Firms innovative behaviors are strongly influenced by the competencies of their managers and the ways in which their performance is judged and rewarded (and punished). Methods of judgment and reward vary considerably amongst countries, according to their national systems of corporate governance in other words the systems for exercising and changing corporate ownership and control. In broad terms, we can distinguish two systems one practiced in the USA and UK, and the other in Japan, Germany and its neighbors such as Sweden and Switzerland. In his book Capitalism against Capitalism Michel Albert calls the first the Anglo Saxon and the second the Nippon Rhineland variety. A lively debate continues about to essential characteristics and performance of the two systems, in terms of innovation and other performance variables. Table based on a variety of sources and tries of identify the main differences that affect innovation performance.
The effects of corporate governance on innovative activities
Characteristics Anglo Saxon Nippon Rhineland
Ownership: Individuals pension funds insurers: Companies individuals’ banks.
Control: Dispersed arms length: Concentrated close and direct.
Management: Business schools (USA), accountants (UK); Engineers with business training.
Evaluation pf R&D: Publish information: Insider knowledge.
Strengths: Responsive to radically new technological opportunities; Efficient use of capital; Higher priority to R&D than to dividends for shareholders, Remedial investments in failing firms.
Weakness: Short term> Inability to evaluate for specific un-tangible assets; Slow to deal with poor investment choices. Slow to exploit radically new technologies.
In the UK and the USA corporate ownership (share holders) is separated from corporate control (managers) and the two are meditated through an active stock market Investors can be persuaded to hold shares only if there is an expectation of increasing or profits and share values. They can shift their investments relatively easily. On the other hand, in countries with governance structures like those of Germany or Japan banks, suppliers and customers are more heavily locked into the firms in which they invest. Until the 1990s, countries strongly influenced by German and Japanese traditions persisted in investing heavily in R&D in established firms and technological whilst the US system has since been more effective in generating resources to exploit radically new opportunities in IT and biotechnology.
During the 1980s the Nippon Rhineland model seemed to be performing better as we saw in Table aggregate R&D expenditures were on a healthy upward trend, and so were indicators of aggregate economic performance. Since then there have been growing doubts. The aggregate technological and economic indicators have been performing less well Japanese firms have proved unable to repeat in telecommunication software microprocessors and computing their technological and competitive successes in consumer electronics. German firms have been slow to exploit radically new possibilities in IT and biotechnology and there have been criticisms of expensive and unrewarding choices in corporate strategy like the entry of Daimler’s Benz into aerospace. At the same time US firms appear to have learned important lessons, especially from the Japanese in manufacturing technology, and to have reasserted their eminence in IT and biotechnology. The 1990s have also been sustained increases in productivity in US industry. According to The Economists in 1995, in a report entitled Back on top? One professor at the Harvard business school believed that people will look back at the this period as a golden age of entrepreneurial management in the USA.
However some observers have concluded that the strong US performance in innovation cannot be satisfactorily examined simply by the combination of entrepreneurial management, a flexible Labor force and a well developed stock exchange. The US experience has not been repeated in the other Anglo Saxon country with apparently similar characteristics – the UK
Excerpts from Managing Innovation