This paper critically examines the debate on corporate governance and the claim (often made in Anglo-American companies) that the close links between German banks and industry are primarily responsible for the longer-term investment strategies and greater quality competitiveness of German manufacturing. Instead, it is argued here that manufacturing investment and bank behavior must be examined within a broader system of economic governance. In particular, the regulation of labor markets is a key factor influencing company choices between price and quality-competitive strategies.
The corporatist regulation of German labor markets has encouraged quality-competitive strategies by keeping labor costs out of competition to a greater extent than in the US, where a collapse in pattern bargaining in core manufacturing industries and the strategic use of bankruptcy was motivated by companies' attempts to gain a comparative price advantage on the basis of lower labor costs. This argument is supported through a case study of the restructuring of the steel industry in Germany and the US in the 1980s.