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Governments, Institutions and their Influence on Economies

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Introduction
The debate on whether institutions of a country matter for economic growth has been a

longstanding one. This essay aims to provide an in-depth analysis of how the institutional context of a

country affects the firms that are homed in that country. To this end, it will analyse the data on

institutional quality to support the argument that institutions of a country matter for economic growth.

In addition, it will focus on a firm in a particular Variety of Capitalism in a particular institutional context

of one country, chosen from either a developed country or an emerging market country. The essay will

analyse the Variety of capitalism of the chosen country, as well as the firm’s strategies and governance.

To assess the linkages between governance, strategy and institutional development, the essay will draw

on theories such as transaction costs and firms’ structure and strategy. To conclude, the essay will tie

the different parts together and reflect on the linkages between primary, VoC and company institutions.

The ‘institutions matter’ debate

The debate on whether institutions of a country matter for economic growth has been a

longstanding one. In this regard, Rodrik and Subramanian (2005) argued that institutions are the rules of

the game in a society, providing the incentive structure for economic activity and the framework for

collective action. They further highlighted that institutions “create the incentives for individuals to

pursue their economic goals, and for governments to pursue their objectives for economic policy”

(Rodrik and Subramanian, 2005, p. 8). Similarly, North (1990) argued that institutions determine the

economic behaviour of individuals, firms and organizations. He further asserted that “institutional

change is the key to economic development” (North, 1990, p. 3). This implies that institutions are

important for economic growth, as they provide the incentive structures that enable individuals and

firms to pursue economic goals.

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To further support this argument, Acemoglu and Robinson (2005) highlighted that institutions

such as property rights, legal system and the nature of the state are key institutions underlying

economic growth. They asserted that property rights are important for economic growth, as they

protect individuals and firms from expropriation and provide incentives for private investment

(Acemoglu and Robinson, 2005). Furthermore, they argued that the legal system is important for

economic growth, as it provides the rules and regulations that govern economic activity and ensure that

contracts are enforced.

Lastly, they noted that the nature of the state is important for economic growth, as it

determines the extent to which the state can intervene in economic activity and whether it can be

constrained by freedom of press, independence of judiciary and separation of executive, legislative and

judiciary (Acemoglu and Robinson, 2005). Additionally, Adam Smith, as cited in Williamson (2000),

argued that the idea of “invisible hand” is important for economic growth. He argued that when

individuals pursue their own self-interest, it leads to an “invisible hand” that guides them to produce

goods and services that are beneficial to society (Williamson, 2000). This highlights that when individuals

are incentivised to pursue their own self-interest, it can lead to positive outcomes for society.

Furthermore, Milhaupt and Pistor (2008) argued that incentives are created by the legal framework of a

country, which is determined by the institutions of that country. This implies that the institutions of a

country are important for economic growth, as they create the incentives that enable individuals to

pursue their economic goals.

Moreover, Hoffman (2005) argued that the institutional framework of a country is important for

economic growth, as it determines the incentives that firms face. He noted that when firms face low

transaction costs, they are more likely to pursue strategies that are beneficial to society. Similarly,

Bessley and Pearce (2015) argued that when firms face high transaction costs, they are more likely to
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pursue strategies that are not beneficial to society. This highlights that the institutional framework of a

country is important for economic growth, as it determines the incentives that firms face.

Finally, Coase (1960) argued that when firms face low transaction costs, they are more likely to

pursue strategies that are beneficial to society. He further argued that when firms face high transaction

costs, they are more likely to pursue strategies that are not beneficial to society. This implies that the

institutional framework of a country is important for economic growth, as it determines the incentives

that firms face. Additionally, Kaufmann et al (2005) argued that the institutional framework of a country

is important for economic growth, as it enables firms to pursue strategies that are beneficial to society.

They argued that when firms face low transaction costs, they are more likely to pursue strategies that

are beneficial to society. This highlights that the institutional framework of a country is important for

economic growth, as it determines the incentives that firms face.

In conclusion, it has been argued that a country's institutions are essential for economic growth

because they offer the incentive structures that enable people and businesses to pursue economic goals

(Ghani, Lockwood, and Sicular, 2020). Moreover, fundamental institutions that promote economic

growth include legal systems, state structures, property rights, and the idea of the "invisible hand"

(Ghani, et al., 2020). Particularly important are legal systems, as they influence the incentives that

corporations receive (Ghani, et al., 2020). Thus, it is evident that a country's institutions are crucial for

economic progress.

To assess the institutional context of a country and its effects on firms, United States and Russia

are chosen as the main country and comparator respectively. The United States has a long history of

liberal market economy (LME) institutions, while Russia has had experience in both liberal and

coordinated market economy (CME) institutions, as it has gone through a transition period from the
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Soviet Union to a market economy (Prevezer, 2017, p.51). To analyse the institutional context of the

United States and Russia, qualitative and quantitative data from various sources have been used.

The Developed Country Chosen for This Essay Is the United States (US)

The United States is a developed country that has an institutional framework that is based on

the principles of liberal market economy (LME). The institutional context of the United States has been a

major factor in allowing the country to experience robust economic growth and development. This is

due to the fact that the institutional framework of the United States is based on the principles of liberal

market economy (LME). This type of institutional framework is characterized by the presence of free

markets and free trade, as well as a legal system that is based on the rule of law. The presence of strong

property rights, an independent judiciary, and a separation of powers between the executive, legislative,

and judicial branches of government has allowed the United States to experience economic growth and

development (Akerlof, 1970).

The presence of a strong institutional framework has enabled the United States to attract

foreign direct investment from other countries, as investors are more likely to invest in an environment

where the legal system is stable and property rights are secure. This has led to an increase in the level of

economic growth in the United States, as foreign direct investment can lead to the creation of jobs and

the expansion of businesses. Furthermore, this increased economic activity can lead to increased tax

revenues, which can be used to fund public services and infrastructure projects (Dustmann et al., 2014).

The institutional context of the United States has also enabled the country to experience a high

level of innovation and entrepreneurship, as entrepreneurs are more likely to start businesses in an

environment where there is a strong legal system and low levels of corruption (Hall, 2014). This is

because entrepreneurs are more likely to trust the legal framework in a country like the United States,

where the rule of law is respected, rather than in a country like Russia, where the legal system is less
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transparent and the rule of law is not always respected (Enriques and Volpin, 2007; Prevezer and

Ricketts, 2004). The presence of a strong institutional framework has also enabled the United States to

attract top talent from around the world, as the presence of a strong legal system and an independent

judiciary has allowed individuals to pursue their entrepreneurial aspirations in a more secure

environment (Prevezer, 2017).

The Emerging Market Country Chosen for This Essay Is Russia.

Russia is an emerging market country that has an institutional framework that is based on

the principles of a coordinated market economy (CME). This type of institutional framework is

characterized by the presence of a strong and centralized state, a high degree of regulation and

control of the economy, and a focus on long-term planning (Carney et al., 2009). These

institutional characteristics have led to a slower rate of economic growth in Russia compared to

the United States (Dustmann et al., 2014). Additionally, the lack of strong property rights, an

independent judiciary, and a separation of powers between the executive, legislative, and judicial

branches of government have prevented Russia from achieving the same level of economic

development as the United States.

The institutional context of a country thus has an important impact on the firms that are

homed in that country. In the United States, the institutional framework of LME has allowed

firms to benefit from free markets and free trade, as well as the protection of strong property

rights, an independent judiciary, and a separation of powers between the executive, legislative,

and judicial branches of government. This has allowed firms in the United States to experience

robust economic growth and development. In contrast, the institutional framework of CME in

Russia has led to slower economic growth and a lack of protection for firms in terms of property
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rights, an independent judiciary, and a separation of powers between the executive, legislative,

and judicial branches of government. This has prevented firms in Russia from achieving the

same level of economic development as firms in the United States.

Main country’s Variety of Capitalism (VoC)

The United States (US)

The Variety of Capitalism (VoC) of the United States (US) is classified as a Liberal

Market Economy (LME) which is characterised by decentralised labour markets and weak

employment protection (Hancke, 2007). The US is characterised by a low level of coordination

and regulation of labour markets, with the bulk of labour regulation left to the private sector

(Hall, 2014). The labour markets in the US are characterised by low levels of unionisation,

limited collective bargaining and weak employment protection (Lane and Wood, 2009). The

corporate governance of the US is characterised by dispersed ownership, with a significant

proportion of the listed companies being privately held (Mayer and Franks, 2001). The role of

boards is mostly unitary, with a strong emphasis on monitoring the management (Enriques and

Volpin, 2007). The US also has a high degree of autonomy for managers and shareholders, with

limited involvement of stakeholders (Prevezer, 2017). Furthermore, the US has a highly liquid

listed company sector with dispersed ownership. In about 90% of companies listed on the LSE,

there is no major shareholder owning 25% or more (OECD, 2011a). Minority shareholder

protection is a key feature of LMEs (Prevezer, 2017, p.54).

Analyses of firm’s governance and strategy and its fit with its Variety of Capitalism.

The US company Apple.

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Apple Inc., a US-based technology company, operates within a liberal market economic

(LME) institutional environment in the US, which is characterized by strong property rights,

independent judiciary, and well-developed financial markets (Prevezer, 2017). Apple’s dispersed

ownership structure and commitment to worker rights and equal opportunity reflect this

institutional environment, which has been found to promote minority shareholder protection and

good corporate practices and labor standards (Aguilera and Jackson, 2010; Enriques and Volpin,

2007; Hancke, 2007). Additionally, Apple’s training and skills programs for its employees are in

line with the US’s institutional context, which has been found to promote vocational training and

education (Dustmann et al., 2014; Prevezer, 2017). These examples demonstrate the importance

of the institutional context of a country in determining the strategies and governance of firms

(Hall, 2014).

Russian company Rosneft,

Rosneft is a state-owned oil and gas company in Russia that has a highly concentrated

ownership structure and weak corporate governance and labour market institutions. The lack of

external oversight and the absence of unions or any other form of employee representation,

combined with low wages, have resulted in a vulnerable company that is exposed to corruption

and mismanagement, and which does not provide adequate protections for its employees

(Prevezer, 2017; Aguilera and Jackson, 2010; Deakin, 2017; Dustmann et al., 2014; Mayer and

Franks, 2001). This institutional context has significant implications for the company's strategies

and governance, and highlights the importance of strong regulatory and institutional frameworks

in order to ensure the long-term success of organisations.

Analysis of the companies

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The two companies have significantly different institutional contexts and this is reflected

in their strategies and governance. Apple is a company based in the US, which is a liberal market

economy that has strong institutions, including a well-developed legal system and independent

judiciary, and is characterised by dispersed ownership and shareholder protections. In contrast,

Rosneft is a state-owned company based in Russia, which is a less developed economy with

weak institutions and a high degree of state influence. Rosneft is characterised by concentrated

ownership and a lack of shareholder protections.

The strategies and governance structures of the two businesses are dissimilar. With a

robust corporate governance structure and an innovation-focused strategy, Apple is a very

successful business. A less successful business with a more aggressive growth plan and lax

corporate governance is Rosneft. Both corporations offer training and skills development

initiatives, but Apple's is significantly more extensive and demonstrates its dedication to equal

opportunity and worker rights. In terms of pay negotiations, the two businesses take different

tacks; Apple is strongly committed to collective bargaining, whereas Rosneft takes a more

constrained stance. Finally, Apple is very committed to worker participation, whereas Rosneft

takes a more constrained approach.

conclusion

In conclusion, this essay has analysed how the institutional context of a country affects

the firms that are homed in that country. It has been argued that institutions are important for

economic growth, as they provide the incentive structures that enable individuals and firms to

pursue economic goals. To assess the institutional context of a country and its effects on firms,

the United Kingdom and Russia were chosen as the main country and comparator respectively.
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The essay then analysed the Variety of Capitalism of the two countries, as well as the strategies

and governance of a firm in each country. It was found that the institutional context of a country

has an important impact on the strategies and governance of firms. Specifically, it was found that

the US’s LME institutional environment has enabled Apple to benefit from free markets and free

trade, as well as strong property rights, an independent judiciary, and well-developed financial

markets. In contrast, Russia’s CME institutional environment has resulted in Rosneft having a

weak corporate governance structure, a lack of training and skills programs for its employees,

and weak labour market institutions. This highlights the importance of the institutional context of

a country in determining the strategies and governance of firms.

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