The Legal Framework Governing Business Firms and its Implications for Manufacturing Scale and Performance: The UK Experience in International Perspective (CBR project)

Overview

Aims and objectives

This project was carried out for the Review of Manufacturing and was undertaken under the auspices of the UK government’s Foresight Programme. The aim was to survey and assess the literature on the role of the legal framework governing business firms, with specific reference to its impact on innovation.

The report identified two models of legal support for manufacturing: on the one hand, the Silicon Valley model of VC-funded growth which depends on liquid capital markets and flexible labour markets; and, on the other, the northern European and Japanese model, which is based on long-term innovation, stable ownership, and institutionalised worker-management cooperation. The UK has some of the legal features of the Silicon Valley model, but important parts are missing: for example, the Californian rule under which post-employment restraints (‘restrictive covenants’) are void on the grounds of their anti-competitive effects has no equivalent in the UK. Conversely, although the UK has certain elements of the northern European or east Asian model of institutionalised corporate governance, it is unlikely to be able to replicate the ‘productive coalition’ approach of these countries as long as the legal framework prioritises shareholder rights and the market for corporate control, and provides limited encouragement for job security.

The report concluded that the Silicon Valley and ‘productive coalition’ models are ideal types which can distract from the fact that most countries, the UK included, are hybrid systems with some of the characteristics of each model. Rather than designing laws and policies exclusively with one model or the other in mind, it may be preferable to consider specific laws and policies on their own merits, while bearing in mind that a given legal rule or policy does not operate in isolation from others and that there may be some ‘network effects’ in operation due to the way that particular rules interact.

Bearing these points in mind, the empirical evidence presented in this review suggested that there is a case for looking again at the way that the legal framework of corporate governance affects innovation and manufacturing more widely. The weight of the empirical evidence is that the current legal framework in the UK is a deterrent to certain types of innovative activity, namely those involving complementary investments in knowledge-based technologies and firm-specific human capital which generate returns over an extended time horizon. Over the past 30 years there have been very few cases of British firms attaining pre-eminence in global competition in high-technology manufacturing industries requiring complementary investments of this kind. A shift in the UK legal framework away from the current emphasis on prioritising liquid capital markets and flexible labour markets, in favour of a ‘productive coalition’ approach to corporate governance, could help build a larger and more sustainable manufacturing sector going forward.

Project leader

Simon Deakin

Project dates

2012-2013

Funding

UK Government Foresight Programme