When Small States Make Big Leaps: Institutional Innovation and High-Tech Competition in Western Europe

Introduction: Recasting Corporatism

1 INTRODUCTION Recasting Corporatism This book was inspired by the puzzling ability of several western European states to compete in rapidly evolving high-tech markets. We would not expect continental European economies to succeed in such markets. European capitalism is more commonly associated with sluggish growth and mounting unemployment. Skeptics argue that cozy deals among trade unions, employer associations, and state agencies inhibit the redistribution of resources to new actors and activities . Even those who admire these cooperative economic arrangements suggest that neo-corporatist institutions are most effective in modernizing century-old low- and medium-tech industries such as food processing or forestry. European economies look as though they are uniquely vulnerable to radical innovation and the destruction of traditional niches. Curiously, however, several traditionally low-tech European economies, including Ireland, Finland, and Denmark, have defied these trends. Furthermore, each has done so by entering precisely those dynamic high-tech industries in which they should be most disadvantaged. Ireland, which depended on footwear and textiles until the 1970s, redefined itself as a software and computer export platform. Finland and Denmark made an even more implausible transformation , moving from wood processing and food processing into knowledgeintensive research and design activities in a range of high-tech industries, from telecommunications equipment to biotechnology. These diverse pathways into new markets are particularly puzzling because they defy liberal market-oriented narratives. Ireland, Finland, and Denmark relied on similar bargains among state agencies and industry and labor associations to manage economic adjustment. 2 WHEN SMALL STATES MAKE BIG LEAPS Rather than inhibiting the redistribution of resources, however, these deals appear to have accelerated restructuring. How to resolve this puzzle? I argue that the ostensibly static institutions described above have changed over time. Historically, institutionalized cooperation in policymaking and production was perceived as conservative, protecting existing investments (Katzenstein 1984; Streeck 1992). Firms and employees relied on long-term loans, generous social benefits, and defensive industrial policies to defend established enterprises, occupations, and industries. These conservative deals supported incremental upmarket movement within stable low- and medium-tech industries in early postwar Denmark and Finland. As chapter 6 relates,this logic continues to yield important insights into several contemporary western European countries, such as Austria, Germany, and Norway. Countries facing acute economic crises and new external constraints, such as EU-imposed restrictions on deficits and state aid, however, can use institutionalized cooperation to achieve very different objectives. Literature on “competitive corporatism” suggests that countries can adapt concertation, or institutionalized cooperation in policymaking, to advance market reform (Rhodes 1998). In the Netherlands,Ireland,Italy,Spain,and Portugal policymakers were strong enough to threaten societal actors, particularly trade unions vehemently opposed to promarket reforms, but they were too weak to absorb the political costs associated with unilateral action. In this environment, policymakers struck deals with trade unions and employers,linking wage restraint to fiscal and social benefit retrenchment . In this book, I describe how countries such as Ireland used competitive corporatist bargaining among policymakers and how producer associations facilitated restructuring, entering cost-sensitive assembly activities within new high-tech industries. This strategy enabled Ireland to enter new high-tech markets , although it also rendered the country more vulnerable to cost competition and, eventually, economic crisis. Competitive corporatism, however, is not the only way countries can adapt. Countries with a stronger pattern of coordination or cooperation in production, such as Denmark and Finland, have responded to economic crises differently. Policymakers in these countries also struck deals with vulnerable trade unions, but they were able to engage firms in sensitive domains such as human-capital formation and research. They thus used policy concertation to convert hitherto conservative patterns of coordination in production, adapting private-public, industry-labor, and interfirm collaboration to invest in disruptive new inputs such as venture capital, human capital, and R & D. These “creative corporatist” deals (Ornston 2013) supported very different economic trajectories. In contrast to conservative corporatism,such investments explicitly targeted new enterprises, occupations, and industries. Unlike competitive corporatism, high-quality in- INTRODUCTION 3 vestments supported more knowledge-intensive activities within high-tech industries , greater immunity to cost competition, and a stronger position in the 2007–9 financial crisis. This tripartite distinction among conservative, competitive, and creative corporatism enhances our understanding of contemporary capitalism in three ways. First, in this book I defy descriptions of convergence based on a liberal economic model (Friedman 1999). In showing how institutionalized cooperation can be converted to assume an independent and...