NewAge-Bio is a biotechnology company that is considering opening a research and development centre abroad and has to choose between the USA, a country with liberal market economy, and Germany a classical coordinated market economy. This article represents a report for NewAge-Bio CEO Mr Mark Phillips and gives advices backed by research and justifications regarding the choice of the country to open a research and development centre.
The article starts with general discussions about advantages and disadvantages of liberal and coordinated market economies in cases of USA and Germany and proceeds to focusing on five main aspects of the issue: industrial relations, employee relations, education and training, inter-company relations, corporate governance and financial markets.
Moreover, a personal letter is also included to NewAge-Bio CEO Mr Mark Phillips that gives specific recommendations regarding the choice of the country, providing detailed justifications for each of the points being recommended.
Advantages and Disadvantages of Liberal and Coordinated Market Economies for Opening NewAge-Bio Research and Development Centre: USA or Germany?
Liberal and coordinated market economies are the two forms of free market economies that have specific differences which would have direct impact on various aspects of practice of NewAge-Bio Research and Development Centre.
The basis for the distinction between liberal and coordinated market economies are specified to be differences in “the structure of institutions used to resolve contractual dilemmas between economic groups” (Meunier and McNamara, 2007, p.162). Accordingly, the main advantages of liberal market economy like US are cost competition and the infrastructure for radical innovation and at the same time this form of market economy has disadvantages in terms of benefiting from special skills, as well as, benefiting from incremental innovation.
Likewise, coordinated market economies offer the advantages of benefiting from higher levels of specific skills, wage moderation, and taking advantage from long-term capital, while its disadvantages are inability of companies to gain increase their market share solely through cost reduction, and gaining competitive edge through implementation of radical innovations.
Hollingsworth et al (2005) discuss the liberal and coordinated market economies from innovation perspective in a way that in liberal market economies radical innovations are commonplace, whereas gradual, but steady improvements tend to prevail in coordinated market economies.
This specific difference between liberal and coordinated markets would affect NewAge-Bio Research and Development Centre in a way that if the Centre is opened in US the company would be able to conduct radical changes in various aspects of operations more efficiently, while in Germany such changes would have to be more gradual due to increased level of dependencies to various types of other institutions.
In order to advice NewAge-Bio regarding the choice between US and Germany in terms of setting up their foreign Research and Development Centre the issue of liberal market economy vs. coordinated market economy needs to be divided into following five components and studied individually: industrial relations, employee relations, education and training, inter-company relations, and corporate governance and financial markets.
There are big differences in industrial relations between liberal and coordinated markets in general, and between US and German markets in particular, and these differences will directly affect NewAge-Bio Research and Development Centre to be set up in either of these countries.
For instance, in liberal economy, US coordination and negotiations of industrial relations are limited only to a company level whereas in Germany, industrial relations are based on the notion of collective bargaining that is undertaken on sector level (Hancke, 2009).
For instance, in Germany industrial relations related to NewAge-Bio activities are conducted with the participation and assistance of such organisations as German Industry Association for Biotechnology (DIB) and Association of German Biotech Companies (VBU), whereas in the USA no such infrastructure exist.
Apart from the biotechnology industry, such associations and organisations exist in all other industries in Germany and other countries with coordinated market economy, and they possess real powers to influence any particular organisation within respective industry.
Moreover, there are sector collective bargaining agreements in Germany that address such issues as setting wages for biotechnology industry as well as setting labour standards. Generally, from the industrial relations viewpoint Germany is considered to be more suitable option for NewAge-Bio to set up a Research and Development Centre than US due to the following reasons:
Firstly, there would be considerably less chances of industrial strikes in NewAge-Bio Research and Development Centre located in Germany than the same Centre located in the USA due to the fact that the whole biotechnology industry is better regulated in Germany with the participation of various organisations above the company level specifically focusing on the biotechnology sector issues. In the USA, on the other hand, industrial relations issues are solved through negotiations in company-level. Such a practice usually proves to be costly from financial perspectives, and also there are considerably lower rates of successful outcomes of negotiations and this fact will result in industrial strikes.
Secondly, in the US there would be greater inequality in various aspects of NewAge-Bio Research and Development Centre industrial relations practice, because this practice will be guided only by the rules of free market economy. In Germany, on the other hand, there would be considerably less level of inequality due to the fact that all the potential issues that could result in inequalities will be dealt with by such organisations as German Industry Association for Biotechnology (DIB) and Association of German Biotech Companies (VBU). Accordingly, Germany makes a better choice compared to US in that aspect of the business.
Thirdly, unlike in the US, there would be no low wage competition in NewAge-Bio Research and Development Centre located in Germany. This factor is especially important for biotechnology industry due to the fact that the success in that industry depends on the competency of highly qualified professionals, and it is not possible to attract and retain such professionals by engaging in low wage competition.
Employee relations is another aspect where liberal and coordinated market economies differ from each-other on fundamental level, and therefore , this issue needs to be clarified for NewAge-Bio for decision making. “Germany has a relatively centralised and cohesive institutional infrastructure of employment relations. In the US, the micro level provides the forum for most union-management relations” (Muller-Jentsch, 2008, p.62, as taken from Wever (1995)).
The main differences between US and Germany employee relations practices are summarised by Cooke (2007) into two points:
Firstly, US labour markets are considered to be deregulated and highly mobile, whereas, long-term employment often with a single employer is commonplace in Germany. Considerable amount of resources would be spent to attract and foster highly qualified professionals at NewAge-Bio Research and Development Centre. If the Centre is located in the US, there would be high risk that these professionals would like to move on with their employment, sometimes even joining competitors, thus resources invested in these professionals would be wasted. In Germany, on the other hand, professionals would be expected to serve longer term, therefore any amount of resources spent on them could be considered as strategic investment, making Germany a better choice.
Secondly, in the US the contracts are individual and often last for only specific period of time after which they can be renewed. In Germany, on the other hand, employees enjoy unlimited working contracts. This difference is related to the point above, and makes Germany better choice for NewAge-Bio to set up Research and Development Centre there in a way that long-term employment gives more confidence to company to invest increasingly in training and development of employees and thus gain competitive edge in the marketplace.
Education and Training
There are vast differences in education and training between USA and Germany and between most of the other countries with liberal and coordinated market economies. These differences need to be studied in detail and relevant information need to be reported to NewAge-Bio CEO for decision making purposes.
Clear distinctions between education systems of liberal and coordinated market economies are drawn by Hall and Soskice (2003). In simple terms, these differences can be summarised into the idea that in liberal market economies most of the training and development initiatives at various levels are directed at developing general skills, whereas industry-specific and company specific skills are in greater demand in coordinated market economies.
Because the nature of the workforce is very mobile in US, companies are hesitant at committing to increased level of expenses for training and development purposes. This is caused by the fact that once appropriately trained by the company the workforce may be targeted and attracted by other companies, including direct competitors and financial resources spent for training and development purposes may be lost. Accordingly, educational institutions in US aim to offer courses that provide general skills that can be applied at a wide range of industries and companies.
Likewise, the development of industry specific and company specific skills are prioritised in coordinated market economies because these skills will serve the industry and the company in long-term basis. From this perspective locating NewAge-Bio Research and Development Centre in Germany is more suitable option because the management will find the workforce with specific skills in biotechnology industry there, the workforce will be taught specific skills required to succeed in NewAge-Bio, and the workers will remain with the company for a longer period of time.
Moreover, the existence of opinions that “the consequences of the decline of vocational training systems in the liberal market economies are now evident…many companies in such economies are now complaining of shortages of vocationally qualified staff” (Bosch and Charest, 2008, p.431) further justify the choice of Germany as the location to open the Research and Development Centre.
Inter-company relations can be shown as another point of difference between liberal and coordinated market economies. Specifically, as Okada (2006) informs, inter-company relations in liberal market economies like US are purely based on the principles of free market economy with no or only minor role of any third parties like associations and various organisations. As a result, there is scarcity of general rules and principles companies can be guided by and too many things depend on personalities and competencies of CEOs of two companies that have to deal with each-other.
In Germany, on the other hand, there is a wide range of collective bargaining, training and education among the companies within the same industry that prove to be extremely helpful in dealing with such issues as setting industry standards measures for quality control. According to Streeck (1995) one of the distinctive traits of German market is an increased level of cooperation among competitors, as well as bargaining among organised groups that is executed through associations.
NewAge-Bio would gain more benefits at various levels if it decides to open its Research and Development Centre in Germany as there would be more intensive cooperation with other market players in knowledge sharing, dealing with various issues the biotechnology industry is facing in general, and setting industry standards and quality control measures in general.
Moreover, there is a great difference in relationships with suppliers in US and German markets in a way that in Germany companies have long-term relationships with their suppliers, while US companies are guided by their immediate needs in the choice of their suppliers. This point makes Germany more suitable option for NewAge-Bio one more time, because long-term relationships with its suppliers will benefit the company in a way that suppliers will learn the corporate culture of the company and will devise their products and service in accordance with this culture to satisfy the company needs in the most efficient manner.
Corporate Governance and Financial Markets
The forms and characteristics of corporate governance as well as financial markets in a country play significant role in decision making related to engaging in any type of a business activity in that country. Therefore, this report also includes a brief analysis of corporate governance and financial markets of US and German markets.
Clarke (2009) distinguishes US and German corporate governance with decision making power of shareholders and the workforce. Specifically, while in US liberal market economy the majority of decision making power is held and exercised by shareholders of the company, in German coordinated market economy most of the decisions are taken the specific members of management appointed by the supervisory board.
This difference has deep implications on the strategic development of the company due to the fact that the majority of the shareholders of the company are guided by their preference for immediate benefits in forms of dividends, while company management is more interested in long-term development and is also equipped with more relevant theoretical and practical knowledge.
NewAge-Bio should choose a coordinated market economy, Germany as an appropriate place to open their Research and Development Centre because this choice will contribute to the long-term development of the company for above stated reason.
Conclusion: A Personal Letter to NewAge-Bio CEO
Dear Mr Phillips.
This last part of the report is a personal letter to you as the CEO of NewAge-Bio and provides specific advice with due justifications about where to open the new Research and Development Centre of the company. This letter summarises all the main points mentioned above and intends to show you why choosing German coordinated market economy would be a better choice than choosing US liberal market economy in terms of locating NewAge-Bio Research and Development Centre.
The justification for this specific recommendation can be summarised into following six points:
Firstly, there will be better coordination of industrial relations in Germany, because of the existence of various industry associations and organisations above the company level in that country, while negotiations and discussions in US companies are mainly limited to company level discussions and negotiations. Therefore, if NewAge-Bio chooses Germany there would be no or very few industrial issues like strikes and other interruptions to work.
Secondly, NewAge-Bio Research and Development Centre will enjoy more loyal and longer serving workforce if it is opened in Germany and therefore all of the resources spent for training and development purposes of the workforce will generate far greater results, than if the Centre was opened in US.
Thirdly, NewAge-Bio will be able to attract workforce with more biotechnology industry specific skills in Germany and thus become more efficient in conducting its operations. Moreover, the company has an opportunity to teach NewAge-Bio company specific skills to that workforce and use the services of the workforce for an extended period of time. This opportunity does not exist in US, where the workforce is highly mobile, and possess mainly general skills.
Fourthly, NewAge-Bio will benefit from inter-company relations if the Research and Development Centre is opened in Germany compared to no effective relationships among US companies. Such a relationship is important for biotechnology industry in general, and for NewAge-Bio in particular due to the fact that it provides platform for knowledge sharing and thus provides a huge potential for research and development cost saving.
Fifthly, locating NewAge-Bio Research and Development Centre in Germany will result the Centre having a better form of corporate governance, than the typical US corporate governance. Indeed, most of the corporations in Germany are governed by managers appointed by the company supervisory boards. These people have relevant business knowledge and experience and interested in long-term prospects of the company. However, there is a different scenario in US companies, where corporate governance is conducted by shareholders of the company, who are more interested to receive dividends than not to receive dividends for the sake of long-term growth.
Sixthly, the global financial crisis of 2007-2010 had started in the US and then expanded to most of the other countries around the globe. Along with most of the other implications at various levels, this fact indicates to the fundamental shortcomings of the liberal market economy. In simple terms, the fundamental shortcoming of liberal market economy that places high emphasize on the principles of free market to govern most of the other aspects of national economy allowed businesses to engage in profit maximisation in individual level, unrelated to other players and institutions within the industry. As a result, businesses in various industries engaged in profit maximisation not being guided by industry norms, industry organisations and associations and this partially led to the global financial crisis of 2007-2010.
The only advantage liberal market economy has over coordinated market economy relates to innovations. Specifically, biotechnology is a type of industry where competitive edge is gained and the market share is sustained and increased through being highly innovative. Liberal market economies encourage radical innovations and breakthrough that can assist businesses to become leaders in their respective markets locally as well as globally. This point is justified by the fact that the majority of innovative global market leaders like Apple and General Electric are US companies.
In the coordinated market economies, on the other hand, there is a less incentive for being highly innovative, because of less focus on individualism within companies, and therefore innovations in coordinated market economies have slower and more gradual characteristics compared to liberal market economies.
In order to minimise the negative effect of only disadvantage of coordinated market economy that relates to innovation, NewAge-Bio is recommended to implement increased level of focus to innovation aspect of their practice, and thus gain competitive edge in the marketplace.
Taking into account all of the points formulated and justified above NewAge-Bio is highly recommended to open its Research and Development Centre in Germany, that has a coordinated market economy.
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