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Working papers: 2008

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

Ajit Singh

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

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

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

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 per cent 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

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

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

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

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

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

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

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, Aristea Koukiadaki

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, Prabirjit Sarkar

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, Frank Wilkinson

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, Ajit Singh

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

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, Alan Hughes

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

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, Priya Lele

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

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.