Path Dependence, Corporate Governance and Complementarity

Reinhard H. Schmidt and Gerald Spindler

International Finance, 2002, vol. 5, issue 3, 311-333

Abstract: The concept of path dependence can be used to challenge the widespread view that the corporate governance systems of the major advanced economies are likely to converge towards the economically best system at a rapid pace. This paper argues that it is important for the discussion of path dependence and corporate governance to distinguish clearly between two arguments that can explain path dependence: one based on the role of adjustment costs, and the other using concepts borrowed from evolutionary biology. Making this distinction is important because the two concepts of path dependence have different implications for the issue of rapid convergence to the best corporate governance system. The authors introduce the concept of complementarity as a reason for path dependence and demonstrate that national corporate governance systems are usefully regarded as – possibly consistent – systems of complementary elements. The dynamic properties of systems composed of complementary elements are such that a rapid convergence towards a universally best corporate governance systems is not likely to happen. More importantly, though, there is even the possibility of a convergence towards a common system that is economically inferior. Especially in the case of European integration, ‘inefficient convergence’ of corporate governance systems is a real possibility.

Date: 2002
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