Global Competition and the Labour Market

Nigel Driffield

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9781138002203
• eBook ISBN: 9781134958658
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

This study combines an industry level and a firm level analysis on the wage and employment effects of multinational companies. This has not been attempted in any previous work. In view of the results, important questions are raised regarding how global changes in the structure of production may affect labour markets and the organisation of work in the future.

1

The Likely Impact of Foreign Direct Investment on the UK Labour Market

INTRODUCTION

It is often postulated that multinational enterprises (MNEs) pay above the industry average for a country and that this impinges, not only on their competitors, but on the UK labour market as a whole. While issues concerning competition in the product market of MNEs have been well covered in the literature, an issue which is less often addressed is the extent to which employment policies of firms will impinge on this. Indeed the arguments that follow will demonstrate how the employment effects of FDI can not only be a source of gain to the firm concerned, but can also have serious implications for their competitors.

Much of this centres on the reported difference between MNEs and domestic firms, which may for example be due to MNEs tending to operate in particular sectors, which are characterised by, say, high levels of capital intensity, or different policies concerning R&D. While it is now established that foreign owned enterprises (FOEs) pay higher wages than domestic firms, this is only the beginning of the story. This begs the question of whether this foreign presence has an effect throughout the industry.

This simple introduction outlines one of the major points, but we are also interested in why MNEs may pay different wage levels from domestic firms and I hope to present some of the possible reasons in the following chapters.

The explanations of this phenomenon fall into two categories, the first of which is based on ideas concerning bargaining power. These models assume that MNEs' bargaining power differs from that of uni-national firms due to their organisational structure, while at the same time being possibly more prone to strikes than domestic firms. The arguments here can again be divided into two. Firstly, in some cases foreign owned plants are in a weaker bargaining position, due to their position within the global corporate structure, then wages may be bargained up, leading in the traditional way to a shift in factor proportions increasing the capital/labour ratio and improving labour productivity. Secondly, wages are higher for other reasons explained in the bargaining model, or because MNEs wish to “buy” industrial peace, this they can afford to do because of higher levels of productivity and profitability. This is similar to the argument that, irrespective of nationality, the more successful firms pay higher wages in order to attract the better workers.

The second type of study follows the analysis introduced by Hymer (1966). The focus here is on the ‘level of production’, the extent to which new technology is employed and production linked to research and development, as distinct from merely assembly operations.

Firms who wish to compete in terms of new technology will set up an R&D function in those locations that have a good reputation for R&D, so that they hope to gain from the degree of diffusion that will occur, as well as from the proven R&D infrastructure.

This obviously focuses on the effect that technological progress will have, while factor proportions are seen to be fixed and productivity is raised through this technological improvement. Thus, as productivity rises, wages are seen to follow, but the important question is whether these wage rate increases keep pace with the productivity increases that are experienced by the firm. This therefore provides a possible explanation of inter-firm wage differences. Those plants that have high levels of R&D will have faster rates of technological advance, and therefore greater productivity and hence higher wages. Mere assembly plants on the other hand, with lower levels of R&D and therefore lower productivity, will pay lower wages.

This generates the ‘cumulative causation’ theory, where production agglomerates at certain sites, with the most dynamic locations attracting the plants with the newest technology, while the rest tend to stagnate. Thus, the strongest, most successful firms are drawn to the best locations, and a cycle of ‘cumulative causation’ begins. This also has the effect of drawing these firms away from other areas, relegating them to assembly-type operations with little R&D and no fundamental research.

The work that has been carried out on the cumulative causation ideas follows Hymer's theory on agglomeration. Such agglomeration can be explained, at least in part by the technological accumulation of global firms, together with their R&D policy. All technology acquired in a location is at least in part specific to that plant, due to the previous work on which it is based, the skills of the domestic workers and the specific demands of customers. Traditional MNE theory states that in general the most efficient way to transport technology across national boundaries is foreign production, at which point more (local) R&D is required in order to transplant it to the local market and infrastructure. It is this that will encourage firms to centre R&D activities at their largest plants, therefore encouraging technological accumulation, and where this is done by all or many of the largest firms they will all be centred around the same area. It is also a feature of global firms that they create national productive networks, encouraging a system where the plants with R&D at the head, and all others being little more than assembly units. In general, it is presumed that MNEs invest less in R&D in the host countries than in the source country. The extent to which this then affects the local labour market needs to be determined, although the theoretical link between R&D and pay is clear, that R&D will be undertaken in the ‘high level’ production locations, where the firm employs workers with a high marginal productivity of labour. The issue of causality between the two however is a different matter. This again forms part of the cumulative causation theories which are further discussed below.

International production therefore is explained in these terms, where due to the nature of the industry, a firm has to compete using technology, in the production process either to cut costs or to produce a better product. This, as Cantwell suggests, will lead to an increase in international production as firms have to move to the centres of R&D in order to survive, and will be accompanied by a decentralisation of R&D on a global scale, but a large degree of centralisation on a national scale.

These ideas on international production, particularly the latter, have direct relevance to the labour market, specifically to the welfare of such companies' employees. The most obvious link between the two is the work done by Hymer on uneven development. Hymer postulated that as firms became larger, about 500 companies (of which about 300 would be American and 200 European or Japanese) would establish themselves, and the world economy would strongly resemble that of the USA. He said that three levels of business activity would become distinct:

Level 1 — The strategic decision making functions which would only be located in the major capital cities of the world.

Level 2 — The day-to-day running of the firm with an office in every country in which the MNE operates.

Level 3 — The lowest level which would be spread all over the globe.

Hymer stated that as a result of this, the best administrators, scientists, etc., would be attracted to the major centres and the best jobs, and the local residents would also benefit from the better employment. Those that did not move to the major centres became better off at a much slower rate if at all, doing jobs with lower levels of productivity and payment. It should be stressed here that it is not technology that is creating the problem, but the organisation of the firms, promoting hierarchies rather than equality.

It should be pointed out at this juncture that Hymer was essentially concerned with information flows and organisation in mind, and also that since then the relative importance of Europe and Japan has increased. One can clearly see the relevance of this to the question, particularly from the point of view of the R&D policy of global firms, despite the fact that in recent years the USA has become less important in relation to the rest of the world so the international distribution of firms has become more even.

The New International Division of Labour

As I have already said, there is a link between international production and national labour markets, through the way in which firms promote a specific type of division of labour. The ideas developed on this grew into a branch of the subject referred to in the literature as ‘The New International Division of Labour’. Much of the work carried out on this is reported by Frobel, F., Heinrichs, J. and Kreye, O. (1980) and Kreye, O., Heinrichs, J. and Frobel, F. (1988).

The essential thrust of this theory is that with the development of global markets and firms taking an increasingly international perspective, they will locate different (technological) levels in different centres according to the local conditions. See for example Casson (1986). The division of labour within an industry will generate intermediate products, which are then combined to produce the final good. Thus it is therefore likely that firms will locate high levels of production in areas already populated by R&D intensive firms, with high levels of productivity and wages, while the low level production, such as ‘screwdrivering’ plants will be located in low wage areas with a large source of available unskilled labour. Thus, while this is a likely phenomenon within a country, with such policies being pursued by domestic firms, it is easy to show that the location of the foreign plants within the UK could be one of the most important factors in determining not only productivity but also wages.

In this case, as I have already said, the ‘level’ or nature of production that is carried out at a plant is closely related to the level of R&D. Where a plant carries out fundamental research the jobs will be of a higher level than where little R&D takes place and the jobs are mainly confined to assembly. Broadly speaking, firms tend to locate R&D abroad when there are locations where host-country firms are already successful in the same area. This provides links with complementary lines of research and encourages growth. Alternatively, however, there may be an indirect employment effect where host-country firms are weak, with little R&D and therefore no new technology. In such a situation an MNE with it's superior technological capabilities may be able to attain a larger share of the market faster than would otherwise be the case. This argument is important because it demonstrates that it is vital to see the foreign owned sector in UK manufacturing, not as a homogeneous block but as a diverse set of establishments, ranging from those which are established in the UK for historical reasons, such as the older American firms Fords and Singer, to the newer Japanese owned plants established over the last ten years. Linked in with this are the ideas surrounding the nature of production employed in the plant. I shall later examine the relationship between labour productivity and wages, but it has been perceived in the past that this relationship is extremely strong. Given this case it is likely that those plants that operate new technology related to the latest R&D are not only likely to have an advantage in terms of productivity and efficiency, but also to pay higher wages. Thus we have a model where it is not only important to recognise the bargaining issues concerning the derivation of prevailing wage rates, but also levels of technology and other plant-specific factors involved.

As I have already mentioned, it is important not to perceive the foreign owned sector as a uniform set of firms. As well as age and nationality differences, there is also the question of how the parent company perceives it's overseas operations, and the role that they play in corporate strategy. For example, the degree of influence that the parent exerts over it's subsidiaries will be an important factor in the determination of employee relations. This is covered well by Hamill (1982). The industrial relations policies of MNEs' subsidiaries depend on the degree of control that the foreign parent maintains, which in turn is dependent on several factors:

1. Whether the plant was obtained by acquisition or from a green-field site. Hamill found it more likely that already existing plants are given greater freedom over management decisions than newly created ones.

2. The number of foreign investments that a parent company has. This is often a ‘bounded rationality’ problem for the corporate managers.

3. The size of the subsidiary relative to firm size.

4. The performance of the plant in the past.

5. The management structure of the parent company. Some are simply more centralised than others, often for historic reasons.

These are all somewhat obvious points in the light of what I have already said, but it is important to realise that many of these inter-plant differences may not be due to inter-industry or even inter-country differences, but simply differences in individual firms on a global scale.

The nature of production at the plant in question may also be a determining factor in this. If a plant is created merely as a screwdrivering operation to service a local market, the local managers are more likely to be given a degree of autonomy than if the plant is an integral part of the firm's overall production process.

The nationality of the parent company is an important factor in many of these inter-plant differences. Dunning (1985) reported some of the differences between the US owned plants in the UK and those owned by Japanese companies. Apart from the obvious differences in the ages of the plants in Dunning's study and the domestic population, these subsidiaries show many characteristics that are true in the plants operated in the relevant source country. For example, the US owned plants experience less influence from the parent company than do the Japanese plants, particularly in matters concerning industrial relations, and while both sets of firms pay slightly above the industry average, there are far more incentives offered in the American plants, than in the Japanese ones, where the employees are generally paid on a piece rate basis, which is assumed to be sufficient incentive.

Both sets of firms however are strictly controlled in terms of expenditure on research and development, demonstrating that in general, the nature of production in terms of product and process sophistication, is something that is determined at the corporate level.

THE IMPACT OF FOREIGN OWNED FIRMS ON UK INDUSTRY

Next we come to the types of study that assess the impact of MNEs in host countries. These are generally presented either in terms of an empirical study of wage differences, or in terms of attempts to determine the extent to which ‘foreign’ man...

Table of contents

• Cover
• Half Title
• Full Title
• Copyright
• Contents
• Introduction to the Series
• 1. The Likely Impact of Foreign Direct Investment on the UK Labour Market
• 2. The Extent to Which Foreign Firms Pay Above the UK Average
• 3. The Firm Level Study
• 4. Implications for UK Manufacturing
• 5. Determinants of Respective Bargaining Power Between Workers and Foreign Owned Multinationals in the UK
• 6. The Dynamic Analysis
• 7. Concluding Remarks
• Appendix 1: The Data for The Plant Level Study
• Appendix 2: The Data for The Bargaining Model
• Appendix 3: The Data for The Dynamic Study
• Index