What explains the emergence of different kinds of capitalist systems across advanced industrialized democracies? In particular, why do highly coordinated employer associations form in some states and not others, and why do such organizations change over time? Because different kinds of contemporary employer coordination or varieties of capitalism are linked to long-term outcomes of unemployment, inequality, social policy generosity, and product innovation, it is important to understand their historical origins and development. I propose a new theory of the development of highly coordinated employer associations and their absence in advanced industrialized states. I argue that the key decisions firms faced involved addressing the redistributive threat posed by the political organization of workers, and the collective action problem of organizing themselves. The cross-national and temporal variation in firm strategies depends on two variables: levels of industrial heterogeneity and the political mobilization of workers. The former affects the incentives of firms to act collectively or individually; the latter shapes their incentives to pursue a collaborative or repressive approach. This parsimonious framework accounts for a much wider range of variation in firm strategies. To test the theory I use extensive qualitative and quantitative evidence from the development of employer associations in Germany and the United States. I also test the portability of the theory with cross-national evidence. I conclude with discussion of broader implications for comparative politics, in particular the importance of understanding collective action among firms and instruments of repression.