“Social capital can be defined simply as the existence of a certain set of informal values or norms shared among members of a group that permit cooperation among them."
Francis Fukuyama
"When economic and political negotiation is embedded in dense networks of social interaction, incentives for opportunism are reduced. Dense networks of interaction probably broaden the participants' sense of self, developing the "I" into the "we"."
Robert D. Putnam
When we talk about the idea of European local productions systems that exist, the differences in social cohesion and cooperation among European regions might be interesting. This idea has been examined by scientists for a couple of years, now. Trust and the development of cooperation have been studied by behavioural as well as social and political scientists.
In 1993, after the Communist Block in Eastern Europe collapsed, Francis Fukuyama published his book “Trust” where he examines trust and social capital as an economic factor in the industrialized and industrializing nations.
A large part of his book is dedicated to the success of Germany’s economy. Fukuyama refers to the successful cooperation of horizontally (e.g. inter-capitalistic) and vertically interdependent agents (e.g. shop-owners and their employees). Indeed, the cooperation of business owners, or their managers, with their employees can be described as unique among large industrialized nations. Nevertheless, the “Mitbestimmung”-legislation (codetermination) and the “Deutschland AG” (Germany Inc.) conglomerate have been the object of severe criticism during the last decade. Attempts were made in order to cut back inter-firm dependencies and union-involvement in the German industry. With the latest scandal in the Volkswagen AG the “German Trust Model” seems to become a “lame duck”.
In this essay it will be focused on the interdependencies of firms and investors, and the role trust and social cohesion play in today’s German economy. Fukuyama’s thesis will be compared to the reality of German or Rhenish capitalism. Financial interdependencies and cooperation among Germany’s companies will be examined and it will be asked if they have changed during the last decades.
Table of Contents
1 Preface
2 Trust and Cooperation
3 Germany’s economy
3.1 Germany’s socio-economic conditions
3.2 Inside Deutschland AG
3.3 Changes in economy and policy
3.3.1 A model challenged
3.3.2 East and West
3.3.3 Globalization
4 Conclusion and Outlook
Research Objectives and Core Themes
This paper examines the role of social capital and trust within the German economic system, analyzing how historical structures like the "Deutschland AG" have evolved in the face of globalization and institutional pressure. The central research question explores whether the traditional German model of cooperation and inter-firm interdependence remains a viable economic strategy or if it is being fundamentally dismantled.
- The theoretical significance of trust and social capital as economic drivers.
- Institutional characteristics of the German "Rhenish Capitalism."
- Financial interdependencies and corporate control in German companies.
- Challenges to the German model caused by globalization and reunification.
- The shift from traditional bank-centered industrial groups to management-controlled enterprises.
Excerpt from the Book
3.2 Inside Deutschland AG
Financial corporations play a major role in the development of Germany’s economy. They assign loans, hold stocks and vote at shareholders’ meetings and/or have seats on supervisory boards of their corporate clients. Thus, they are able to influence continually the management policy of these firms.
Cross-over shares are widely spread in the financial sector: the Allianz AG insurance company, for example, holds shares from Deutsche Bank AG and Deutsche Bank holds shares from Allianz AG. Allianz AG is also involved in several other banks and reinsurance companies. This shows the existence of a German financial conglomerate.
Generally, German industrial groups are tied by hierarchical forms of financial participation. Horizontal capitalistic interdependencies (circles and reciprocal groups) are rather rare in Germany. In return these institutional investors get a lot of information so they become more willing to invest in long-term strategies.
Fukuyama describes big German shareholders as trustful towards a professional management that enables the firms to grow. The willingness and the trust to give power to third persons outside the family is even a necessary condition to develop large organizations. The only question would be how far managers could go and if there are any restrictions on their powers. Indeed, cooperation plays a major role in Germany’s economy. By any financial integration a company is part of a “network of partners that largely protects each member firm from attempts (of) ‘hostile takeover’ by other companies”. The long-term expectations and typical German legislation allow managers to use financial integration to survive periods of losses over a longer period of time.
Summary of Chapters
1 Preface: Introduces the theoretical basis of trust and social capital as defined by Fukuyama and Putnam, setting the framework for the analysis of the German economy.
2 Trust and Cooperation: Discusses the role of civil society and shared values in creating efficient organizations and fostering economic prosperity.
3 Germany’s economy: Analyzes the structural foundations of the German model, including high-wage labor, institutionalized cooperation, and the specific role of the bank-centered industrial group.
3.1 Germany’s socio-economic conditions: Details the institutional framework and unique "German Way of Life" that balanced growth with high social cohesion.
3.2 Inside Deutschland AG: Investigates the network of financial cross-ownership and its protective function against hostile takeovers.
3.3 Changes in economy and policy: Addresses the external pressures, including globalization and unification, that are challenging traditional German economic institutions.
3.3.1 A model challenged: Examines the limits of Germany's negotiated management and the struggle to maintain full employment.
3.3.2 East and West: Discusses the economic impact of German reunification and the integration of western institutional structures into the East.
3.3.3 Globalization: Explores how global market pressure and the shift toward international capital impact German national economic boundaries.
4 Conclusion and Outlook: Synthesizes the findings, reflecting on the potential erosion of social capital and the political implications for Germany's future.
Keywords
Social capital, Trust, Germany’s economy, Rhenish capitalism, Deutschland AG, Mitbestimmung, Globalization, Institutional economics, Corporate governance, Socio-economic, Financial integration, Industrial groups, Social cohesion, Management control.
Frequently Asked Questions
What is the primary focus of this paper?
The paper explores how trust and social capital function within the German economy, specifically investigating the structures that have historically protected German firms and how these are currently changing.
What are the central themes of the work?
Key themes include the institutional framework of German capitalism, the significance of financial interdependencies (Deutschland AG), and the impact of global competitive pressures on national economic models.
What is the ultimate goal of the research?
The goal is to test Fukuyama’s theories about trust and social capital against the reality of the German economic model and determine if this "trust-based" system is under threat.
Which scientific methods are employed?
The work utilizes a combination of institutional economic theory, literature review, and the analysis of empirical data (e.g., Jürgen Beyer’s study on corporate control) to evaluate economic trends.
What is discussed in the main body?
The main body focuses on defining the "German model," analyzing financial cross-ownership between banks and corporations, and identifying the factors—such as globalization and reunification—that contribute to the questioning of these traditional institutions.
Which keywords define this work?
The most defining keywords are Social Capital, Deutschland AG, Rhenish Capitalism, Financial Integration, and Corporate Governance.
How does the "Deutschland AG" structure protect companies?
It creates a network of financial cross-ownership where banks and insurance companies hold stakes in firms, which prevents hostile takeovers and encourages a focus on long-term investment rather than short-term profit.
How has the role of the "Mittelstand" changed in this context?
The paper notes that the small and medium-sized enterprises (Mittelstand) were less affected by recent tax reforms intended to "decongest" the economy because they lack the high levels of cross-ownership typical of the large conglomerates.
- Quote paper
- Christoph Rieder (Author), 2005, Trust and Germany's Economy, Munich, GRIN Verlag, https://www.grin.com/document/49361
