Industrial politics and global production networks: first, don’t make things worse

Current debates over the future of the UK’s relations with the EU seem to be taking place with a limited appreciation of how international productive capitalism works in a globalised economy. Some on the Right argue that being outside the single European market is likely to be a catalyst to trade with the rest of the world, without explaining how this might be the case. Some in the Labour Party argue for a ‘hard Brexit’ on protectionist grounds.  Both ignore the complexities of how the international production of goods and services works. It is therefore worth recapping what we know about competition between countries and regions in global production networks, and how this has developed. Our focus here is on Europe and North America, as globalisation processes have somewhat different outcomes in the Global South.

The post-war internationalisation of production was done mainly by industrial firms with fairly integrated production systems. They benefitted from national markets which were protected by tariff and other trade barriers. These firms made monopoly rents on their domestic production. Where labour movements, or political pressures, were strong enough, these translated into rising real wages. To differing extents in different places, states and capitalists often came to support rising real wages, in order to boost demand.

Some of these firms sought to expand production beyond their national borders. This was done for a variety of reasons: to exploit national differences in wage levels, to reduce transportation costs, and to avoid tariffs and other trade barriers by opening branch plants. Branch plants basically reproduced domestic production for a foreign market. They did not generally engage in much R&D or other high value-added activities.

“Branches” continue to exist where product market access requires them to. Walmart, for example, obviously needs to open large stores outside the USA. However, in general, ‘production’, whether of goods or services, is increasingly fragmented. This has been enabled by the growth of economies outside the Global North, the liberalisation of global trade, the building of continental markets in Europe and North America, financial globalisation, and by technological advances.  Fragmentation refers to two things:

organisational fragmentation – lead firms increasingly outsource large parts of the processes by which they create value. Outsourcing once mainly concerned relatively peripheral parts of firms’ value chains. However in recent years it has extended to previously ‘core’ functions such as manufacturing and R&D.

geographical fragmentation – firms have become increasingly able to locate their production across a wider range of geographies.  This means they can make very fine-grained decisions about where to perform different elements of their production processes. This geographical fragmentation sometimes takes place within multinationals, and sometimes outside them, in wider production networks.

An example of this can be seen in the travels undergone by just one component, a fuel injector for diesel lorries manufactured by the US-owned component maker Delphi. As the FT’s Peter Campbell writes:

“This part uses steel from Europe which is machined in the UK before going to Germany for special heat treatment. The injector is then assembled at Delphi’s UK plant in Stonehouse, Gloucestershire, before being sold on to truckmakers based in Sweden, France or Germany. If the resulting truck is sold into the UK market, the component or materials used in it will have crossed the Channel five times before the lorry is ever driven by the customer”.

Places – countries, regions, cities and towns – then compete to be the best location for specific activities. This is sometimes on a global basis, but perhaps more often at the level of continents. Different countries, and different regions within countries, may have different advantages. These might include, among other things, cost, light regulation, low tax, but also access to skills, to innovation systems, and access to markets.

Specific places may have well-known forms of advantage in this competition. So for instance Germany is often seen as having advantages in complex manufacturing through its high-quality training system, and relatively participative patterns of work organisation. However, being competitive, whether through ‘high road’ high quality, high wage approaches, or low road, low cost approaches, is not as simple as building competitive forms of labour and other regulation. It is also about continual processes of adaptation, as places continually try to boost their competitiveness by building relations with international firms. For example, in our research into multinationals and regional development, we examined an old industrial region in Spain (Asturias). This had excellent engineering education developed through its long history as a mining region. It was able to repurpose this in order to establish a high-end global R&D centre for a German multinational originally attracted to the region to perform lower-value assembly work. This process involved civil servants, a university, trade unions and various employer organisations.

Such processes of adaptation are necessary because lead firms have the capacity to make fine-grained decisions about the geographical and organisational location of their activities. This means that subsidiary units increasingly compete to exercise functions on an international basis. This is sometimes referred to as ‘mandate competition’. Units which are unsuccessful in these contests face dim prospects in cases where access to markets no longer requires the existence of national ‘branches’. This process also occurs, in a slightly different way, in external firms that the multinational has close links to.

In previous work, we have argued that this results in ‘regime shopping’. In other words, firms play the regulations and fiscal regimes of countries and regions off against each other.  It also leads to ‘resource shopping’. This describes the process of firms seeking places where the most ‘positive’ resource combinations are available for specific tasks.

To be clear, ‘regime shopping’ is clearly problematic.  It puts pressure on wages, on trade unions, and on the tax base of nations. Equally, we may object to vital public services being organised in private hands as a result of liberal regulation.

However, identifying that something about contemporary capitalism has bad consequences is quite a long way from finding a remedy for it. Having researched this subject in Canada, it is very clear that the game of attracting firms to countries and regions is very much dirtier in North America. This is because NAFTA is a much less regulated market for state support of firms than the European Union is. This enables overt competition on the grounds of high-subsidy, anti-union arrangements.

Britain is currently embarking on a process of striking a new round of deals with multinationals. It does so in a context of marked uncertainty about regulation. It is difficult to see how opaque deals such as that apparently reached with Nissan are likely to be more socially progressive than what they replace. Such deals are going to have to be reached with any firm with a loud enough voice.  This is likely to happen quite a lot in the case of a ‘hard Brexit’: from the firms’ perspective, gains from these negotiations simply compensate for the lost advantage of single market access.

Avoiding models of international competition built on worse outcomes for workers and the public has to be an international enterprise. This is, of course, difficult at the best of times. However, global production networks are not about to be abolished. The problems of regime shopping in general will be worsened, not cured, by attempts to build ‘walls’.

Some of the arguments here are developed in Almond, Gonzalez, Lavelle and Murray, ‘The Local in the Global: Regions, Employment Systems and Multinationals’, forthcoming in the Industrial Relations Journal, and in Almond and Gonzalez (2014) ‘Geography and International HRM’ in the Routledge Companion to International Human Resource Management.

Phil Almond is Director of the Comparative Employment Research Centre (CERC) at DMU.

His research interests are in the theoretical and practical challenges of the governance of almondwork and employment in contemporary global capitalism, with specific expertise on the social relations of multinationals. He was Principal Investigator on an ESRC project on regions, multinationals and human resources, and is currently working on an ESRC project on ‘globalising actors’ in multinationals.

 

The challenges of host effects in regime-shopping multinationals.

Multinational companies, particularly those which have significant capacity to choose where their activities are located, pose substantial challenges to domestic systems of employment regulation. These are sometimes seen as contributing to international convergence , but it is generally acknowledged that globalisation has not – yet – resulted in cross-national uniformity in labour management, even between economies of comparable wealth and development.

Because of this, the literature on industrial relations and human resource management in multinational corporations (MNCs) frequently discusses ‘host country effects’. This type of research deals with two slightly different concepts.

Firstly, host effects often imply ‘constraints’ on foreign multinationals acting within the economy under investigation. These might impede or prevent the transfer into particular host countries of country-of-origin, or global ‘best practice’ inspired labour management policies. This literature looks at whether and how MNCs, conform with, seek to avoid, or seek somehow to negotiate, the nature of host country constraints.  It sometimes also analyses the pressures foreign multinationals place on historically-established national systems of industrial relations and labour market regulation.

Second, some researchers examine how MNCs may attempt to use institutionally embedded resources. These may include potential advantages derived from skills institutions, research and development infrastructures, or the presence of clusters of competent firms which may engage as suppliers to global firms. Such resources are often seen as the domain in which older, higher cost industrialised economies compete.

Trying to make any realistic assessment of host constraints and resources requires an understanding of the contemporary context of international business. Clearly, neo-liberal globalisation has strengthened the hand of MNCs in relation to host business and employment systems. There are of course many factors at play here, but it is worth briefly highlighting the following:

  • the additional locational flexibility of FDI brought into play by single market legislation, as well as broader international trade agreements;
  • in Europe in particular, the possibilities for ‘brownfield’ investment which emerged in processes of privatisation (see for example the internationalisation of ownership of the European steel sector);
  • the multiple ways in which technology, often allied to product market liberalisation, has enabled markets to be serviced remotely (in Anglophone countries at least, the Indian call centre was one of the core public images of corporate globalisation in the last decade);
  • the ways in which corporate financialisation, and the related ideology of the lean enterprise, have made MNCs increasingly unwilling or unable to tolerate redundancy of capacity, leading in many cases to intense competition between different geographical sites of the same MNC for investment (the auto industry is the emblematic case in point here);
  • the broad transition at state level from protecting domestic industries to securing positions in international contests for mobile investment.

All these factors both enable and encourage increasing proportions of productive capital to engage in ‘regime shopping’ between the institutionally-derived constraints and resources of different national and local economies.

Regime shopping was a phrase popularised in the industrial relations literature by Wolfgang Streeck. It has been used mainly to draw attention to the ways in which some MNCs have sought to avoid labour-friendly elements of host country regulation, the consequent risks of social dumping if investment decisions are made on this basis, and thus the risks of a race to the bottom as erstwhile social democracies compete for productive investment with regimes that offer fewer protections for labour. All of this is still relevant. But regime shopping is now more endemic, and goes beyond host country industrial relations (recent controversies around the dubious tax strategies of many MNCs reinforce this point).

To extend the ‘shopping’ analogy, those firms whose investment is mobile are quasi-customers of the business and employment systems of different economies, balancing host resources and constraints within a context in which geographies are constrained to conceive of each other as rivals for investment. But not all mobile MNCs ‘shop’ in the same way. Broadly speaking, there is a continuum between, on the one hand, firms that attempt to select the most appropriate locations à la carte and then attempt to act pretty much in isolation from institutional actors in the host economy, and, on the other, firms where subsidiary managers choose to engage with host institutions in order to construct a more desirable environment for themselves through continuing relationships.

If we take the need for national and local economies to compete for mobile investment as a given, the important question is that of ‘capture’: while most can see the potential for ‘overspill’ effects from foreign direct investment boosting local productivity and creating gains for the locality/region beyond the direct employment effects of FDI, these are not automatic and require governance. Equally, there are clear dangers, that given the asymmetric power relations between foreign investors and sub-national governance actors, that local institutions will, in attempting to maximise FDI, be ‘captured’ by MNCs.

Our international research in this area , funded in the UK by the ESRC , showed a number of different approaches to the local governance of FDI. We examined two national economies with strong sub-national levels of government – Spain and Canada – in both these cases there was a marked internal contrast between a relatively coordinated approach, with attempts at institution-building (Asturias and Quebec, respectively) and a much more free-market approach (Madrid and Ontario). Ireland, something of an outlier due to its dependence on the foreign-owned export sector, has maintained a largely national, coordinated network approach to FDI. Finally, the UK, and particularly England, has moved from a Blairite experiment in nationally-driven attempts to use Regional Development Agencies to correct market failures, to a much more squarely neo-liberal approach.

It is difficult to quantify which of these approaches is the most successful. This is particularly the case if we see the goal as optimising the local benefits to FDI, which is not necessarily the same thing as maximising the amount of FDI. However, one might tentatively conclude that those governance systems that have benefitted from a degree of political consensus that the process of FDI attraction and retention require substantive governance (Asturias, Ireland, and Quebec) seem to have more chance of potentially creating positive outcomes than those where this is not the case. In particular, the institutional destruction in England, justified by the requirement for deficit-reduction, has occasioned substantial losses of institutional memory at sub-national levels, and has left a situation where even directors of some large foreign MNCs lamented institutional loss. Given current pressures at all levels of the state to cut costs, it is important not to lose sight of the need for what will remain high-cost host economies to create resources. This cannot happen in an institutional vacuum; despite talk of a “Northern Powerhouse”, the government’s recent lack of action to defend the steel sector shows little sign of any real interest in industrial policy at national or regional levels.

Finally, social actors and policy makers have to be aware that any analysis of FDI, local embeddedness and potential contributions to local economies needs to take a very granular approach. That is, it needs to ask, on a unit by unit basis, why the firm is in a particular location, whether it is doing something there that is unique and/or is local resource dependent, whether there are sister plants elsewhere in the world, and what the real degree of potential mobility of the production/service provision of particular units is. This knowledge, which trade unions often have privileged access to, is a necessary pre-condition to policymakers making sensible choices in this area

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Phil Almond is Professor of Comparative Employment Relations at DMU. His research interests are in the theoretical and practical challenges of the governance of work and employment in contemporary global capitalism, with specific expertise on the social relations of multinationals.

A more detailed account of the above research can be found here. Alongside the project’s researchers, he gratefully acknowledges the support of the ESRC, a Spanish Research, Development and Innovation grant, and of CRIMT.