios on the CAM world econometric model indicate that at a disaggregated level there are severe supply side constraints on energy, raw materials and food which thwart the expansionary demand side effects of fast growth in India and China.


WP377: Stock Markets in Low & Middle Income Countries

Ajit Singh

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This paper explores the question of whether the institution of the stock market is likely to be helpful to low and middle income countries in promoting development of their real economy and ensuring fast industrial growth. The case for and against the stock market inevitably involves a discussion of the important related subjects of corporate finance, corporate governance and corporate law. Contrary to the literature the paper arrives at a negative overall assessment of the institution of the stock market in relation to economic development. It also contributes by its policy proposals concerning the markets for corporate control which again are in conflict with much of the conventional wisdom on the subject.


WP376: The Past, Present & Future of Industrial Policy in India: Adapting to the Changing Domestic & International Environment

Ajit Singh

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In the post-World War II period India was probably the first non-communist developing country to have instituted a full-fledged industrial policy. The purpose of the policy was to co-ordinate investment decisions both in the public and the private sectors and to seize the ‘commanding heights’ of the economy by bringing certain strategic industries and firms under public ownership. This classical state-directed industrialisation model held sway for three decades, from 1950-1980. The model began to erode in the 1980s. Following a serious external liquidity crisis in 1991 the model was fundamentally changed. Indian industrial policy in the period 1950 to 1980, as embodied in its five-year plans, has long been the subject of intense criticism from the powerful neo-liberal critics of the country’s development. In their view it was the change away from India’s traditional industrial policy in 1991 towards liberalisation, de-regulation, and market orientation that ushered in a new era of faster economic growth. This paper takes a wide view of industrial policy, emphasising the government’s continuing co-ordinating role in various spheres. It regards the institution of the Planning Commission as a major benefit for the country particularly as its role in formulating industrial policy in the narrow sense and in guiding India’s ongoing industrial revolution in the broader sense is still widely accepted by the mainstream political parties of the left and the right (for example, Bhartiya Janata Party, Indian People’s Party). The paper suggests that industrial policy and planned economic development did not come to an end with the deregulation of India’s traditional investment regime in the 1980s and 1990s. Industrial policy has continued in a different form during the period, facing an agenda of new issues and an updating of older ones. The analysis of this paper suggests that today a central challenge for the Planning Commission is to exploit India’s lead in ICT and its `institutional surplus’ (democracy, common law legal heritage) to raise the current 8% trend rate of growth to double-digit numbers while maintaining equitable distribution of the fruits of economic progress. To do so, India requires a somewhat different industrial policy than that pursued in the Nehru-Mahalanobis era, or that has been followed since then.


WP375: Do the English Legal Origin Countries Have More Dispersed Share Ownership & More Developed Financial Systems?

Prabirjit Sarkar

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The essence of the legal origin hypothesis is that a country with an English legal origin provides better investor and creditor protection and experiences greater financial development; financial institutions and stock markets flourish, the general public participate more in financing investment projects of companies and so shareholding is less concentrated. The present paper examines this hypothesis on the basis of a cross-country study of 85 countries. We find no evidence of more dispersed share ownership in the English law countries than in other countries with different legal origins irrespective of whether we adjust for the existence of transitional economies and less developed countries present in the sample. Using three indicators of development of banking and other credit institutions and four indicators of stock market developments, we also find no evidence of more developed financial systems in the English law countries. As expected, there is some evidence of lower financial development in the less developed countries and transitional countries. It is not the English law heritage but the security of persons and goods that appears to explain the cross-country variations in financial development.


WP374: Tiger, Tiger, Burning Bright? Industrial Policy Lessons from Ireland & East Asia for Small African Economies

David Bailey, Helena Lenihan and Ajit Singh

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When comparisons in terms of industrial policy lessons to be learned have taken place, it has tended to be solely vis-a-vis the ‘development state’ East Asian experience. This paper broadens the analysis and considers lessons which African countries can learn fro other so-called ‘tiger’ economies including Ireland and the East and South Asian countries. The Irish model is relevant not least because of its emphasis on corporatism rather than simply relying on state direction in the operation of industrial policy. The Irish model is also more democratic in some senses and has protected workers’ rights during the development process. Overall we suggest that some immediate actions are needed, notably with regard to the financial system in small African economies. Without such changes, a poorly functioning financial system will continue to keep investment at low levels. In relation to the small size of the African economies, the paper recommends regional integration and sufficient overseas development assistance (ODA) for infrastructural development.


WP373: The Evolution of the Corporation: Organization, Finance, Knowledge & Corporate Social Responsibility

Peer Zumbansen

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This paper, which selectively focuses on the contested concept of Corporate Social Responsibility [CSR], forms part of a larger research project on the evolution of corporate governance. This research posits the evolution of corporate governance along three historical paradigms: first, the economic/industrial organisation paradigm, second, the financial paradigm, and third, the knowledge paradigm. With regard to CSR, the paper explores the promises and shortcomings of the concept against the background of an evolutionary theory of corporate governance. The identification of three historical-conceptual paradigms allows us to trace the development of the relation between a general discourse on corporate governance regulation [CGR] on the one hand and a more specialised, often polemic debate over corporate (social, environmental, human rights) responsibilities on the other. On the basis of the review of the three paradigms of CSR over the course of more than one hundred years, the paper concludes that there is no convincing justification to separate the general Corporate Governance from the more specific CSR discourse when assessing the nature of the corporation. Instead, it is argued that a more adequate understanding of what defines a corporation is gained when capturing its embedded nature in a continuously changing domestic, global and functional environment. Besides being both a legal fiction and an economic actor, the business corporation is assuming a host of other roles in a functionally differentiated global society. The paper suggests that the generation and dissemination of knowledge, both internally and externally, has become the defining feature of the firm. The corporation as a knowledge actor succeeds the prior stages of assessing it as a private, political or financial actor, without however erasing these dimensions of the firm. In that, the history of the corporation – as concept and reality – shares important features with that of the state – as concept and as fact.


WP372: Revisiting the Party Paradox of Finance Capitalism: Evidence from Switzerland, Sweden & the Netherlands

Gerhard Schnyder

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The ‘party paradox’ thesis claims that centre-left parties have a genuine interest in pro-shareholder corporate governance reforms, while centre-right parties oppose such reforms. Based on case studies of Switzerland, Sweden, and the Netherlands, I test the accuracy of this thesis and find that it does not apply to either of these cases: in Switzerland pro-shareholder reforms were made possible by centre-right not centre-left support; In Sweden and the Netherlands pro-shareholder reforms were marginal, because a broad coalition uniting centre-right and centre-left opposed them. My findings show therefore that the ‘party paradox’ is not a universal phenomenon and that most micro-level explanations of this phenomenon are inaccurate. In order to explain in which cases a party paradox will emerge, we need to add the nature of relations between employees and employers (cooperative vs. confrontational) as a determinant of centre-left preferences.


WP371: The Reflexive Properties of Corporate Governance Codes: Their Reception of the ‘Comply & Explain’ Approach in Slovenia

Nina Cankar, Simon Deakin and Marko Simoneti

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The Slovenian Corporate Governance Code for Public Joint-Stock Companies was adopted in March 2004. Using a systems-theoretical approach, we examine the extent to which the implementation of the Code has resulted in the kinds of ‘reflexive’ learning processes which the ‘comply or explain’ approach aims to bring about. The adoption of the Code has already had an impact on the wider legal system, triggering certain changes in the body of core company law, and assisting the process of adjustment to EU-level norms. On the whole, companies’ implementation strategies are strikingly similar both in terms of the contents of deviations as well as in the type of disclosure and explanations for deviations. At the same time, the quality of disclosures is low, with effective comply-or-explain declarations representing only a small minority of disclosures. On this basis, the Code has been more effective, to date, in legitimating Slovenia’s adjustment to transnational norms and standards, than in stimulating institutional learning.


WP370: Does Social Democracy Matter? Corporate Governance Reforms in Switzerland & Sweden (1980-2005)

Gerhard Schnyder

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This paper tests the accuracy of Roe’s (2003) claim that ‘social democracies’ tend to have insider-orientated corporate governance systems, for two extreme cases concerning Roe’s independent variable: Switzerland and Sweden. Starting from a position in which both were clearly insider-orientated systems, there was a significant weakening of insider control in Switzerland during the 1990s, but no comparable change in Sweden up until the early 2000s. These developments occurred against the background of contrasting political contexts in the two countries: in Switzerland, change took place in a context of stable dominance over the political arena by centre-right parties; in Sweden, no change took place despite the fact that centre-right parties managed several times to break the traditional social-democratic dominance over government. Thus it would seem that political power relations as such do not explain the observed trajectories of these two corporate governance systems. Instead, the different trajectories are explained by the different preferences of central political and economic actors. The Swiss labour movement, which was traditionally under the dominance of a strong employer side, had important incentives to favour increasing external shareholder control over firms. Conversely, the Swedish labour movement, which had played a considerable part in the shaping of the Swedish corporate governance system, had no such incentives. Also, as Swiss banks started to reorientate their strategies towards financial market-related activities, they became a very important pro-shareholder reform force in Switzerland. Swedish banks, which were part of business groups in which financial interests did not necessarily prevail over industrial interests, did not play any comparable role.


WP369: Legal Origin, Juridical Form & Industrialisation in Historical Perspective: The Case of the Employment Contract & the Joint-Stock Company

Simon Deakin

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The timing and nature of industrialisation in Britain and continental Europe had significant consequences for the growth and development of labour market institutions, effects which are still felt today and which are visible in the conceptual structure of labour law and company law in different countries. However, contrary to the claims of the legal origin hypothesis, a liberal model of contract was more influential in the civilian systems of the continent than in the English common law, where the consequences of early industrialisation included the lingering influence of master-servant legislation and the weak institutionalisation of the juridical form of the contract of employment. Claims for a strong-form legal origin effect, which is time invariant and resistant to pressures for legal convergence, are not borne out by a growing body of historical evidence and time-series data. The idea that legal cultures can influence the long-run path of economic development is worthy of closer empirical investigation but it is premature to use legal origin theory as a basis for policy initiatives.


WP368: Governance Processes, Employee Voice & Performance Outcomes in the Construction of Heathrow Terminal 5

Simon Deakin and Aristea Koukiadaki

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The Major Projects Agreement (MPA) is a framework agreement designed to improve performance in large mechanical and electrical engineering projects. It is built on integrated team working and includes the trade union as a partner in strategic, organisational and employment decisions. The agreement was recently implemented in the construction of Heathrow Terminal 5 (T5). The use of the MPA at T5 illustrates how the promotion of a framework that legitimises a role for unions in continuing dialogue with employers can positively affect organisational outcomes in large construction projects. While serving as a reminder that mechanisms exist within UK corporate governance for the representation and articulation of the interests of non-shareholder constituencies, T5 may be a unique case: the currently uncertain future of the MPA is indicative of wider constraints on the adoption of the partnership model in Britain.


WP367: Assessing the Long-run Economic Impact of Labour Law Systems: A Theoretical Reappraisal & Analysis of New Time Series Data

Simon Deakin and Prabirjit Sarkar

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Standard economic theory sees labour law as an exogenous interference with market relations and predicts mostly negative impacts on employment and productivity. We argue for a more nuanced theoretical position: labour law is, at least in part, endogenous, with both the production and the application of labour law norms influenced by national and sectoral contexts, and by complementarities between the institutions of the labour market and those of corporate governance and financial markets. Legal origin may also operate as a force shaping the content of the law and its economic impact. Time-series analysis using a new dataset on legal change from the 1970s to the mid-2000s shows evidence of positive correlations between regulation and growth in employment and productivity, at least for France and Germany. No relationship, either positive or negative, is found for the UK, and although the US shows a weak negative relationship between regulation and employment growth, this is offset by productivity gains.


WP366: The Influence of Stock Market Listing on Human Resource Management: Evidence for France & Britain

Neil Conway, Simon Deakin, Suzanne J Konzelmann, Héloïse Petit, Antoine Rebérioux and Frank Wilkinson

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We use data from REPONSE 2004 and WERS 2004 to analyse whether approaches to HRM differ according to whether an establishment is part of a company with a stock exchange listing. In both countries we find that listing is positively associated with teamworking and performance-related pay, while in France, but not in Britain, it is also linked to worker autonomy and training. Our findings are inconsistent with the claim that shareholder pressure operates as a constraint on the adoption of high-performance workplace practices. The pattern is similar in the two countries, but with a slightly stronger tendency for listing to be associated with high-performance workplace practices in France.


WP365: The Stock Market, the Market for Corporate Control & the Theory of the Firm: Legal & Economic Perspectives & Implications for Public Policy

Simon Deakin and Ajit Singh

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It is argued here that – contrary to current conventional wisdom – an active market for corporate control is not an essential ingredient of either company law reform or financial and economic development. The absence of such a market in coordinated market systems during their modern economic development was not an evolutionary deficit, but an effective and positive institutional arrangement. The economic and social costs associated with restructuring driven by hostile takeover bids, which are increasingly seen as prohibitive in the liberal market economies, would most likely harm the prospects for growth in developing and transition systems.


WP364: Regulatory Competition in Europe after Laval

Simon Deakin

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This paper considers the implications for regulatory competition of the recent judgment of the European Court of Justice in Laval. This case is potentially the most important decision on European labour law for a generation. The Court has greatly extended the scope for judicial review of state-level labour laws on the grounds that they restrict freedom of movement from one member state to another. It has also undermined the principle of the territorial effect of labour legislation and has given a strictly pre-emptive interpretation to social policy directives. The Laval judgment is, however, open to attack on a number of grounds. It fails to mount a coherent economic case for judicial intervention on the scale envisaged, and is, more generally, incompatible with the recent experimentalist or reflexive turn in European governance represented by the open method of coordination.


WP363: Takeovers after Takeovers

Andy Cosh and Alan Hughes

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We review five decades of takeover actively in the UK. We assess the relative characteristics of acquiring and acquired companies and the performance impacts of merger using both accounting and share price based measures. We conclude that the fundamental conclusions reached by Ajit Singh about takeovers and the market for corporate control in his seminal contributions of the 1970s remain true in the light of subsequent work.


WP362: The Law & Economics Debate about Secured Lending: Lessons for European Lawmaking?

John Armour

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This review paper is a contribution to a symposium on the ‘Future of Secured Credit in Europe’. Its theme is the way in which empirical research has shed light on earlier theoretical literature. These findings tend to suggest that the legal institution of secured credit is, on the whole, socially beneficial, and that such benefits are likely to outweigh any associated social costs. Having made this general claim, the paper then turns to consider the effects of four particular dimensions across which systems of secured credit may differ, and which may therefore be of interest to European law-makers. These are: (i) the scope of permissible collateral; (ii) the efficacy of enforcement; (iii) the priority treatment of secured creditors; and (iv) the mechanisms employed to assist third parties in discovering that security has been granted. In each case, consideration is paid first to the theoretical position, and then empirical findings. It is argued that perhaps the most difficult of these issues for European law-makers concerns the appropriate design of publicity mechanisms for third parties.


WP361: Law, Finance, & Politics: The Case of India

John Armour and Priya Lele

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The process of liberalisation of India’s economy since 1991 has brought with it considerable development both of its financial markets and the legal institutions which support these. An influential body of recent economic work asserts that a country’s ‘legal origin’-as a civilian or common law jurisdiction-plays an important part in determining the development of its investor protection regulations, and consequently its financial development. An alternative theory claims that the determinants of investor protection are political, rather than legal. We use the case of India to test these theories. We find little support for the idea that India’s legal heritage as a common law country has been influential in speeding the path of regulatory reforms and financial development. There is a complementarity between (i) India’s relative success in services and software, (ii) the relative strength of its financial markets for outside equity, as opposed to outside debt, and (iii) the relative success of stock market regulation, as opposed to reforms of creditor rights. We conclude that political explanations have more traction in explaining the case of India than do theories based on ‘legal origins’.


WP360: No ‘Third Way’ for Economic Organization? Networks & Quasi-Markets in Broadcasting

Simon Deakin, Ana Lourenço and Stephen Pratten

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We present two linked, longitudinal case studies of the use of quasi markets in UK broadcasting over the past decade: one looks at the regulated outsourcing of programme making to independent producers, the other at the development of an internal market system within the BBC. New network forms are shown to have arisen from the interaction of legal regulation, contracts, and property rights. However, these organisational forms are also seen to be associated with increased transaction costs and with signs of deterioration in programme quality and innovation. We suggest that for such networks to be a viable ‘third way’ between markets and hierarchy, closer attention needs to be given to the issue of institutional design.

2007 working papers

WP359: Shareholder Protection around the World (“Leximetric II”)

Mathias Siems

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This article analyses how shareholder protection has developed in 20 countries from 1995 to 2005. In contrast to traditional legal research, it draws on a quanti-tative methodology to law (“leximetrics”, “numerical comparative law”). Some of its results are that in most countries shareholder protection has improved in the last years; that developed countries perform better than developing countries in protecting shareholders; that shareholder protection in common law countries is relatively similar whereas there is no comparable similarity within the Ger-man and French civil law families; that German corporate law is “more main-stream” and US corporate law is “more eccentric” than the law of the other countries; and that in general there has been convergence in the last decade. In order to explain these results, the distinction between origin and transplant countries can be useful. However, in contrast to previous studies, this does not mean that all depends on the distinction between English, French and German origin and transplant countries. Rather it is decisive (a) which “version” of the corporate law the transplant country copied, (b) whether transplant countries continue to take developments in the origin countries into account and (c) whether transplant countries have left the path of their (former) origin countries.


WP358: Shareholder Protection & Stock Market Development: An Empirical Test of the Legal Origins Hypothesis

John Armour, Simon Deakin, Prabirjit Sarkar, Mathias Siems and Ajit Singh

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We test the ‘law matters’ and ‘legal origin’ claims using a newly created panel dataset meas-uring legal change over time in a sample of developed and developing countries. Our dataset improves on previous ones by avoiding country-specific variables in favour of functional and generic descriptors, by taking into account a wider range of legal data, and by considering the effects of weighting variables in different ways, thereby ensuring greater consistency of cod-ing. Our analysis shows that legal origin explains part of the pattern of change in the adop-tion of shareholder protection measures over the period from the mid-1990s to the present day: in both developed and developing countries, common law systems were more protective of shareholder interests than civil law ones. We explain this the result on the basis of the head start common law systems had in adjusting to an emerging ‘global’ standard based mainly on Anglo-American practice. Our analysis also shows, however, that civil law origin was not much of an obstacle to convergence around this model, since civilian systems were catching up with their counterparts in the common law. We then investigate whether there was a link in this period between increased shareholder protection and stock market devel-opment, using a number of measures such as stock market capitalisation, the value of stock-trading and the number of listed firms, after controlling for legal origin, the state of economic development of particular countries, and their position on the World Bank rule of law index. We find no evidence of a long-run impact of legal change on stock market development. This finding is incompatible with the claim that legal origin affects the efficiency of legal rules and ultimately economic development. Possible explanations for our result are that laws have been overly protective of shareholders; transplanted laws have not worked as ex-pected; and, more generally, the exogenous legal origin effect is not as strong as widely sup-posed.


WP357: UK Corporate Governance & Takeover Performance

Andy Cosh, Paul Guest and Alan Hughes

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This chapter addresses the changing nature of corporate governance in the United Kingdom over recent decades and examines whether these changes have had an impact on the UK market for corporate control. The disappointing outcomes for acquiring company shareholders in the majority of corporate acquisitions, public discontent with some pay deals for top executives and some high profile corporate scandals led in the early 1990s to a call for governance reform. The scrutiny of governance in UK companies has intensified since the publication of the Cadbury Report in 1992 and has resulted in calls for changes in the size, composition and role of boards of directors, in the role of institutional shareholders, the remuneration and appointment of executives, and in legal and accounting regulations. We review the background to these changes and the consequences of the changes since 1990 for governance structures. Finally, we examine whether these changes have affected takeover performance in recent years. Our analysis is specific to the institutional circumstances of the UK although we refer where appropriate to takeover studies in other countries.


WP356: Resurrecting the UK Historic Sector National Accounts

Bill Martin

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The UK national accounts do not provide a full long-run set of historic data describing the behaviour of the UK’s private sector. Although comprehensive figures are available from 1987, the pre-1987 historic sector national accounts are marred by discontinuities, gaps and error.


WP355: Corporate Governance & Employment Relations

Suzanne J. Konzelmann, Frank Wilkinson and Neil Conway

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Using the 2004 United Kingdom Workplace Employment Relations Survey (WERS 2004), this paper examines the impact of corporate governance on HRM practices and employment relations outcomes within organisations in the UK. The analysis suggests that when a remote external stake-holder is assigned dominance, particularly in the case where their liability is limited and the organisation is large, the conditioning of managerial commitments on the requirements of the dominant stake-holder has the potential to undermine the effectiveness of the HRM system in achieving its objectives.


WP354: The Impact of Mergers & Acquisitions on Executive Pay in the United Kingdom

Paul Guest

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We examine the impact of acquisitions on executive pay in UK acquirers over 1984-2001. For the overall sample, which includes foreign, domestic, public and private targets, there is a significant transitory pay increase. Pay changes are not affected by target nationality or organisational form, although initial cross-border acquisitions do result in higher pay. Pay increases are higher following acquisitions of targets with high pay, but not of targets in high pay countries. CEOs are rewarded equally for bad and good acquisitions, and those well rewarded are more likely to reacquire. However, bad acquisitions do not on average increase CEO wealth because of an offsetting decline in CEO shareholding value. Pay impacts are not affected by the corporate governance characteristics of the acquiring firm.


WP353: Labour Law, Judicial Efficiency & Informal Employment in India

Sonja Fagernäs

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This study assesses the effects of industrial disputes legislation and the dispute settlement process on informal versus formal employment in India. It uses indicators of pro-worker court awards and court efficiency as well as amendments to the Industrial Disputes Act (IDA) at the level of Indian states. The state-level IDA amendments are classified as pro-worker or pro-employer and enforcement enhancing. Three complementary empirical approaches and data sources are used. These include a quasi-panel dataset constructed from four household employment surveys (NSSO) between 1983-1999, a state-industry level panel dataset for organised (formal) sector industrial units (ASI) for 1980-1997 and a cross-sectional survey of unorganised (informal) manufacturing firms for 2000/2001. The significance of the judicial indicators varies by indicator and the magnitude of relationship with formal employment remains rather small. The evidence is neither robust, nor consistent, enough to confirm that pro-worker judicial change would be related to a lower degree of formal work in the entire service or industrial sectors. However, pro-worker judicial change and judicial efficiency can be linked more consistently to a formalisation of work within the organised industrial sector. More efficient courts are also associated with a lower tendency of unorganised firms to produce for a sub-contractor. Finally, education, personal attributes and social status are found to be significant correlates of employment type, which implies that policies aiming to raise formality should also focus on such factors.


WP352: The Evolution of Labour Law: Calibrating & Comparing Regulatory Regimes

Simon Deakin, Priya Lele and Mathias Siems

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We present evidence on the evolution of labour law in five countries (the UK, USA, Germany, France and India) using a newly-created dataset which measures legal change over time. The results cast light on the claim that legal origin, or the influence of common law and civil law regulatory styles, affects the content of labour law regimes. We find some divergence between common law and civil law countries at the aggregate level but a more complex picture when the index is decomposed so as to identify changes in specific areas of labour law. We discuss the potential significance of this relatively new approach to the measurement of law for understanding the forces at work in the evolution of labour law.


WP351: Japan’s Paradoxical Response to the New ‘Global Standard’ in Corporate Governance

John Buchanan and Simon Deakin

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We suggest, on the basis of empirical research into the implementation of recent legal reforms, that Japan is not moving inexorably towards a ‘global standard’ in corporate governance, based on external monitoring and a market for corporate control. Japanese corporate governance is nevertheless changing: in part as an indirect response to legal initiatives, new structures and practices are emerging, aimed at providing greater flexibility in decision-making, while retaining the organisational core of the Japanese firm. The paradoxical effect of legal reforms aimed, in large part, at transplanting the global standard, may be to renew the distinctive Japanese model of the corporation.


WP350: The Regulation of Women’s Pay: From Individual Rights to Reflexive Law?

Simon Deakin and Colm McLaughlin

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Legislation mandating equality of pay between women and men was among the earliest forms of sex discrimination legislation to be adopted in Britain. However, the model embodied in the Equal Pay Act 1970 is increasingly being questioned: the law is, at one and the same time, highly complex and difficult to apply, while apparently contributing little to the further narrowing of the pay gap. As a result there is a growing debate about whether a shift in regulatory strategy is needed, away from direct legal enforcement to a more flexible approach, based around the concept of ‘reflexive law’. This paper provides an assessment of whether reflexive approaches are likely to work in the equal pay area’


WP349: The Legal Framework of Employment Relations

Simon Deakin and Wanjiru Njoya

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The aim of this paper is to reassess the place of labour law in the wider area of employment relations research and to argue the case for labour law’s importance to social scientists. We give an analytical account of the principal institutional features of labour law as a form of legal regulation, from an interdisciplinary perspective which takes into account both the internal workings of the labour law system and the social and economic context within which it has evolved. We analyse, in the manner of an internal or ‘immanent’ critique, the categories which are generally used within labour law discourse to describe the social and economic relations of employment; account for their emergence and evolution in historical terms; consider the origins of their diversity across different national systems; and look at future prospects for convergence or divergence.


WP348: Innovation Policy as Cargo Cult: Myth & Reality in Knowledge-led Productivity Growth

Alan Hughes

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This paper questions the current emphases in innovation policy on a particular interpretation of US performance which emphasises R&D intensive high technology producing sectors, spin-offs from the science base and private sector venture capital. Whilst recognising the important role they may play it is argued that it has been greatly exaggerated to the neglect of other key factors. One is the importance of the diffusion and use of ICT as a general purpose technology beyond the ICT and other R&D intensive high-tech producing sectors. A second is the dominant role which performance transformation in existing firms plays in driving industry level productivity compared with the direct role of new entrants. A third is the diversified role played by universities in knowledge exchange which extends beyond a narrow focus on spin offs and licensing to encompass the creation of human capital and a wide range of formal and informal business interactions. Finally there is the major role that public R&D procurement policy has played in the US in the effective provision of public rather than private sector venture capital. The paper provides a broad overview of evidence on each of these factors and considers some broad implications for innovation policy which might be drawn on the basis of that review. In particular it concludes by arguing that the crafting of innovation policy in the context of any specific national innovation system requires a careful consideration of the structural features of that context and the particular opportunities and challenges facing policy practitioners in it. An imperfect interpretation of the experience of one country’s system is unlikely to be an appropriate guide to innovation system failure or success elsewhere.


WP347: Varieties of Capitalism & the Learning Firm: Corporate Governance & Labour in the Context of Contemporary Developments in European & German Company Law

Peer Zumbansen

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Research in corporate governance and in labour law has been characterised by a disjuncture in the way that scholars in each field are addressing organisational questions related to the business enterprise. While labour has eventually begun to shift perspectives from aspirations to direct employee involvement in firm management, as has been the case in Germany, to a combination of ‘exit’ and ‘voice’ strategies involving pension fund management and securities litigation, it remains to be seen whether this new stream will unfold as a viable challenge to an otherwise exclusionary shareholder value paradigm. At the same time, recent suggestions made by Delaware Chancery Court Vice Chancellor Strine, to dare think about potentially shared commitments between management and labour – and UCLA’s Stephen Bainbridge’s response – underline the viability – and, the contestedness – of attempts at moving the corporate governance debate beyond the confines of corporate law proper.


WP346: Reflexive Governance & European Company Law

Simon Deakin

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The use of reflexive forms of regulation is growing within the EU, in particular as the open method of coordination (‘OMC’) is applied to a growing number of contexts including employment policy, social inclusion, enterprise promotion, environmental protection, energy policy, and fundamental human rights. Company law, however, seems to be an exception to this: recent activity has taken the form of ‘hard law’ harmonisation through directives, coupled with the stimulation of regulatory competition through judgments of the European Court of Justice in relation to freedom of movement, stemming from the Centros case. There is a very limited ‘company law OMC’ in the form of the deliberations of the European Corporate Governance Forum, but there is little evidence here of what proponents of the OMC call ‘learning from diversity’; instead, the Forum appears to envisage the elimination of country-specific practices which it refers to as ‘distortions of competition’. This paper argues that the lack of a meaningful company law OMC is likely to prove a more serious longterm obstacle to capital market integration than the persistence of inter-country variations in corporate governance practices. The example of labour law shows how functional convergence and a coordinated raising of standards can be achieved by the dovetailing of the OMC with social policy directives. By contrast, the recent failure of the Takeover Directive to impose a uniform model of takeover regulation indicates the limits of top-down modes of harmonisation. At the same time, the case of labour law highlights the importance of placing the OMC within a wider framework of legal support for fundamental rights, of the kind which is capable of providing a countervailing force against court-led deregulation.


WP345: Work Intensification & Employment in Security in Professional Work

Suzanne J Konzelmann, Frank Wilkinson and Roy Mankelow

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Professional work is a category of employment that has traditionally been associated with high levels of worker autonomy, economic and social status. During the past decade, changes in customer expectations, government policy and technology have generated pressures resulting in enhancement of the quality and efficiency of service provision, expansion in task requirements and a need for higher levels of discretion. In this sense, professional work has been upgraded. However, the changes have also led to a deterioration in the economic and social status of professional work, adversely impacting on the social and psychological well-being of professional workers. This paper examines these developments in five professions including two established professions (lawyers and pharmacists), one aspiring profession (midwives) and two emerging professions (counselling psychologists and human resource managers). The empirical findings are based on a survey of 1270 professional workers conducted in 2000 and 2001.


WP344: NHS Reforms & the Working Lives of Midwives & Physiotherapists

Frank Wilkinson, Anna Bullock, Brendan Burchell, Suzanne J Konzelmann and Roy Mankelow

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From 2000 the NHS was subjected to a series of far reaching reforms, the purposes of which were to increase the role of the primary care sector in commissioning and providing services, promote healthier life styles, reduce health inequality, and improve service standards. These were seen as requiring a greater leadership role from health professionals, closer and more cooperative working between health professionals, and between health professionals, social services, and community and other service providers. The project surveyed a random sample of midwives and physiotherapists to investigate their perceptions of the effectiveness of the reforms, and their effects on working lives. The predominant perception was that NHS reforms had negatively affected the funding of their services; and had done little to improve service quality, delivery or organisation. Although the potential existed for the reforms to improve services, the necessary resources and required staffing were not made available and the objectives of the reforms were only partially secured by intensifying of work. The downside of this was a deterioration of the socio-psychological wellbeing of midwives and physiotherapists, especially the former, exacerbating the shortage of skilled and experienced. Shortage of staff and the associated increased work burdens were demoralising and demotivating; morale and job satisfaction declined, and job insecurity and labour turnover increased.


WP343: Legal Origin, Shareholder Protection & the Stock Market: New Challenges from Time Series Analysis

Sonja Fagernäs, Prabirjit Sarkar and Ajit Singh

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This paper uses a new time series dataset of shareholder protection consisting of 60 annual legal indicators for the period 1970-2005 for France, Germany, the UK and the US. On the basis of these data it examines developments in shareholder protection and reassesses the claims that common-law countries have better shareholder protection than civil law countries. Furthermore it examines the relationship between legal changes and stock market development. It casts serious doubt on the claim that common-law countries have better shareholder protection which in turn leads to more stock market development.


WP342: The Productivity-enhancing Impacts of the Minimum Wage: Lessons from Denmark, New Zealand & Ireland

Colm McLaughlin

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There has been increasing interest of late in the question of whether minimum wage regulations can raise productivity through the ‘shock effect’. This paper explores this question in comparative perspective, by examining the impact of minimum wage regulations and institutions in Denmark, New Zealand and Ireland. It argues that while they are important, a supportive institutional framework plays a far more crucial role in providing coordinated solutions to issues of market failure, such as inadequate levels of training. The paper suggests that sectoral bargaining institutions in low-paid sectors may have the potential to facilitate such coordination and enable the high-productivity model to emerge. For the UK context, this raises the question as to whether Wages Councils in a modernised form might have some future role to play.


WP341: Fiscal Policy in a Stock Flow Consistent (SFC) Model: A Comment

Bill Martin

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This comment provides a simple analytical exposition of the stock-flow consistent closed economy model used by Godley and Lavoie (2007b) to argue a case for fiscal stabilisation policy. We show that the government spending stabilisation rule proposed by Godley and Lavoie (GL) is equivalent to an optimal-output budget deficit rule that automatically ensures budget solvency as long as private sector saving behaviour is itself stable. Assuming a non-inflationary full-employment objective, we derive an optimal government-spending rule. We endorse GL’s view that fiscal policy needs to be “appropriate” if monetary policy is to be actively pursued. The main requirement of fiscal policy is a government debt rule to avoid instabilities arising from the accumulation of debt interest payments. Godley and Lavoie (2007a) simulate such instabilities but do not propose a solution. We do so and derive an optimal monetary rule. The theoretical substitutability of policy rules raises important questions about the wisdom of macroeconomic stabilisation strategies that relegate fiscal policy to a purely supporting role


WP340: The End of Comparative Law

Mathias Siems

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Following the 1900 congress in Paris, the beginning of the 20th century saw comparative law emerge as a significant discipline. This paper suggests that the early 21st century is seeing the decline, or maybe even the ‘end’, of comparative law. In contrast to other claims which see the 21st century as the ‘era of comparative law’, there are at least four trends which give rise to pessimism: ‘the disregard’, ‘the complexity’, ‘the simplicity’, and ‘the irrelevance’ of comparative law. These phenomena will be explained in the body of this paper; the concluding part considers suggestions as to how to proceed further.


WP339: The Eclipse of Private Equity

Brian Cheffins and John Armour

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Private equity, characterised by firms operating as privately held partnerships organising the acquisition and ‘taking private’ of public companies, is currently dominating the business news due to deals growing rapidly in number and size. If the trend continues unabated, the 1989 prediction by economist Michael Jensen of ‘the eclipse of the public corporation’ could be proved accurate soon. This paper argues matters will work out much differently, with private equity being at least partially eclipsed. One possibility is that current market and legal conditions, which are highly congenial to public-to-private transactions, could be disrupted in ways that cause the private equity surge to stall or even go into reverse. The paper draws on history to make this point, discussing how the spectacular rise of conglomerates in the 1960s was reversed in subsequent decades and how the 1980s buyout boom led by LBO associations — the private equity firms of the day — collapsed. Factors that undercut conglomerate mergers and buyouts by LBO associations (e.g. the tightening of debt markets and increased regulation) potentially could do the same with the current wave of private equity buyouts, and cause at least a temporary eclipse of private equity deals. Even if conditions remain favorable to private equity, its eclipse is likely to occur in a different way. Privacy has been a hallmark of private equity, with industry leaders operating as secretive partnerships that negotiate buyouts behind closed doors and restructure portfolio companies outside the public gaze. However, assuming market conditions remain sufficiently favorable, top private equity firms, following the lead of the Blackstone Group, may well carry out public offerings. If this happens, then even if the taking private of publicly quoted companies remains a mainstream pursuit, the exercise will occur largely under the umbrella of public markets.

2006 working papers

WP516: Elucidating Limited Shareholder Engagement: Identifying Ethical and Epistemological Factors in the Fiduciary

Helen Mussell

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The legal concept of fiduciary, from the Latin fiducia meaning trust, plays a fundamental role in all financial and business organisations: it acts as a moral safeguard of the relationship between trustee and beneficiary, ensuring that the beneficiaries’ best interests are met. It is often referred to as a duty of care. This paper focuses on the ethics of the fiduciary, but from a unique and historical perspective, going back to the original formulation of the fiduciary within a familial context, to reveal not only why care plays a central role in the fiduciary, but to also uncover key foundational presuppositions regarding agential capabilities embedded in the trustee-beneficiary relationship. In doing so, the paper uncovers ethical issues of an epistemological kind at the core of the fiduciary. By using Miranda Fricker’s theory of pre-emptive testimonial injustice, the analysis helps shed light on shareholder activism and explains limited engagement to date.


WP515: Do Corporate Governance Ratings Change Investor Expectations? Evidence from Announcements by Institutional Shareholder Services

Paul M Guest and Marco Nerino

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This paper examines empirically the announcement effect of commercial corporate governance ratings on share returns. Rating downgrades by Institutional Shareholder Services (ISS) are associated with negative returns of –1.14% over a 3-day announcement window. The returns are highly correlated with the proprietary analysis of ISS and are decreasing in agency costs, consistent with ratings providing independent information on underlying corporate governance quality. We thus show that the influence and impact of ISS extends beyond proxy recommendations and subsequent voting outcomes. Our findings contrast with the insignificant price impact of Daines, Gow, and Larcker (2010), whose analysis we replicate and successfully reconcile to ours by pooling upgrades and downgrades together.


WP514: Resurrecting the UK Sector National Accounts after 1945

Bill Martin

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Building on the methodology explained in Martin (2009), this paper sets itself the task of backcasting the UK national sectoral accounts before 1987, the date prior to which fully comprehensive data are not provided by the Office for National Statistics. Backcast data cover the private, government and overseas sectors. Innovations compared with the earlier paper include the extension of the dataset to begin in 1946 rather than 1948, and, more importantly, an attempt to backcast financial balances for the household and corporate sectors. This attempt involves the backcasting of pension saving before 1963 and of major components of the household and corporate capital account before 1987. The household and corporate sector data are likely subject to greater measurement error than estimates for more aggregate sector balances, as shown in Martin (2009) and provisionally upheld in this paper by simple tests of stability across different data vintages. Subject to further verification and improvements, now in prospect, in official historic data, the derived postwar sectoral estimates may nevertheless enable more robust testing of a variety of long-run macroeconomic hypotheses.


WP513: Fiscal Policy in a Depressed Economy: A Comment

Robert Rowthorn

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In an influential article, Delong and Summers (2012) consider the implications of hysteresis for government debt. They derive an upper limit for the after-tax real interest rate. If the interest rate is below this limit, the debt incurred during a one-off fiscal stimulus will be automatically repaid without the need for higher taxes. Their analysis assumes that a one-off stimulus leaves an infinite legacy of future benefits (hysteresis effects) that increase through time. This note extends their analysis to situations where hysteresis effects remain constant or decay in the course of time. By highlighting the hysteresis time profile, it provides a more transparent treatment of debt dynamics.


WP512: Keynesian Economics – Back from the Dead? The Godley-Tobin Lecture

Robert Rowthorn

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This paper surveys some the main developments in macroeconomics since the anti-Keynesian counter-revolution 40 years ago. It covers both mainstream and heterodox economics. Amongst the topics discussed are: New Keynesian economics, Modern Monetary Theory (MMT), expansionary fiscal contraction, unconventional monetary policy, the Phillips curve, and hysteresis. The conclusion is that Keynesian economics is alive and well, and that there has been a degree of convergence between heterodox and mainstream economics.


WP511: Fiduciary – Asymmetrical Power, Asymmetrical Care

Helen Mussell

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The legal concept of fiduciary plays a fundamental role in all financial and business organisations. It acts as a moral safeguard of the relationship between trustee and beneficiary, ensuring that the beneficiaries’ best interests are met. It is often referred to as a duty of care. Originally formulated within familial law to protect property put into Trust, beneficiaries were women and children, allocated passive and subordinated roles. This paper investigates two aspects of the asymmetrical power relations central to the fiduciary. Firstly it reveals the gendered presuppositions regarding male and female agential capabilities on which the fiduciary is premised, drawing out the origins of the authority differential in the trustee-beneficiary relationship. Secondly, the paper engages with the ethical nature of the fiduciary relationship, arguing that Care Ethics offers a robust framework for explicating the history of the relationship, alongside delivering a morally-enhanced and future-fit fiduciary free of damaging gendered stereotypes.

2005 working papers

WP318: Domestic Capabilities & Global Production Networks in the Clothing Industry: A Comparison of German & UK Firms’ Strategies

Christel Lane and Jocelyn Probert

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In this paper we examine the sourcing strategies of clothing firms in the developed economies of the UK and Germany in the context of their national institutional framework. We argue that, as a result of their embeddedness in divergent national structures, these firms pursue different sourcing strategies and make different locational choices. We place particular emphasis on the different mix of arms’ length and relational contracting that firms develop, and on the divergent degree of control over the manufacturing process and the product that they retain. We suggest that the construction of global production networks and control over supplier firms is mediated by co-ordinating firms’ product strategy and the degree of dependence on national retailers this engenders. In the UK and Germany, firms and their networks differ from the US case which is normally taken as representative of the industry.


WP317: The Comparative Evolution of the Employment Relationship

Simon Deakin

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It is widely believed that the legal institution of the contract of employment is currently undergoing a conceptual crisis as a result of changes in labour markets, the organisation of production, and the form of the enterprise. A historical and comparative perspective, however, indicates that conceptual crises of this kind are nothing new, and have occurred periodically in the systems of western Europe since the industrial revolution. The employment form serves important functions in a market economy even in an era of deregulation and liberalisation, and is unlikely to be replaced by a radically new model in the near future.


WP316: ICT & Productivity Growth – The Paradox Resolved?

Alan Hughes and Michael S Scott Morton

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This paper argues that the gains from ICT at the individual business level depend upon the implementation of a range of complementary ‘investments’ and organisational changes appropriate to the competitive and institutional context of particular sectors. To support our proposition we provide a brief overview of a recently emerging but compelling body of large sample micro-econometric research. We focus in depth, however on a single case study of ICT related organisational transformation in the transportation sector. This case builds upon the conceptual framework developed in the MIT interesting organisations project (Scott Morton (2003)). Taken as a whole we believe there is clear evidence of the conditions that seem to be required before the payoff from ICT can be realised by an organisation and hence diffuse through the economy. Effective use of ICT requires a holistic solution which recognises that there is no single factor, or even just a few, which leads to successful exploitation. Rather success comes from the artful crafting of a series of interrelated and mutually interdependent driving forces. The paradoxical ‘gap’ between investment in computers and realised performance can be closed if this lesson is absorbed.


WP315: Shareholder Value Maximization, Stock Market & New Technology: Should the US Corporate Model Be the Standard?

Ajit Singh, Jack Glen, Ann Zammitt, Rafael De-Hoyas, Alaka Singh and Bruce Weisse

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In 1992 a blue-ribbon group of US economists led by Michael Porter concluded that the US stock market-based corporate model was misallocating resources and jeopardising US competitiveness. The faster growth of US economy since then and the supposed US lead in the spread of information technology has brought new legitimacy to the stock market and the corporate model, which is being hailed as the universal standard. Two main conclusions of the analysis presented here are: (a) there is no warrant for revising the blue-ribbon group’s conclusion; and (b) even US corporations let alone developing country ones would be better off not having stock market valuation as a corporate goal.


WP314: The Export of National Varieties of Capitalism: The Cases of Wal-mart & Ikea

Suzanne Konzelmann, Frank Wilkinson, Charles Craypo and Rabih Aridi

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Using the cases of Wal-Mart and IKEA, this paper takes a productive systems approach to examine ‘varieties of capitalism’ from the perspective of the ways by which production and market relations are structured and prioritised. It considers the nature of these relations and their interaction within the domestic economy and the ways that firms and national systems interact with each other in the global economy. It examines the processes by which trading standards are transported via supply chain relationships, which ultimately become embedded in products and recognised by consumers at various stages. In this analysis, the cases of Wal-Mart and IKEA provide insight into the ways by which national systems extend themselves globally, their contrasting effects on the business environments in host localities, and the impact of the resulting supply chain relations on organisational performance.


WP313: Corporate Governance, Stakeholding & the Nature of Employment Relations in the Firm

Suzanne Konzelmann, Neil Conway, Linda Trenberth and Frank Wilkinson

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This paper investigates the effect of different forms of corporate governance on the structure and nature of stakeholder relationships within organisations and the consequent impact on employment relations within the firm.


WP312: Labour Regulation, Corporate Governance & Legal Origin: A Case of Institutional Complementarity

Simon Deakin and Beth Ahlering

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We explore the finding of La Porta et al. that differences in ‘legal origin’ account for part of cross-national diversity in labour regulation and corporate governance. We suggest that the finding needs a better historical grounding and that a mechanism which might explain it has not been adequately spelled out. In search of an explanation we focus on the role of complementarities between legal and economic institutions, and in particular the part played by the distinctive ‘legal cultures’ of the common law and civil law in setting national systems on separate pathways to economic development.


WP311: Management Characteristics, Collaboration & Innovative Efficiency: Evidence from UK Survey Data

Andy Cosh, Xiaolan Fu and Alan Hughes

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This paper explores the impact of management characteristics and patterns of collaboration on a firm’s innovation performance in transforming innovation resources into commercially successful outputs.


WP310: Will Services Be the New Engine of Economic Growth in India?

Sukti Dasgupta and Ajit Singht

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This paper revisits the role of manufacturing and services in economic development in the light of the following new facts: (a) a faster growth of services than that of manufacturing in many developing countries (DCs). (b) The emergence of “de-industrialisation” in several DCs at low levels of per capita income. (c) Jobless growth in the formal sector even in fast growing countries such as India and (d) a large expansion of the informal sector in both fast growing and slow growing DCs. Although the paper examines these phenomena in the specific case of the Indian economy, the analysis has much wider application, both for economic policy and for theories of growth and structural change.


WP309: The Book Publishing industry in Japan & the UK: Corporate Philosophy/Objectives, Behaviour & Market Structure

Dai Miyamoto and Hugh Whittaker

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A number of prominent publishers in the UK and US have become parts of globalised media groups. In Japan, by contrast, they have neither been absorbed into media groups nor become globalised businesses. Based on interviews of major players in the Japanese publishing industry as well as annual reports, other written materials, and in comparison with the UK, this paper examines co-relationships among corporate philosophy, behaviour, and market structure with a view to explaining comparative divergence between Japan and the UK.


WP308: Anglo-American Corporate Governance & the Employment Relationship: A Case to Answer?

Simon Deakin, Richard Hobbs, Sue Konzelman and Frank Wilkinson

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The corporate governance environment in the UK and US is generally thought to be hostile to the emergence of cooperative employment relations of the kind exemplified by labour-management partnerships. We discuss case study evidence from the UK which suggests that, contrary to this widespread perception, enduring and proactive partnerships may develop, in conditions where management can convince shareholders of the long-term gains from this approach, and where other regulatory factors operate to extend the time-horizon for financial returns. We conclude that there is more scope than is commonly allowed for measures which could reconcile liquidity in capital markets with cooperation in labour relations.


WP307: Who Should Make Corporate Law? EC Legislation Versus Regulatory Competition

John Armour

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This paper makes a case for the future development of European corporate law through regulatory competition rather than EC legislation.


WP306: The Revealed Preferences of High Technology Acquirers: An Analysis of the Characteristics of their Targets

Panayotis Dessylla and Alan Hughes

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In this paper we investigate the motives of high-tech acquirers by analysing their revealed preferences in terms of the high-tech companies they acquire.


WP305: Combined & Uneven Development: Reflections on the North-South Divide

Robert Rowthorn

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This paper is concerned with the geography of structural change in Great Britain since 1971. It divides the country into two broad areas – the ‘North’ comprising Northern England, the West Midlands, Wales and Scotland, and the ‘South’ comprising the rest of mainland Britain. The paper documents the uneven regional impact of industrial decline and the rise of the new service economy. The North has experienced the greatest industrial decline and has gained least from the growth of new service industries. With certain local exceptions, the apparent revival of the Northern economy in recent years is not based on self-sustaining growth but on public sector and related employment financed by fiscal transfers from the more dynamic South. Such transfers have disguised but have not eliminated the old North-South divide.


WP304: FDI, Globalisation & Economic Development: Towards Reforming National & International Rules of the Game

Ajit Singh

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The key analytical and policy question examined in this paper is whether multinational companies and their overseas investment need to be regulated at the national or the international level, in order to address market failures, and to enhance their potential contribution to world welfare. The paper examines two kinds of regulatory regimes: first the current regime and second, a new regime proposed by the European community and Japan at the WTO (ECJ) to institute fresh global rules of the game which will effectively allow multinationals unfettered freedom to invest where they like, whenever they like, how much and in what products.


WP303: The ‘Capability’ Concept & The Evolution of European Social Policy

Simon Deakin

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Amartya Sen’s capability approach has the potential to counter neoliberal critiques of social welfare systems by overcoming the false opposition between security and flexibility. In particular, it can be used to promote the idea of social rights as the foundation of active participation by individuals in the labour market. This idea is starting to be reflected in the case law of the European Court of Justice concerning free movement of persons but its use in the European employment strategy is so far more limited, thanks to the continuing influence of neoliberal ‘activation policies’.


WP302: How Do Multinationals Build Social Capital? Diageo’s Corporate Citizenship Programme

David Bek, Ian W Jones and Michael J Pollitt

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This paper attempts to enhance understanding of the process by which multinationals build social capital by examining the Corporate Citizenship (CC) activities and associated social capital outcomes of the UK-based branded alcoholic drinks company, Diageo. The firm possesses a structured portfolio of CC initiatives and projects and has a long-standing tradition of community engagement. This paper examines Diageo’s CC strategy in depth and considers the ways that their engagements impact upon social capital development in different arenas. The forces driving social capital outcomes are considered and implications for companies and governments are offered.


WP301: Outside Entrepreneurial Capital

Douglas Cumming, Andy Cosh and Alan Hughes

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This paper investigates the internal versus external financing decisions among 1900 early stage privately held UK firms in 1996-1997.


WP300: Bankruptcy Law & Entrepreneurship

John Armour and Douglas Cumming

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Entrepreneurs, catalysts for innovation in the economy, are increasingly the object of policymakers’ attention. Recent initiatives both in the UK and at EU level have sought to promote entrepreneurship by reducing the harshness of the consequences of personal bankruptcy law. Whilst there is an intuitive link between the two, little attention has been paid to the question empirically. We investigate the link between bankruptcy and entrepreneurship using data on self employment over 13 years (1990-2002) and 15 countries in Europe and North America.


WP299: The Proprietary Foundations Of Corporate Law

John Armour and the late Michael J Whincop

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Recent work in both the theory of the firm and of corporate law has called into question the appropriateness of analysing corporate law as ‘merely’ a set of standard form contracts. This working paper develops these ideas by focusing on property law’s role in underpinning corporate enterprise.


WP298: R&D & Patenting Activity & the Propensity to Acquire in High Technology Industries

Panayotis Dessylla and Alan Hughes

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In this paper we investigate the incidence of high technology acquisitions using a large international sample of acquisitions by public high technology firms.

2004 working papers

WP297: Responsible Ownership, Shareholder Value & the New Shareholder Activism

Richard Barker, Paul Sanderson, John Hendry and John Roberts

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In this paper we use interview data to explore the ‘new shareholder activism’ of mainstream UK institutional investors. We describe contemporary practices of corporate governance monitoring and engagement and how they vary across institutions, and explore the motivations behind them. Existing studies of shareholder activism mainly assume that it is motivated by a desire to maximise shareholder value, and we find some evidence both of this and of alternative political/moral motivations related to ideas of responsible ownership. We conclude, however, that in the current situation both these act primarily as rationalisations rather than as genuine motivators. The main driving force behind the new shareholder activism is the institutions’ own profit maximisation and the need to position themselves against competitor institutions in the context of political and regulatory changes that have significantly changed the non-financial expectations of their clients.


WP296: Owners, Traders & Providers of Capital: The Multiple Faces of Institutional Investors

Richard Barker, Paul Sanderson, John Hendry and John Roberts

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We draw on a series of in-depth interviews with senior fund managers and senior company executives to explore how different and often-contradictory conceptualisations of institutional investors, their role in the corporate governance process, and their interactions with corporate management, are reflected in the attitudes and perceptions of the actors concerned. We find that while conceptualisations in terms of agency and ownership dominate both academic and popular discourses, the actors conceptualise institutional investors more as financial traders and, from the management perspective, politically powerful resource providers.


WP295: Motor Vehicle Recalls: Trends, Patterns & Emerging Issues

Hilary Bates, Nick Oliver, Matthias Holweg and Michael Lewis

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This paper examines patterns and trends in motor vehicle safety recalls using a dataset based on 23.1 million vehicles registered in the UK between 1992 and 2002. A safety recall occurs when vehicle manufacturers call vehicles that have been sold and are in use back to their dealerships for safety-related remedial work. Safety recalls can be costly for car makers, and potentially harmful to brand and image. The data show that the incidence of vehicle recalls has been increasing – between 1998 and 2002 there was an average of over 120 recall incidents per annum in the UK, compared to less than 50 per annum between 1992 and 1994. Total numbers of vehicles recalled show no trend over time, but absolute level of recalls year on year is very high: 10.8 million vehicles were recalled during 1992-2002, representing 47% of all vehicle registrations in the period. Moreover, there are substantial differences in recall rates between different car manufacturers, suggesting that recall rates may be a useful final indicator of process performance in the car design-and-production chain. European and American producers have recall rates that are nearly three times greater than their East Asian counterparts. This paper offers some suggestions for corporate differences in propensity to recall, and concludes with an agenda for further research.


WP294: Reflexive Law, Corporate Social Responsibility & the Evolution of Labour Standards: The Case of Working Time

Catherine Barnard, Simon Deakin and Richard Hobbs

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Through an empirical study of working time in the United Kingdom, we explore the scope for initiatives based on corporate social responsibility (CSR) to engender voluntary action by employers to raise labour standards. Our evidence suggests that a CSR-based approach faces considerable problems of implementation in this area, in large part because the legal mechanisms which might underpin CSR (‘reflexive law’) have not yet been effectively developed.


WP293: The Corporate-Fund Management Interface: Objectives, Information & Valuation

Richard Barker, Paul Sanderson, John Hendry and John Roberts

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Fund managers are the primary investment decision-makers in the stock market, and corporate executives are their primary sources of information. Meetings between the two are therefore central to stock market investment decisions but are surprisingly under-researched. There is little in the academic literature concerning their aims, content and outcomes. We report findings from interview research conducted with chief financial officers and investor relations managers from FTSE 100 companies and with chief investment officers and fund managers (FMs) from large institutional investors. Of particular interest we note that FMs place great reliance on discounted cash flow valuation models (despite informational asymmetry in favour of CFOs). This leads the former to seek to control encounters with the latter and to place great store on the clarity and consistency of corporate messages, ultimately relying on them for purposes other than estimating fundamental value. We consider some of the consequences of this usage.


WP292: Incentives for Knowledge Production with Many Producers

Bronwyn H Hall

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In this paper, I briefly review the motivations for inventive behavior and describe two common incentive systems that harness and encourage such behavior. This review of well-trodden ground is performed only so that the implications of the rise of the networked knowledge economy for the effectiveness of these incentive systems can be noted. Some theoretical results on the operation and stability of the two incentive systems for the production of knowledge are presented with a discussion of how they might apply in the networked economy. The paper concludes with suggestions on open research questions.


WP291: Exploring the Patent Explosion

Bronwyn H Hall

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This paper looks more closely at the sources of patent growth in the United States since 1984. It confirms that the increase is largely due to US patenters, with an earlier surge in Asia, and some increase in Europe. Growth has taken place in all technologies, but not in all industries, being concentrated in the electrical, electronics, computing, and scientific instruments industries. It then examines whether these patents are valued by the market. We know from survey evidence that patents in these industries are not usually considered important for appropriability, but are sometimes considered necessary to secure financing for entering the industry. I compare the market value of patents held by entrant firms to those held by incumbents (controlling for R&D). Using data on publicly traded firms 1980-1989, I find that in industries based on electrical and mechanical technologies the market value of entrants’ patents is positive in the post-1984 period (after the patenting surge), but not before, when patents were relatively unimportant in these industries. Also, the value of patent rights in complex product industries (where each product relies on many patents held by a number of other firms) is much higher for entrants than incumbents in the post-1984 period. For discrete product industries (where each product relies on only a few patents, and where the importance of patents for appropriability has traditionally been higher), there is no difference between incumbents and entrants.


WP290: In the Mirror of the Market: the Disciplinary Effects of Company/Fund Manager Meetings

Richard Barker, Paul Sanderson, John Hendry and John Roberts

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We consider the consequences of the regular private meetings between directors of FTSE 100 companies and their major institutional shareholders. Whilst the economic incentives for both the flow of information and the formation of ‘strategic informational relationships’ between the two have been described elsewhere, little attention has been paid to date to the effects that increased levels of monitoring and surveillance have on the conduct and performance of company directors. We present findings from a qualitative study in which we interviewed finance directors and fund managers, and observed a series of meetings between them. We draw on Foucault’s analysis of the operation of disciplinary power to suggest that the meetings serve as ritual reminders to directors that their primary objective must be the pursuit of shareholder value, a task that whilst empowering, may also have unintended consequences.


WP289: Reforming the Governance of Corporate Rescue: The Enterprise Act 2002

John Armour and Rizwaan Jameel Mokal

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English corporate insolvency law has been reshaped by the Enterprise Act 2002. The Act was intended to ‘to facilitate company rescue and to produce better returns for creditors as a whole’. Administrative receivership, which placed control of insolvency proceedings in the hands of banks, is for most purposes being abolished. It is being replaced by a ‘streamlined’ administration procedure. Whilst it will still be possible for banks to control the appointment process, the administrator once in office owes duties to all creditors and must act in accordance with a statutory hierarchy of objectives. In this article, we seek to describe, and to evaluate, this new world of corporate rescue.


WP288: Corporate Governance, Competition & Finance: Rethinking Lessons from the Asian Crisis

Ajit Singh and Jack Glen

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This paper critically examines the Greenspan-Summers-IMF thesis concerning the Asian crisis, which suggested that the fundamental causes of the Asian crisis lay in the microeconomic behavior of economic agents in these societies – in the Asian way of doing business. The paper concentrates on corporate governance and competition in emerging markets and outlines the international significance of these issues in the context of the New International Financial Architecture and the Doha Development Round at the WTO. It reviews new analyses and fresh evidence on corporate governance, corporate finance and on competition in emerging and mature markets, to suggest that the basic thesis above is not valid and the consequent policy proposals are therefore deeply flawed.


WP287: Has China’s Economic Reform Improved Enterprise Performance? A DEA Evaluation of China’s Large & Medium Enterprises

Yang Qing Gong

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This paper attempts to investigate whether China’s economic reform has improved enterprise performance, and what determine enterprise efficiency in the context of China’s transition. Contrast to the results of improving enterprise performance measured by TFP from other studies, we find that there is a general tendency of divergence of enterprise efficiency rather than a convergence of firm’s efficiency as is expected from a competitive market. Further econometric analysis suggests that firms of different ownership types seem to respond similarly to catch up with technology frontier, enterprise reform characterised by profit retention program have improved firms’ efficiency at the initial stage of reform, and market competition seems to be working, but ineffectively.


WP286: Exports, FDI, Growth of Small Rural Enterprises & Employment in China

Xiaolan Fu and VN Balasubramanyam

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This paper analyses the growth of employment in China during the post reform period. It argues that the Chinese experience with export-led growth provides an excellent example of the phenomenon of a vent for surplus productive capacity provided by exports, identified by Adam Smith in the Wealth of Nations and elaborated by Hla Myint. The paper extends the Smith-Myint model of ‘vent-for-surplus’ productive capacity to ‘vent-for-surplus’ resources by allowing foreign investment inflows. The ‘vent-for-surplus’ effect of exports on employment growth is examined in a dynamic labour demand framework for a panel of township and village enterprises (TVEs) in China.


WP285: Multinationals in Developing Communities: How EU Multinationals Build Social Capital in Poland

Ian W Jones, Chris M Nyland and Michael G Pollitt

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Corporate Social Responsibility (CSR) is usually an area that does not lend itself easily to inter-company or cross-country analysis. This paper is an attempt to provide some metrics of multinational CSR drawing on the recent literature on social capital. We look at the self-reporting of social engagement in Poland by European multinational firms with operations there, mapping the configurations of declared engagement. Such social engagements are an important component of how these companies contribute to social capital in the communities within which they operate. We find high performance by some firms, with stronger performance depending upon the multinational’s country of origin. Two case studies – on Bayer and Danone – detailing different but successful approaches to social capital building are given.


WP284: Entry, Exit & the Dynamics of Productivity Growth in Chinese Manufacturing Industry

Yang Qing Gong

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In this paper we have attempted to examine aspects of the competitive selection process, firms’ entry, survival and exit, in an important sector of Chinese manufacturing, looking in particular for changes resulting from the latest stage of reform, dubbed the transition to the “socialist market economy”. These dynamic processes may be becoming increasingly important for the continuing growth of manufacturing, as the agricultural sector as a source of surplus labour begins to decline.


WP283: Between the Global & the Local: A Comparison of the British & German Clothing Industry

Christel Lane and Jocelyn Probert

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The clothing industry is regarded as one the most globalised industries of developed economies, yet most studies focus on the geography of production for US firms and pay scant attention to the geography of trade or to other national cases. This paper broadens the perspective to cover the whole network of German and British clothing firms’ relationships by examining both their supply chain organisation and their market strategy, including their relations with retailers. It demonstrates the interdependencies between their strategic responses at different stages of the value chain and shows that relationships with both suppliers and customers have strongly defined the industry and firms in both countries, albeit differently. The global context of the clothing industry and the common pressures experienced by the national industries are also considered. We draw on industry statistics and on early impressions from interviews with clothing firms and retailers in both countries during 2003.


WP282: Opting Out of the 48-hour Week – Employer Necessity or Individual Choice? An Empirical Study of the Operation of Article 18(1)(b) of the Working Time Directive in the UK

Catherine Barnard, Simon Deakin and Richard Hobbs

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The EU Working Time Directive has so far had little impact on an ingrained culture of long-hours working in the UK. Case studies suggest that the use of individual opt-outs from the 48-hour limit on weekly working time is a principal reason for this. However, removal of the individual opt-out (currently under consideration at EU level) is unlikely to make much difference to UK practice in the absence of a wider review of working time policy. In particular, the UK’s individualised system of workplace bargaining is currently ill-placed to adapt to a continental European model of working time regulation.


WP281: The Legal Road to Replicating Silicon Valley

John Armour and Douglas Cumming

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Must policymakers seeking to replicate the success of Silicon Valley’s venture capital market first replicate other US institutions, such as deep and liquid stock markets? Or can legal reforms alone make a significant difference? In this paper, we compare the economic and legal determinants of venture capital investment, fundraising and exits. We introduce a cross-sectional and time series empirical analysis across 15 countries and 13 years of data spanning an entire business cycle. We show that the legal environment matters as much as the strength of stock markets; that government programmes more often hinder than help the development of private equity, and that temperate bankruptcy laws stimulate entrepreneurial demand for venture capital. Our results provide generalisable lessons for legal reform.


WP280: The Impact of Regulatory Stringency on the Foreign Direct Investment of Global Pharmaceutical Firms

Beth Ahlering

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Cross-national regulatory differences in safety, price and intellectual property protection are an inherent feature of the operating environment of the global pharmaceutical firm. Institutional, transaction cost and more recent ‘race to the bottom’ theories assume that regulation represents a cost to the firm; therefore firms ‘vote with their feet’ and avoid investment in stringently regulated markets. However, a cross-national empirical study of the FDI levels of 20 firms across 19 markets reveals that regulatory stringency is not related to FDI, and price control stringency is positively related to FDI, when controlling for other market factors. National governments are not powerless in games of regulatory arbitrage, and have in fact developed adaptive strategies to maintain high regulatory standards and FDI simultaneously. Furthermore, glob