Ch. 7

The Location of Factories as a Strategic Process

The Enterprise Approach Galbraith’s modern industrial economy Corporate strategy and structure Landscapes of countervailing power Interdependent pricing behaviour Sources of countervailing power

Content

Corporate Strategy: Bargaining over Location

Bargaining Between MNCs and Nation States

Bargaining Between MNCs and Labour Industrial Location Policy – National &

Regional Levels Issues with Assessing Incentives Conclusion

Content

‘Factory location is explained in terms of thefactors that influence strategy formulation’

The factors that influence strategy are:‘internal’ long-term motivations, accumulated expertise and established corportate structures and the ‘external’ strategies and structures of other business organizations, especially rivals and other instituatioanl forms and interest groups (labour organizations and governments)

‘The Enterprise Approach’

Definition: professional, specialized management bureaucracies, who have power to influence the behaviour and performance of other agents.

Galbraith’s modern industrial economy(1967):

invisible’ hands of the Neoclassical theory are replaced by

technostructures and by the very visible strategies and structures of large corporations

Technostructures

Corporate Strategy: Ansoff (1965)

Corporate Strategies

Internal /External

Horizontal Integration

Horizontal Diversificati

on

Vertical Integration

Conglomerate

ForwardsBackwar

ds

Offensive = leading product innovators Defensive = ‘catch up’ with leaders Imitative = copying successful technology Dependent =purchase ‘off the shelf’ technology Traditional =rely on ‘old’ technology

Strategies of Ansoff and Freeman are not mutually exclusive

Corporate strategy: Freeman (1982)

‘Structure follows strategy’:

Chandler (1963)

Entrepeneurs

Entrepreneurs and managers

Functional decentralizatio

n

Prod.line decentralizatio

n

Geographic decentralization

1)Locational Overlap model◦ ◦ 1,2,3 Rival Firms

Head Office

Branch Plant

Core Region Peripheral Regions

Landscapes of countervailing power

1

2

3 3

1

2

3

2

1

3

2

1

2)Exchange of threats model

Core Region Core Region

Landscapes of countervailing power cont.

21

2

12

1

3)Collusion: the spatial monopoly model

Regions Regions

Landscapes of countervailing power cont.

1 2 32 31

Basing-point pricing system: designated basing point price plus transportation charges from the basing points, regardless of where the good is actually produced

Price fixing in a regional market: producers will secretly collude to fix prices in particular markets even if this is illegal

Administered prices: prices charged in large corporations are administered and subject to the policies of particular corporations. Within the internal flow of goods and services, large firms have some discretion as to pricing and this discretion can have important implications for location

Interdependent pricing behaviour in countervailing landscapes

Rivals Governments Labour Consumer groups Environmental groups

sources of countervailing power

Location a strategic investment decision Spatial mobility of ‘new’ capital Wider location options – not geographically

fixed bargaining power

◦ Between MNCs and Nation States◦ Between MNCs and Labour Relations

Corporate Strategy:Bargaining Over Location

MNCs are increasingly powerful and influential◦ opinions differ!

Yes, increasingly able to influence nation states No, nation states remain influential Few MNCs are truly stateless

Bargaining between MNCs and Nation States

Korbin: 3 Dimensions of Bargaining Power◦ Relative demand for each other’s resources◦ Constraints on organization that affect the

translation of bargaining power into control over outcomes

◦ Bargaining ability

Other factors:◦ Past experiences(MNC can better predict impact of investments on the local

economy)

Bargaining between MNCs and Nation States

Constraints

Degree of Competition and Concentration in the industry

Extent to which HC government is important customer or distributor

Power Resources

Technological complexity, intensity, rate of change

Managerial complexity

Capital

Access to markets or export potential

Advertising intensity and product differentiation

Employment

Power Resources

Access to domestic market

Control of natural resources

Availability of appropriate labour

Availability of suitable infrastructure

Political climate

Government incentives

Constraints

Degree of global integration in industry

Degree of competition among countries for the investment

Balance of payments or debt problems

Dependence of the economy on FDI

Political instability or uncertainty

Multinational Corporations

Negotiating Ability of MNC and

HC

Change over time in relative bargaining strengthRelative power of MNC vis-à-vis HC increases

Relative power of HC vis-à-vis MNC increases

Host Country

Bargaining power for Home Country Governments (HCGs) increases once MNCs invest◦ MNC has fixed investments in HC◦ HC knows more about MNC operations

Bargaining between MNCs and Nation States

Focus on specific investment proposals

Possible conflict areas:

◦ minimum requirements: Taxation, profit repatriation, local benefits, etc.

◦ HCGs prefer a specific area (‘economic zones’) MNC can always choose not invest, or find

alternatives

Bargaining between MNCs and Nation States

New locations – new labour to develop◦ Threaten current factories and existing unions◦ Existing work practices are difficult to change◦ Hire workers with desirable characteristics

Product life cycle model (Clark)◦ Labour is not just a cost component, also a determinant

of how work is organised – the employment relation.

◦ Firms spatially separate labour groups, in order to control them: scientists, engineers, and skilled labour involved in R&D

(costly to replace) unskilled manual labour involved in production

(less costly to replace unless concentrated in one location and unionized)

Bargaining between MNCs and Labour

MNCs may want to enhance worker participation and responsibility – and not just control.

Threat of Closure:◦ Alters bargaining position, create new alliances◦ May encourage changing the existing employment

relation.◦ Concessions granted by unions may not save the

factory.

MNC bargaining processes are worldwide◦ Negotiations at one location are compared to others

Bargaining between MNCs and Labour

Regional policy which offers incentives to locate in designated regions:◦ A good social bargain by promoting regional

economic equality and political social stability National & social cohesion

◦ Policy may generate positive externalities (new site) Absorption of unemployed Better use of existing social and economic infrastructure

◦ And decrease negative externalities (old site) Inflation, pollution, congestion

(But it really depends on the country!)

Industrial Location Policy- National Level

Regional or community policy which offers industrial incentives to firms◦ Tax relief, grants, financing

A bad idea:◦ Competition between regions and communities is

a zero-sum game Firms can ‘play off’ one region against another

A good idea:◦ Firm mobility is limited◦ Principles of competition can also apply to

communities

Industrial Location Policy- Regional Level

◦ Measure local efficacy of incentives through incrementality: Effectiveness of incentives in:

changing investment preferences (locational incrementality) changing timing, scale, and financing of investments (non-

locational incrementality)

◦ Difficult to measure a priori What incentives are needed to make them effective? (And

how much must be offered?)

◦ and ex post Significant Benefit of the actual incremental effects

generated: Have the incentives actually worked?

How do you compare with an unknown alternative? What are appropriate requirements/targets for subsequent

benefits? e.g. a 50% job increase or 60%?

Issues with Assessing Incentives

Firms can pursue different strategies Countervailing powers in the external

environment of the company have a big influence on firm location

Location decision is not just a simple matter of cost, it also involves bargaining between MNC, region, government, community, labour, etc.

The bargaining process is complex and multifaceted, in particular with regard to bargaining power, incentives, and benefits.

Conclusion