Institutional theory: varieties of capitalism and business systems theory

Bo-Yi Lee

Chapter 5 in Theories and Concepts in Work and Employment Relations, 2025, pp 50-58 from Edward Elgar Publishing

Abstract: This chapter examines the impact of institutions on firms by exploring two comparative institutional theories: the Varieties of Capitalism (VoC) and Business Systems. VoC, proposed by Hall and Soskice, categorizes economies into liberal market economies (LMEs) and coordinated market economies (CMEs), focusing on how firms address coordination challenges in areas such as industrial relations, skills formation and corporate governance. In LMEs, market mechanisms dominate coordination, fostering short-term goals and general skill development, while CMEs emphasize strategic non-market mechanisms, promoting firm-specific skills and collaborative decision-making. Business Systems, advanced by Whitley, identifies eight distinct business systems, shaped by institutional factors such as state support, legal reliability and labour relations, which influence firms’ dynamic capabilities and authority-sharing mechanisms. Both theories underscore the complementary nature of institutions in shaping economic activities, emphasizing how market and strategic operations operate within specific political economies. We also present critiques of these frameworks, addressing their limitations in adapting to contemporary challenges such as globalization, climate change and geopolitical tensions. Finally, we propose future research directions to inspire reflection on the applicability of these theories to emerging economic sectors and evolving institutional landscapes.

Keywords: Varieties of Capitalism; Business Systems; Liberal market economies; Coordinated market economies; Institutions; Complementarities (search for similar items in EconPapers)
Date: 2025
ISBN: 9781035316199
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