Varieties of Capitalism: Why UK HR Practice Doesn’t Always Travel Well

Hall and Soskice’s LME–CME Framework, Comparative HRM and What Germany, Japan and the Nordic Countries Teach Us

Central argument: HR practices are embedded in institutional systems. A practice that works effectively in one national business system may not transfer successfully to another because the surrounding institutions, incentives, skills systems, employment relationships, corporate governance and patterns of coordination are different.

When “Good HR” Doesn’T Travel

A UK-headquartered organisation has built a people-management model around individual performance targets, individual performance-related pay, external recruitment, flexible labour, limited collective bargaining, generalist education, mobile employees and relatively decentralised employment relationships. The model appears successful: managers can set targets quickly, recruit from a broad labour market, reward differentiated performance and adjust staffing as commercial conditions change.

The organisation expands into Germany. Head office assumes that it already knows what good HR looks like and that implementation is mainly a matter of translating policies, training local managers and ensuring compliance. The German subsidiary, however, raises questions about employee representation, vocational skills, collective arrangements, pay-setting, employment security, consultation and the role of works councils. Recruitment managers find that occupational qualifications matter more than expected. Local managers discover that a performance-rating process can interact with collective arrangements and employee voice. A direct communication initiative is welcomed by some employees but is not treated as a substitute for representative mechanisms.

Is the German subsidiary resisting “good HR”? Or is the UK model dependent on institutional conditions that do not exist in exactly the same form in Germany?

The second question is analytically stronger. It does not assume that Germany is incapable of performance management, external recruitment or flexible work. It asks what these practices mean in a different institutional setting, how they must be designed, who has a legitimate role in implementing them and which outcomes the organisation is trying to preserve.

This article uses the progression national institutions → business system → organisational behaviour → HR practice → employee outcomes. It then asks whether the practice can travel successfully. The distinction between practice transfer and practice transplantation is important. Transfer involves interpretation, negotiation and adaptation; transplantation implies that a practice can be lifted out of one context and inserted into another without changing its operating conditions.

The Level 7 question: Before transferring an HR practice across borders, identify the institutional system that makes the practice work, then test whether those conditions exist, can be recreated or need to be replaced in the destination context.

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What Is Varieties Of Capitalism?

Peter Hall and David Soskice’s edited volume Varieties of Capitalism: The Institutional Foundations of Comparative Advantage was published in 2001.¹ It challenged accounts of capitalism that treated market coordination as a single universal model. Its central proposition is that firms coordinate economic activity through different institutional arrangements. The framework is therefore a theory of comparative institutional organisation, not a league table of national management quality.

Hall and Soskice place firms at the centre of the analysis. Firms are strategic actors that must solve coordination problems involving finance, workers, skills, suppliers, technology, corporate governance and government. They do so through markets in some settings and through non-market relationships, negotiated institutions and long-term coordination in others. The framework distinguishes between liberal market economies (LMEs) and coordinated market economies (CMEs) as ideal types.¹

The framework’s distinctive concept is institutional complementarity. An institution is complementary to another when the presence of one increases the returns available from the other. For example, a vocational skills system may produce greater value where employers, employees and industry bodies expect longer employment relationships and where firms can use occupational skills over time. Conversely, general education and mobile labour markets may complement recruitment practices based on transferable skills and external hiring.

Hall and Soskice also argued that institutional configurations can support different patterns of comparative advantage. Their original account associated LMEs more strongly with radical innovation and CMEs more strongly with incremental innovation, while recognising that the analysis concerns institutional tendencies rather than mechanical national destinies.¹

The analytical chain

Level	Guiding question	HR relevance
National institutions	What rules, norms and organisations shape economic action?	Labour law, bargaining, training, governance and voice.
Business system	How do firms coordinate with capital, labour, suppliers and the state?	Strategy, workforce architecture and employment models.
Organisational behaviour	What do managers and employees regard as legitimate or workable?	Authority, trust, participation and risk-taking.
HR practice	How are people recruited, developed, rewarded and represented?	Performance, pay, careers, training and employee relations.
Employee outcomes	What happens to skills, voice, security, mobility and fairness?	Experience, commitment, capability and performance.

The chain is not deterministic. Institutions constrain and enable choices, but managers, employees, unions, works councils, professional bodies and multinational headquarters can contest and reshape those choices. A useful analysis therefore combines structure with agency.

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The LME Vs CME Distinction

Liberal Market Economies

In an LME, coordination tends to rely more heavily on competitive markets, arms-length relationships, formal contracting, external labour markets, general skills, shareholder-oriented finance and relatively decentralised bargaining. The UK and US are commonly used as illustrative cases, although neither is internally uniform and neither is perfectly represented by the ideal type.^{1 2}

This configuration may make external recruitment, occupational mobility, individualised employment relationships and market-referenced reward comparatively easy to organise. It can also support rapid reallocation of labour and a high premium on transferable skills. These are tendencies, not universal properties of every organisation.

Coordinated Market Economies

In a CME, coordination tends to rely more heavily on non-market relationships, long-term collaboration, employer associations, trade unions, collective bargaining, vocational education, industry or firm-specific skills, patient capital and stakeholder relationships. Germany is the primary example in the original framework.¹

This does not mean that German firms do not compete, use markets or hire externally. Rather, important coordination problems may be addressed through institutions that make relationships, qualifications, consultation and negotiated rules more consequential. Performance pay, flexibility and external recruitment can exist, but their design may be shaped by collective arrangements, employee representation, occupational identity and the expectations of stakeholders.

Ideal types, not stereotypes

Simplified stereotype	Better analytical formulation
LME means individualistic and flexible.	Market-mediated coordination may make some individualised and mobile practices easier, but sector, occupation and organisational strategy still matter.
CME means collective and secure.	Coordinated institutions may support longer-term and collective arrangements in some domains, while firms and sectors can also experience insecurity, decentralisation and change.
Germany is a CME, so UK practices cannot work there.	German institutions can change how a UK-origin practice is authorised, negotiated, measured and implemented.
Nordic countries are CMEs.	Nordic systems combine coordinated labour markets, welfare-state arrangements, high trust and varied national institutions; binary labels are incomplete.
Japan is a CME like Germany.	Japan shares some coordination features but has a distinctive configuration involving enterprise unions, internal labour markets and historically firm-centred employment.

The framework is useful when it explains mechanisms. It is weak when it becomes a country label detached from institutions, historical change and organisational variation.

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The Five Spheres Of Coordination

Hall and Soskice analyse coordination across several spheres. The following five are especially useful for comparative HRM.

1. Industrial relations

Unions, employer associations, collective bargaining and wage coordination shape the distribution of authority over pay, working time, restructuring and employee voice. HR managers must understand not only the legal right to consult but also the institutional expectations surrounding negotiation and representation. A reward system that appears to be a private managerial decision in one context may be a matter for collective discussion in another.

2. Vocational education and training

Apprenticeships, occupational qualifications, firm and industry skills, and links between employers and educational institutions influence how organisations acquire capability. Where skills are produced through occupational pathways, recruitment may be less about selecting generic “high potential” individuals and more about recognising qualifications, training routes and occupational competence.

3. Corporate governance

Shareholder interests, stakeholder relationships, ownership patterns, finance and managerial decision-making affect the time horizons and priorities of HR. A company subject to intense short-term financial pressure may favour rapid productivity measurement and variable pay. A firm operating within a stakeholder-oriented governance system may place greater weight on continuity, consultation, employment capability and long-term relationships, although no governance system removes commercial pressure.

4. Inter-firm relations

Supplier relationships, networks and cooperation affect the production of knowledge and skills. In sectors where firms collaborate through long-term networks, labour standards and occupational capabilities may be supported beyond the boundaries of a single employer. In more arms-length systems, firms may rely more on market transactions and externally available skills.

5. Relationships with employees

Employment security, skills, consultation, employee voice and internal labour markets shape what employees expect from the organisation and what the organisation can reasonably ask in return. Direct communication, representative voice, team participation and individual performance management are not mutually exclusive, but their legitimacy and interaction differ by institutional context.

Sphere	Typical institutional issue	HR practice affected	Transfer question
Industrial relations	Who negotiates pay and change?	Reward, restructuring, working time	Does the practice require individual discretion or collective legitimacy?
Skills formation	Where do occupational skills come from?	Recruitment, training, succession	Are the required skills general, firm-specific or occupation-specific?
Corporate governance	Who counts as a stakeholder?	Performance, workforce planning, job security	What time horizon and accountability structure support the practice?
Inter-firm relations	Are relationships arms-length or collaborative?	Talent pipelines, supplier capability	Can capability be built by one firm alone?
Employee relations	How is voice exercised?	Engagement, performance, change	Does direct voice complement or bypass legitimate representation?

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Institutional Complementarities

Institutional complementarities are the conceptual heart of the framework. The claim is not that each institution independently causes one HR outcome. It is that institutions can reinforce one another, making a particular set of practices more coherent and rewarding.

A simplified CME pattern might be represented as follows:

Vocational training + long-term employment + employee commitment + industry coordination = investment in specific skills

A simplified LME pattern might be represented as:

General education + external labour markets + employee mobility + market-based recruitment = transferable skills and flexibility

Neither configuration should automatically be described as better. Each can solve some coordination problems while creating others. Specific skills can support quality and incremental innovation but may be vulnerable when technology or demand changes. Transferable skills can support mobility and reallocation but may make it harder for an individual firm to capture the benefits of training investment.

The practical implication is that an HR practice may be only one visible component of a larger system. Individual performance-related pay may work with individual objectives, individualised employment relationships, market benchmarking, managerial discretion and a culture of external mobility. Remove or alter those complements and the same pay mechanism may produce gaming, conflict, short-termism or perceptions of unfairness.

The complementarity audit

Practice	Possible supporting institutions	What happens if the supports differ?
Individual bonus	Individual objectives, discretionary management, individual bargaining	The bonus may need team, occupational or collectively negotiated components.
External recruitment	Transferable skills, open labour market, recognised qualifications	Selection may need to work through apprenticeships, occupational credentials or local networks.
Rapid promotion	Mobile careers, individual competition, short-term performance metrics	Promotion may need to recognise tenure, team contribution, capability and longer-term development.
Generic management training	Portable managerial skills and external hiring	Training may need to be linked to local employment relations, legal duties and representative institutions.
Direct employee voice	Managerial access and low reliance on representation	Direct voice may complement, not replace, works councils, unions or collective bargaining.

A Level 7 answer should therefore move from description to mechanism: which institutions complement the practice, through what incentive, and with what employee outcome?

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Why UK HR Practices May Not Travel Well

A UK-developed practice may depend on UK employment law, labour-market structure, education and skills systems, management norms, corporate governance, shareholder expectations, union structures, occupational identity, professional norms and labour mobility. The practice may look portable because its written policy is portable. Its operating conditions may not be.

For example, an annual individual rating system assumes that individual contributions can be identified, that managers have legitimate authority to rank them, that employees accept differentiated outcomes, that data are sufficiently reliable and that collective arrangements do not require another form of consultation. These assumptions may be present in one business unit and absent in another, even within the same country.

Transferring a practice without transferring or accounting for its institutional foundations may produce poor outcomes.

Transfer can fail through at least five mechanisms. First, legal misfit occurs when the practice conflicts with statutory rights or collective procedures. Second, skills-system misfit occurs when recruitment or development assumes a supply of skills that the destination system produces differently. Third, legitimacy misfit occurs when employees and representatives do not recognise the practice as fair or authoritative. Fourth, strategic misfit occurs when the practice rewards behaviour inconsistent with the subsidiary’s operating model. Fifth, measurement misfit occurs when indicators imported from headquarters do not capture locally meaningful contribution.

The diagnosis should not be “local resistance” until these alternatives have been tested. Resistance may be a rational response to a design that ignores institutional conditions.

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Performance-Related Pay

UK or LME context

Individual performance-related pay may fit relatively well with individualised employment relationships, market-oriented reward, external labour markets and individual performance metrics. Where employees expect mobility and the organisation competes for scarce talent through market pay, individual differentiation can be a plausible part of a reward architecture.

German context

Germany does not reject performance pay. The institutional context may shape how performance-related pay is designed, negotiated and implemented. Works councils may have rights concerning the introduction and application of pay methods; collective agreements may influence wage structures; occupational identity may make team and role contribution important; and stakeholder-oriented governance may support a broader view of sustainable performance. The relevant question is not whether a bonus exists but whether its criteria, data, consultation process and distribution are institutionally credible.

A transfer might therefore retain the global principle of recognising contribution while adapting the mechanism. A German design could combine individual objectives with team, role and quality measures; include transparent criteria; involve the appropriate employee representatives; and avoid creating incentives that undermine cooperation or occupational standards.

Analytical judgement

Performance-related pay is a good example of why institutional analysis is superior to national labelling. Identical terminology can conceal different governance arrangements. The same “individual bonus” may be a managerial instrument in one setting, a collectively structured payment in another and one element of a team-based development system elsewhere.

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Recruitment

External labour markets can make external recruitment, transferable skills and career mobility more prominent. A UK organisation may be accustomed to hiring graduates or experienced professionals on the assumption that core capabilities can be assessed through general qualifications, behavioural interviews and market pay.

Stronger vocational and occupational systems may encourage structured training pathways, apprenticeships and links between employers and skills institutions. In such settings, recruitment can be a process of entering an occupation and a training system rather than simply filling a vacancy. A selection process that ignores recognised qualifications or local training routes may misdiagnose competence and reduce the credibility of the employer.

The transfer question is: What happens if a UK organisation attempts to reproduce its recruitment model in a country where skills are produced through different institutional mechanisms? The answer may include a narrower candidate pool, higher onboarding costs, weaker retention or unintended devaluation of occupational credentials. Local adaptation may involve partnerships with vocational institutions, recognition of apprenticeships and a different balance between selection and development.

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Training And Development

Training investment is partly an institutional arrangement, not simply an HR department choice. General skills are portable and may be developed through broad education; specific skills are more closely tied to a firm, occupation or industry. The incentive to invest depends on who pays, who benefits, how long the relationship is expected to last and whether skills can be appropriated by competitors.

Germany is a key case because vocational education and apprenticeships have historically connected firms, occupations and educational institutions. The system is not static and varies by sector, firm and region, but it illustrates how skills formation can be distributed across institutions rather than left entirely to individual employers.³

In an LME, external mobility can reduce a firm’s ability to capture the benefits of specific training, while increasing the value of portable skills and employer branding. This does not imply that UK organisations do not train. Investment varies by industry, organisation, occupation, workforce and strategy. A strong comparison asks who produces the skill, who certifies it, who bears the risk and how the employment relationship converts it into performance.

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Employee Voice

Germany provides a major example of formal employee representation through works councils, co-determination and collective bargaining. These institutions can shape consultation, information rights, changes to work organisation, pay systems and the legitimacy of managerial decisions. The exact operation varies by workplace and sector; representative institutions should not be treated as identical across all German organisations.⁴

The UK has its own forms of collective and direct voice, but the relative institutional weight of representative mechanisms differs across sectors and organisations. A UK-style direct communication model may be valuable in Germany, but it should not be introduced as a substitute for formal employee representation where the latter has a legal or institutional role.

Direct voice and representative voice can coexist. Managers can communicate openly with employees while consulting the appropriate representatives, sharing information transparently and designing channels that do not undermine collective rights. The transfer question is therefore not “direct or representative?” but how can both forms of voice support informed, legitimate and effective decision-making?

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Germany As A CME

Germany remains a useful case for explaining coordinated capitalism, although the category must be handled historically and critically. Relevant institutions include vocational education, apprenticeships, works councils, collective bargaining, co-determination, stakeholder governance, long-term relationships and industrial coordination. Together, these can support investment in occupational and firm capabilities, negotiated change and a broader employment relationship than the narrow exchange of labour for wages.

These institutions may support HR practices different from those common in the UK. Recruitment can be more closely linked to recognised occupational routes. Training can be shared across employers and institutions. Pay and work organisation can involve collective rules. Employee voice can be formally embedded. Management development may require competence in negotiated employment relations rather than only individual target-setting.

However, the German model faces globalisation, demographic change, digitalisation, labour-market change, international competition, uneven union density and changing employment relationships. Some firms and sectors have experienced decentralisation, non-standard work and pressure to become more flexible. The system has not frozen in 2001, and contemporary German employment relations contain both coordination and market-oriented change.^{3 4}

The correct judgement is conditional: German institutions can make some UK-origin practices harder to transplant in their original form, but they can also provide resources for redesign. The presence of a works council, for example, may be an implementation partner rather than merely a constraint. Vocational institutions may be a route into the organisation rather than an obstacle to external recruitment.

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Japan: The Problem With Simple Classification

Japan is often grouped with coordinated economies, but it should not simply be placed beside Germany as though the two systems were interchangeable. Historically distinctive features include long-term employment practices for a core workforce, enterprise unions, seniority-based pay, internal labour markets, firm-specific skills, graduate recruitment and coordinated relationships centred more strongly on the enterprise.⁵

These arrangements can support firm-specific learning, internal mobility and a long-term employment relationship. They differ from Germany’s stronger occupational and sectoral coordination in important respects. Enterprise unionism is not the same as industry-wide bargaining. Seniority-based careers are not identical to vocational occupation-based systems. Corporate governance and managerial authority have developed through distinct historical trajectories.

Japan has also changed. Non-standard employment, demographic pressures, changing career expectations, global competition and labour-market reforms have challenged the uniform image of the post-war employment system. Contemporary Japanese organisations vary by sector, firm size, workforce category and generation. Some have adopted more performance-based pay, external hiring or flexible employment, while retaining elements of internal development and team-based work.⁵

The analytical lesson is that CME is an analytical category, not a complete description of every national institutional arrangement. A UK practice involving rapid promotion, individual ranking or short-term incentives may create tensions with traditional expectations of internal careers and collective workplace identity, but the degree of tension depends on the organisation and workforce. A transfer strategy should examine which employment groups are affected, how performance is defined and whether the practice complements or disrupts existing development pathways.

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Nordic Countries: Why LME/CME Is Not Enough

Denmark, Sweden, Norway and Finland illustrate why comparative capitalism requires attention to institutional combinations rather than binary classification. Nordic economies commonly combine coordinated labour markets, strong collective institutions, social partnership, extensive welfare-state arrangements, employee protections, active labour-market policies, high levels of trust and collective bargaining. Yet the four countries differ in law, bargaining structures, welfare institutions, employer organisation, union density, sectoral patterns and the balance between centralisation and local coordination.⁶

The Nordic model should not be reduced to a cultural story about trust or a single HR recipe. Participation may be enabled by institutions, management practices, labour-market policies and social expectations operating together. Work-life balance may be supported by public provision and labour-market arrangements as well as by organisational policy. Flexibility can coexist with security through forms of negotiated adjustment and active labour-market support, but the exact balance is country- and sector-specific.

For a UK organisation introducing a target-driven model into a Nordic subsidiary, the issue is not that Nordic employees dislike targets. Rather, participation, collective institutions, social partnership and work-life expectations may shape how targets are set, discussed and revised. A global performance principle may be retained while implementation places more emphasis on dialogue, team contribution, employee involvement and development. That is a hypothesis to test locally, not a mandatory national behaviour.

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The UK As An LME

The UK is commonly used as an LME illustration because of relatively liberal labour markets, shareholder orientation, external labour markets, flexible employment, relatively decentralised bargaining, general skills and individualised employment relationships.^{1 7} These features can support rapid labour reallocation, external recruitment and market-referenced reward.

The UK is not homogeneous, and it is inaccurate to say that UK organisations do not invest in employees. Training, employee voice, career structures and employment security vary by industry, organisation, occupation, workforce and strategy. Public services, regulated industries, professional occupations, manufacturing employers, technology firms and small businesses may operate with different institutional resources and constraints.

The analytical point is not that the UK has “good” or “bad” HR. It is that some UK practices may be compatible with a market-mediated environment in which employees move across employers, skills are treated as relatively portable and managers have considerable discretion over individual performance and reward. When these assumptions are transported, they must be made explicit.

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The United States As A Comparison

The UK and US are both commonly treated as LMEs, but they are not identical. They differ in labour-market regulation, employment-at-will doctrine, unionisation, corporate governance, skills formation, welfare provision, health benefits, employment relations and the role of the state. The US can therefore demonstrate that even within the LME category, institutional differences matter.

Both contexts may make external recruitment, individual performance management and market-oriented reward familiar, yet the employee experience and managerial risks can differ. In the US, benefits and employment-at-will may play a distinctive role in the employment relationship. In the UK, statutory employment protections and institutional histories differ. A global HR policy designed for the UK should not automatically be assumed to fit the US, and vice versa.

This comparison reinforces a central principle: classification is a starting point for questions, not a substitute for country, sector and organisational analysis.

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Does The LME/CME Distinction Still Work?

Strengths

The framework integrates institutions rather than explaining HR through managerial preference alone. It makes institutional complementarities visible, challenges universalist management models, supplies a comparative structure and connects macro institutions to organisational behaviour. It also helps explain why a practice may produce different outcomes when its surrounding conditions change.^{1 2}

Limitations

The binary can aggregate too much at national level. It may understate within-country and sectoral variation, informal institutions, regional differences, multinational firms, globalisation, hybrid systems, emerging economies and institutional change. Critics have also questioned whether national systems are sufficiently coherent, whether firms always act as the central unit of analysis and whether classification can become circular: a country is assigned to a category because of the institutions that the theory then uses to explain its behaviour.

A further limitation is temporal. Digitalisation, financialisation, migration, demographic change and international supply chains can reshape coordination. A national system may contain contradictory tendencies. Firms may combine local institutions with global ownership, international talent markets and headquarters-designed systems.

Balanced judgement

The LME/CME distinction remains valuable as an analytical lens when used to generate mechanism-based questions. It is inadequate as a deterministic taxonomy. A strong Level 7 answer should identify the framework’s explanatory value, specify its unit and time period, test its assumptions against sectoral and organisational evidence, and consider alternative explanations such as power, strategy, regulation, technology and occupational identity.

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Beyond LME And CME

The original framework stimulated wider comparative capitalism research. Extensions and critiques discuss dependent market economies, mixed market economies, Mediterranean or Southern European systems, Eastern European systems, emerging economies and hierarchical market economies.⁸ These categories can help explain systems that do not fit comfortably into the original two-way distinction, but classifications are useful only when they clarify an analytical mechanism.

For HRM, the practical message is to avoid replacing one oversimplification with many labels. Ask what coordination problem the category helps explain. Does it clarify skills, finance, labour relations, governance, supply chains or employee voice? If it does not improve the analysis, the label is decorative rather than explanatory.

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Institutional Change

Institutions are not frozen. Deregulation, globalisation, technological change, demographic change, financialisation, labour-market reform, migration, digitalisation and changing employment relationships can alter how firms coordinate.

A country does not simply “move” from LME to CME as though changing boxes. More plausibly, particular spheres change at different speeds. Bargaining may decentralise while vocational institutions remain strong. Corporate ownership may internationalise while employee representation persists. Digital labour markets may expand while occupational identities remain important. Hybridisation can therefore be uneven and contested.

The key question is: If institutions change, can a country move from one variety of capitalism toward another? The nuanced answer is that systems can experience partial convergence, divergence or recombination. Institutional complementarities can slow change because changing one institution may reduce the returns from others. Political coalitions, employer interests, worker power and legal rules also shape the direction of change.

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Convergence Vs Divergence

Globalisation may create pressures for similar HR practices. Multinationals often use global performance systems, HR technology, talent-management language and global reward frameworks. This supports a convergence argument. Yet national institutions continue to shape the design, legitimacy and implementation of those systems, supporting divergence. A third possibility is hybridisation, in which global practices are adapted locally.^{9 10}

Global policy can converge while local implementation diverges.

A global performance platform may use the same software worldwide, while the definition of performance, consultation process, role of team measures and use of ratings vary by subsidiary. A global talent framework may use common categories while local labour law, skills institutions and career expectations change the pipeline. Standardisation of outcomes can therefore coexist with localisation of process.

The most useful comparison is not “global or local?” but “which elements require consistency, which require adaptation and what institutional reason supports the distinction?”

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National Institutions Vs Organisational Strategy

National institutions constrain but do not completely determine organisational choices. A practical framework is:

National institutional context → strategic choices → HR architecture → managerial implementation → employee experience → performance outcomes

A technology firm, hospital, manufacturer and professional-services partnership may respond differently to the same national setting because their strategies, occupations, ownership, workforce profiles and production systems differ. Subsidiaries also have agency: they interpret headquarters policy, negotiate with local actors and sometimes become sources of innovation for the wider multinational.

This prevents two errors. The first is institutional determinism: “the country made the organisation do it.” The second is managerial voluntarism: “the organisation can choose any HR system.” Good analysis explains the interaction between constraints, choices and power.

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Can UK HR Practices Ever Travel Successfully?

Yes. Transferability is a design question, not simply a country question. A UK-origin practice is more likely to transfer successfully when its underlying institutional conditions are similar, the practice is modular, local adaptation is possible, managers understand local institutions, employee voice is incorporated, legal requirements are addressed, outcomes are tested locally and the organisation standardises outcomes rather than identical processes.

A global organisation might standardise the principle that employees receive regular, fair and evidence-based feedback. It need not standardise every meeting format, rating scale, consultation pathway or reward consequence. The design should distinguish between the practice’s purpose, core principles, assumptions, mechanisms and local interfaces.

Layer	Global question	Local question
Purpose	What problem is the practice solving?	Is the problem experienced in the same way?
Principle	What must remain fair and consistent?	How is fairness made legitimate locally?
Mechanism	What process delivers the outcome?	Which process fits law, voice and skills institutions?
Evidence	What outcomes will be measured?	Are the indicators meaningful and reliable locally?
Governance	Who is accountable?	Who must be consulted or involved?

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Global Principles, Local Implementation

Consider the global principle: employees receive regular performance feedback.

In a UK operation, implementation may involve individual objectives, an annual review and continuous feedback. In Germany, it may combine individual objectives with team and role considerations and works council involvement where relevant. In Japan, it may integrate team-based development with longer-term career considerations. In a Nordic context, it may place greater emphasis on participation, dialogue and development.

These are possible design hypotheses, not mandatory national behaviours. Sector, organisation, occupation and workforce can alter the result. The principle can be globally consistent while the local implementation is institutionally intelligent.

The same logic applies to global talent management, succession, reward, employee listening and HR technology. Local adaptation is not a failure of standardisation when it protects the intended outcome.

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Worked Case Studies

Case 1: UK to Germany

A UK multinational introduces individual performance ratings, individual bonuses, external recruitment, limited formal consultation and generic management training. The German operation raises concerns.

LME/CME analysis: The UK design assumes market-mediated coordination, individualised reward and managerial discretion. The German operation may be embedded in collective and representative institutions that make pay methods, work organisation and consultation more consequential.

Complementarity analysis: Individual ratings are supported in the UK by individual objectives, market benchmarking and mobile careers. In Germany, the practice may need complements involving transparent criteria, role competence, team contribution, vocational pathways and representative legitimacy.

Employee voice and labour relations: Direct communication should not bypass works councils or other applicable arrangements. The subsidiary should map rights, consultation duties and established practices before implementation.

Skills and recruitment: External recruitment should be redesigned to recognise vocational qualifications, apprenticeships and occupation-specific competence. Generic management training should be supplemented with local employment-relations capability.

Governance and culture: Rather than treating consultation as delay, headquarters should treat it as part of implementation quality. Managers should be trained to distinguish constructive challenge from opposition.

Recommendation: Retain the global outcomes of clear expectations, fair recognition, capability development and performance accountability. Redesign the local architecture around transparent measures, team and role contribution, representative involvement, legally compliant consultation, vocational partnerships and a pilot evaluation. The recommendation is not “Germany is a CME, so the practice cannot work.” It is “the practice must be decomposed so that UK-specific assumptions are adapted while the intended outcomes remain visible.”

Case 2: UK to Japan

A UK company introduces rapid promotion, individual performance ranking, external recruitment and short-term incentives. Potential tensions include disruption to internal career expectations, reduced team cooperation, weakened firm-specific development and a narrow definition of contribution. The analysis must also acknowledge contemporary change: Japanese organisations vary and some have adopted more performance-based and external-market practices.

The recommendation is to test differentiated career tracks, combine individual and team evidence, protect development and knowledge-sharing, and segment the design by workforce group and business strategy. The question is not whether Japan is “CME” but which elements of the legacy employment system remain relevant in this organisation and how employees understand fairness.

Case 3: UK to the Nordics

A UK organisation introduces a highly managerial, target-driven HR model into a Nordic subsidiary. The organisation should examine employee participation, collective institutions, trust, work-life balance, social partnership and employment relations. It should not assume that target-setting is incompatible with participation. A more effective design may use jointly discussed objectives, team dialogue, developmental review, transparent workload expectations and locally legitimate employee involvement.

The recommendation is to preserve accountability while redesigning the process to support participation, sustainable work and collective legitimacy. Local evidence should decide whether the changes improve employee experience and performance.

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What This Means For International HR Managers

Before transferring an HR practice, ask the following questions.

Domain	Diagnostic questions
Institutions	What labour laws apply? How does collective bargaining work? What employee representation exists? How are skills developed?
Organisation	What is the business strategy? What is the organisational culture? What is the workforce profile?
HR design	How is performance measured? How are employees rewarded? How is voice exercised? How are careers structured?
Transfer	What assumptions does the practice make? Are they valid locally? What needs adaptation? What must remain globally consistent?

The manager should also identify the stakeholders who can make the practice legitimate: local HR, line managers, employees, unions, works councils, professional bodies, educational institutions and legal advisers. A transfer plan should include a pilot, feedback loop, risk assessment and outcome measures rather than a one-way implementation timetable.

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The HR Practice Travel Test

Use this reusable ten-step tool.

1. What problem is the practice designed to solve? Define the intended outcome rather than copying the visible process.
2. What institutional assumptions does it contain? Identify assumptions about law, authority, markets, skills, trust and time horizon.
3. What employee behaviours does it require? Ask whether employees must compete, collaborate, move, disclose information or accept managerial differentiation.
4. What skills system supports it? Identify general, specific, vocational, occupational and firm-based capabilities.
5. What employment relationship supports it? Examine security, mobility, tenure, careers and mutual expectations.
6. What reward system supports it? Test individual, team, collective, fixed and variable elements.
7. What employee voice arrangements interact with it? Map direct and representative voice.
8. What legal constraints exist? Identify statutory rights, consultation, data protection, equality and contractual requirements.
9. What needs localisation? Adapt mechanisms, language, governance, measurement and timing.
10. What outcome must remain globally consistent? Specify the non-negotiable principle and how it will be evidenced.

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Level 7 Command Word Guide

Command word	What to do	Example use
Explain	Set out the concept accurately and clearly.	Explain LME and CME, then identify their coordination mechanisms.
Analyse	Break the issue into relationships and mechanisms.	Analyse how skills institutions influence recruitment and training.
Discuss	Compare competing explanations and evidence.	Discuss convergence, divergence and hybridisation.
Evaluate	Weigh strengths, limitations and usefulness.	Evaluate whether VoC explains HR differences effectively.
Critically evaluate	Challenge assumptions, evidence, scope and applicability.	Critically evaluate national classification, firm agency and institutional change.
Recommend	Use evidence and analysis to justify action.	Recommend a transferable but locally appropriate HR architecture.

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Model Level 7 Paragraph

Question: Critically evaluate the extent to which HR practices can be transferred across national contexts.

HR practices can be transferred across national contexts, but their effectiveness depends on whether the institutional complementarities supporting the practice are reproduced or intelligently redesigned. Hall and Soskice’s distinction between liberal and coordinated market economies suggests that a practice developed within the UK’s relatively market-oriented environment may encounter different constraints in Germany, particularly where it relies on individualised reward, external labour markets and managerial discretion. The mechanism is not national culture alone: collective representation, vocational training, employment law and stakeholder governance can alter how the practice is authorised, interpreted and rewarded. For example, an individual performance system may be retained in a German subsidiary but require transparent criteria, representative involvement and measures of team or occupational contribution. A counterargument is that multinational firms, global technology and competitive pressures generate convergence; however, convergence in policy language does not establish convergence in local implementation, and power relations may influence which practices are accepted. The LME/CME framework is therefore limited when treated as deterministic or nationally homogeneous, but useful when combined with sectoral, organisational and historical analysis. The HR implication is that organisations should standardise intended outcomes and ethical principles while adapting the institutional interfaces through which those outcomes are delivered. Transfer is consequently feasible, but transplantation is risky: the quality of transfer depends on diagnosing assumptions, testing local legitimacy and evaluating employee and business outcomes.

Line-by-line annotation:

Line function	Where it appears	Purpose
Claim	“HR practices can be transferred…”	Answers the question directly and avoids an absolute claim.
Hall and Soskice	“Hall and Soskice’s distinction…”	Anchors the argument in theory.
Institutional mechanism	“collective representation, vocational training…”	Explains how context changes outcomes.
Example	“an individual performance system…”	Applies theory to HR practice.
Counterargument	“global technology and competitive pressures…”	Demonstrates balance.
Limitation	“limited when treated as deterministic…”	Shows criticality.
HR implication	“standardise intended outcomes…”	Converts analysis into action.
Judgement	“Transfer is consequently feasible…”	Provides a qualified conclusion.

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Weak Vs Strong Writing

Topic	Weak	Strong
Reward	Germany is a CME, so bonuses will fail.	German institutions may shape whether bonuses are individual, collective, negotiated and linked to occupational or team contribution.
Recruitment	Germans prefer internal hiring.	Vocational and occupational pathways may make qualifications and structured training more important alongside external recruitment.
Training	UK firms do not train.	Training investment varies and is shaped by labour mobility, skills portability and the firm’s ability to capture returns.
Employee voice	German employees need works councils instead of direct voice.	Direct and representative voice can coexist; the design must respect institutional roles.
Performance management	Japan rejects individual performance.	Individual performance systems may interact with team identity, internal careers and changing employment practices.
Leadership	Nordic managers are democratic.	Participation may be supported by institutions and organisational practices, but leadership varies by sector and firm.
Talent management	Global talent systems are universal.	Global categories may require local definitions of potential, career and fairness.
Workforce planning	Labour markets determine staffing.	Labour markets constrain staffing, but strategy, technology, occupation and organisational choices also matter.
Employee relations	UK employment relations are weak.	UK voice and bargaining arrangements vary across sectors and organisations.
Flexibility	LMEs are flexible and CMEs are rigid.	Flexibility can be organised through markets, negotiated coordination or institutional combinations.
Job security	CMEs guarantee secure work.	Coordinated systems may support longer-term relationships for some groups while experiencing restructuring and non-standard work.
Skills	General skills are better.	General and specific skills solve different coordination problems and carry different risks.
Governance	Shareholders create bad HR.	Governance shapes time horizons and accountability but does not determine every HR decision.
Standardisation	Global HR should be identical.	Global principles can be consistent while local mechanisms diverge.
Localisation	Local adaptation means loss of control.	Local adaptation can protect the intended outcome by making the practice institutionally legitimate.

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Common Student Mistakes

1. Treating LME/CME as a simple country label.
2. Saying Germany is a CME without explaining the institutions.
3. Treating the framework as deterministic.
4. Ignoring institutional complementarities.
5. Ignoring within-country variation.
6. Ignoring sectoral differences.
7. Treating culture as the entire explanation.
8. Ignoring labour law.
9. Ignoring employee voice.
10. Assuming UK practices are universally transferable.
11. Assuming UK practices can never transfer.
12. Treating Japanese HR as unchanged since the post-war era.
13. Treating Nordic countries as identical.
14. Assuming CME means better HR.
15. Assuming LME means bad HR.
16. Ignoring globalisation.
17. Ignoring institutional change.
18. Describing rather than analysing.
19. Using Hall and Soskice without critically evaluating them.
20. Ending with “it depends” without explaining what it depends on.
21. Confusing an ideal type with an empirical average.
22. Treating a multinational policy as a neutral technical intervention.
23. Assuming a works council is merely a barrier rather than a governance institution.
24. Equating employee voice with employee satisfaction.
25. Using culture to explain what law, power or skills systems explain more precisely.

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Comparative Table

Feature	UK	Germany	Japan	Nordic countries
Broad institutional orientation	Commonly illustrated as an LME, with important internal variation.	Commonly illustrated as a CME, with market-oriented and sectoral variation.	Coordinated and firm-centred features, not interchangeable with Germany.	Coordinated combinations with distinctive welfare, bargaining and policy institutions.
Labour-market coordination	Relatively market-mediated and decentralised.	More institutional coordination in important sectors and occupations.	Historically enterprise-centred, with significant change and segmentation.	Often coordinated through collective institutions and active labour-market policies.
Employee voice	Direct and representative forms vary by sector and organisation.	Works councils, co-determination and collective representation may be important.	Enterprise unions and firm-centred voice have historical significance.	Collective institutions and participation often have substantial legitimacy.
Skills system	General education and transferable skills are prominent, with varied vocational routes.	Vocational and occupational pathways are significant, though changing.	Firm-specific development and graduate recruitment have historical importance.	Education, training and active labour-market institutions vary by country.
Training	Varies strongly by industry, occupation, employer and strategy.	Apprenticeship and employer–institution links can support occupational skill formation.	Internal development has historically supported firm-specific skills.	Public and collective institutions can complement organisational development.
Employment relationships	Relatively mobile and individualised in many settings.	Mix of longer-term, collective and market relationships.	Traditional core employment was long-term and internal, but segmentation has grown.	Security, flexibility and participation are institutionally combined in varied ways.
Corporate governance	Shareholder orientation is a common analytical tendency.	Stakeholder relationships and co-determination are important reference points.	Distinctive firm-centred and governance traditions have evolved.	Governance and welfare arrangements support varied stakeholder configurations.
Collective bargaining	Relatively decentralised and uneven.	Collective bargaining and works councils vary across sectors and firms.	Enterprise unionism differs from industry-wide coordination.	Bargaining coverage and institutions are generally significant but not identical.
External recruitment	Often prominent, especially for transferable skills.	Coexists with vocational pathways and internal development.	Increasingly used in some segments, alongside internal labour markets.	Present alongside occupational, collective and institutional pathways.
Internal labour markets	Important in some organisations and professions but not universal.	Important in some firms and occupations.	Historically central for core employees, with change over time.	Varies by sector, organisation and occupational group.
Reward tendencies	Individual and market-referenced reward may be prominent.	Individual reward interacts with collective arrangements and role identity.	Seniority and team-based traditions interact with performance pay.	Participation, equality and collective norms may shape reward design.
HR implications	Test assumptions about mobility, individual metrics and managerial discretion.	Build consultation, skills and collective legitimacy into design.	Consider careers, teams, firm-specific learning and changing expectations.	Design for dialogue, participation, sustainable work and local institutions.
Key caveat	Not all UK organisations are market-oriented in the same way.	Not all German sectors or firms coordinate identically.	“Japanese HR” is historically layered and changing.	Denmark, Sweden, Norway and Finland are not one institutional system.

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Editable Level 7 Worksheet

Varieties of Capitalism HR Transfer Analysis

HR practice

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Origin country

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Destination country

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LME/CME or broader institutional characteristics

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Relevant institutions

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Institutional complementarities

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Assumptions embedded in the HR practice

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Employee voice implications

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Skills-system implications

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Labour-market implications

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Legal constraints

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Cultural factors

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Organisational culture

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What can transfer unchanged?

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What needs adaptation?

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What should remain globally consistent?

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Evidence

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Alternative explanation

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Final recommendation

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Self-Assessment

Educational self-assessment only — not a validated assessment instrument. Rate each statement from 1 (not yet confident) to 5 (confident and able to apply critically).

I can…	1	2	3	4	5
Explain LME.
Explain CME.
Explain institutional complementarities.
Explain why HR is institutionally embedded.
Apply the framework to Germany.
Apply it critically to Japan.
Explain Nordic differences.
Evaluate UK HR transferability.
Distinguish institutions from culture.
Evaluate convergence and divergence.
Identify hybridisation.
Challenge deterministic classifications.
Make a justified Level 7 recommendation.

After scoring, write one paragraph explaining the institutional mechanism you understand best and one mechanism you need to investigate further.

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FAQ

What is Varieties of Capitalism?

It is a comparative institutional framework associated with Hall and Soskice that explains how firms coordinate economic activity through different combinations of market and non-market institutions.¹

What is an LME?

A liberal market economy is an ideal type in which firms rely relatively more on market relationships, competition, formal contracting, external labour markets and general skills.

What is a CME?

A coordinated market economy is an ideal type in which firms rely relatively more on non-market relationships, collective institutions, vocational systems, long-term coordination and specific skills.

Why is the UK considered an LME?

The UK is commonly used as an LME illustration because of relatively liberal labour markets, external labour markets, decentralised bargaining and market-mediated coordination. This does not mean that every UK organisation behaves in the same way.

Why is Germany considered a CME?

Germany has historically combined vocational education, works councils, collective bargaining, co-determination and coordinated relationships. These institutions vary and are changing, so the label is an analytical shorthand rather than a complete description.

Is Japan a CME?

Japan shares important coordination features but differs from Germany in its enterprise-centred unions, historical internal labour markets, seniority practices and firm-specific employment relationships. “CME” is therefore informative but incomplete.

Are Nordic countries CMEs?

Nordic countries contain coordinated institutions, but Denmark, Sweden, Norway and Finland are not identical. Their welfare, bargaining, legal and labour-market arrangements should be examined separately.

What are institutional complementarities?

They are mutually reinforcing relationships in which one institution increases the returns from another. Vocational training may be more valuable when employment relationships and industry coordination support investment in specific skills.

Why doesn’t UK HR practice always transfer?

Because the practice may depend on UK-specific assumptions about law, skills, labour mobility, employee voice, governance, managerial authority or reward. Those assumptions may not exist in the destination context.

Does LME mean better flexibility?

Not automatically. LMEs may facilitate market-mediated reallocation, while coordinated systems can organise flexibility through negotiated and institutional mechanisms. The relevant question is flexibility for whom, over what time horizon and with what security.

Does CME mean better employee relations?

Not automatically. Coordination can provide voice and stability, but institutions can exclude groups, vary by sector and face pressures from change. Evaluation requires evidence about employee outcomes.

Is the LME/CME distinction still relevant?

Yes, as a mechanism-based analytical lens. It is less useful when treated as a fixed binary that ignores multinational firms, sectoral variation, hybridisation and institutional change.

What are the main criticisms of Hall and Soskice?

Critiques include binary classification, national aggregation, insufficient attention to within-country variation, institutional change, power, multinational firms, informal institutions, emerging economies and hybrid systems.

How does culture differ from institutional analysis?

Culture concerns meanings, norms and learned patterns; institutional analysis concerns rules, organisations, power and coordination structures. They can interact, but culture should not be used as a substitute for analysing law, skills, governance or representation.

How does Varieties of Capitalism relate to convergence and divergence?

Globalisation may produce convergence in policy language and technology, while national institutions produce divergence in implementation. Hybridisation occurs when global practices are adapted to local systems.

How can international HR managers transfer practices successfully?

They should identify the practice’s purpose and assumptions, map local institutions, involve legitimate employee representatives, adapt mechanisms, pilot the design and standardise outcomes rather than identical procedures.

How should Level 7 students use the framework critically?

Use it to explain mechanisms, compare evidence, identify limitations, distinguish ideal types from realities, incorporate organisational agency and make a qualified recommendation.

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References

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The Level 7 Rule

HR practices do not operate in a vacuum. Before transferring a practice across borders, ask what institutional system makes the practice work—and whether those conditions exist in the new context.