Fascinating Factoids - Spain and Germany

Did you know...
After the fall of Franco in the 70s, Spain became a manufacturing powerhouse. Attracted by relatively cheaper labor on the continent, European manufacturers set up shop in droves and the economy grew at a healthy and promising clip... right up until 1989.
Date ring a bell? It's the year the Berlin wall fell and the soviet blocks opened up. Because of their proximity to their Western European neighbors and their decentralized form of communist rule, Eastern European countries had factories and managers galore waiting eagerly for foreign direct investment that would allow them to leap into the EU as fast as possible. No sooner did the doors open, but companies bailed on Spain for the greener/cheaper pastures of the Eastern European states and the Spanish economy was in shambles.
From that shock, the Spanish economy reformed itself from a production and manufacturing-based one to one that is known the world over for fancy banks, investments, and services. (Heard of a little guy called Santander?) How did they do it, and how did that happen? Apparently no one really knows yet and it's a topic of "hot" study...

Did you know:
In Germany after the war, the political economy was designed under the premise that German firms were considered part of society and are treated as a communal good in a way - the goal of the firm in Germany is NOT to serve the shareholders, it is to provide jobs for Germans, grow the German economy, and be a citizen of the country and an entity for the people. German shareholding is done by few large shareholders who are long-term minded and German capital markets are largely served by banks with exclusive relationships with firm customers who offer patient and long-term capital, removing firm's needs to seek quick gains or returns.

Workers sit on the boards of firms and are entered into a social contract with the firm called co-destiny. Employees in Germany really don't switch jobs, almost from the time they exit school, and firms pay for extensive training for skilled workers so that the contract is complete. Benefits, well-being, employment, all these things are the role of the firm. Wages are set at a central level by the industrial representatives, which shores up the no-poaching or job hopping climate that allows firms to invest in their employees.

It all sounds nice... until German firms start expanding overseas to escape the confines of the law because now they have US and other foreign PE and hedge fund investors putting unfamiliar pressures on them to restructure or grow.

It's also interesting to view the effect this system has on innovation. MBA studies would tell you that without the easy hire/fire laws, liberal capital markets that include venture capital money, and institutions like bankruptcy laws, you simply won't get highly innovative companies springing up in Germany. And, this is somewhat true... but you do get a lot of innovation, it's just of another kind.

Since R&D is an Asset in German accounting, not an expense as it is at home, companies invest a TON in internal R&D. Innovation within the firm comes from the employees themselves who have a direct incentive and obligation to see their company survive and grow. In fact, some of the largest IT companies in the world are German, think SAP for instance, which is a highly technical business but is built on relationship-driven sales and long-term partnerships with customers. The German model allows this to work.

Germany also focuses on niche, highly technical manufacturing - not commodity work which it simply couldn't compete on given the high costs of labor. So, it goes for sweet spot high price, high expense, niche markets and does very well. Scarily well for a bunch of socialists. Why this is a bad word in the US lexicon, I'll never understand because Germans are capitalists - very good and successful capitalists, they just practice a very different kind of capitalism from the US-Anglo version.

The point is though, it's their way and it works for them because they went all the way. The second they try to implement liberal market stuff, the system starts to weaken. You have to be either liberal market, or socialized market, you can't be in between or it doesn't work because the institutions can't be streamlined - well, so say the experts at LSE. And I'm inclined to agree.