strategy

Linking corporate strategies to employment effects

Context:
Of the many factors linked to international production that influence employment, the strategies of transnational corporations, as ultimately reflected in organizational structures, have a bearing on the quantity, quality and location of jobs world wide. Strategies for organizing the cross-border production of goods and services involve choices about the location of different activities (including functional activities comprising a firm's value-added chain) and the degree of integration among the various entities falling under the governance of the firm. The range of possible strategies with respect to the functional scope of international production has grown over time to include stand-alone, simple-integration and complex-integration strategies.

Stand-alone strategies refer to the establishment of foreign affiliates that largely replicate the parent company, with only limited links ([eg], through ownership, technology) between the parent firm and the affiliate. Stand-alone strategies have been frequently associated with import substitution policies in the host country, under which production by foreign affiliates substitute for imports in relatively protected domestic markets. Simple integration strategies involve the establishment of affiliates, or outsourcing to subcontractors, to perform specific activities abroad, while the most important operations remain based in the home country. Such strategies are generally driven by cost considerations relating to specific inputs, e.g., labour, and are often encouraged by host country policies that promote export-oriented industrialization under a relatively open trade and investment regime.

Complex integration strategies (or integrated international production strategies) refer to the establishment of affiliates to perform a variety of different functions or value-added activities in whatever location is most suitable in terms of its contribution to a firm's entire value-added chain, as well as the close coordination of geographically dispersed affiliates into global production and distribution networks. In this respect, integrated production strategies involve substantial cross-border flows of various production inputs and services within a firm and allow economies of scale, cost savings and greater efficiency for the firm as a whole. In terms of their geographic scope, stand-alone strategies are largely multi-domestic, that is, primarily geared to serving individual host country markets, while simple and complex integration strategies involve the coordination of TNC activities along regional or global lines. The three strategies coexist as alternatives for firms investing abroad, but there is a trend among TNCs in many industries to adopt strategies that involve closer integration of their functional activities.

The different strategies may influence the quantity of employment in different ways. These various effects arise in part through the consequences of the strategies on the firm's overall level of output. But irrespective of how and whether total output and employment are influenced, the strategies are likely to be associated with different patterns of direct and indirect creation or loss of employment. Under stand-alone strategies and market-seeking FDI, a new foreign affiliate may serve a market formerly serviced from the home country through exports. Some production and employment loss in the home country could be one direct result. But if a foreign investment is motivated by high tariffs on the home country's exports, not making the investment could result in an erosion of the firm's overall share in the international market, ultimately with negative consequences for home-country employment in the firm.

Such unpredictable outcomes may arise for many manufacturing firm's. In the services sector, however, FDI may be the only means of serving foreign markets, since many services continue to be non-tradable, although several are becoming less so. For instance, an insurance firm that establishes a foreign affiliate most likely generates no negative consequences as regards its home-country workforce and, indeed, may even boost domestic employment by creating jobs at home that provide services for affiliates abroad. For the host country, a stand-alone affiliate may imply a relatively stable or secure employment, as the motivation for the firm's presence is the country's market, rather than the more fleeting competitive advantage of low labour cost. The indirect consequences of an affiliate's presence, however, are not easily predictable: Has it brought with it such a strong competitive advantage that it causes more sluggish domestic firms to lose market share and jobs ? On the positive side, will the foreign affiliate establish strong relationships with local suppliers and boost indirect employment through this channel ?

The direct impact of a "simple integration" strategy will be somewhat different. Outsourcing of labour-intensive activities to affiliates or associates can involve a decline in home-country employment engaged in low value-added production and an increase in relatively low-skilled employment in the host country. Indirectly, another effect of the same strategy may be to increase higher-value-added employment in the home country or to secure remaining jobs that may have been at risk as rising labour costs reduce a firm's competitive advantage. The direct loss of jobs from outsourced production is thereby offset somewhat; the overall employment effect for the home country depends upon the net balance of jobs lost by the decision to outsource versus those created to service the expansion of international production. For the host country, direct employment creation is the usual result of this form of FDI. Meanwhile, the multiplier (or indirect) effects of establishing a foreign affiliate will vary. The international division of labour that a simple integration strategy engenders probably does not displace existing local capacity (a negative indirect effect), but the degree to which indirect jobs are created by the affiliate's presence could be relatively substantial or quite minimal (as is frequently the case in export-processing zones).

The quality of employment is also determined by corporate strategies. In stand-alone strategies, the major lines of the occupational structure of a parent firm are reproduced in the affiliate; one exception to this pattern of occupational replication, however, is that the highest value-added activities, e.g., research and development, usually remain parent-company functions. Here it may be noted that, while stand-alone strategies tend to occupy an early chronological niche in the overall spread of FDI, it cannot be said that the importance of such strategies has diminished: restrictions to trade and the resulting motivation for "tariff-jumping" investment can be one factor underlying their persistence. More importantly, because of the non-tradability of many services, much FDI in the services sector follows the stand-alone pattern. Service firms have fewer opportunities than industrial firms to split up the production process into segments and move labour-intensive activities to developing countries to take advantage of lower labour costs. That is because many services still cannot be traded at arm's length, but rather have to be produced where and when they are consumed. As a result, foreign service-sector affiliates tend to reproduce abroad the factor proportions used in home countries, including the skill, research and development and capital-intensity levels of their parent firms, with positive implications as regards the quality of employment and the transfer of technology to foreign service affiliates as compared with affiliates in manufacturing. In contrast, in their separation of the locations of production and consumption, simple-integration strategies introduce a complementary hierarchy of occupations across different national locations, that is, they introduce an international division of labour based on specific locational advantages of host countries. If, as is often the case in manufacturing FDI, those advantages relate to low-cost labour, the more skilled and highly paid jobs remain with the parent firm, while lower skilled jobs are organized around the affiliate. However, a suitable combination of higher wages and skills could result in some higher value-added jobs being located in the host country as well. The location of employment also depends on firms' strategies. Foreign direct investment based on stand-alone strategies is generally "market-seeking" and flows largely to the developed and the larger or higher-income developing countries. With some emerging exceptions to be discussed below, services-sector employment within TNCs is more highly concentrated in developed countries, where the largest markets for services are located. Simple integration strategies, on the other hand, lead mainly to "resource-seeking" (including labour-seeking) patterns of FDI that often involve developing countries. The proximity of developing countries to final markets in the developed world is an important locational criterion for some simple-integration strategies - as is clear from the growth of the maauiladora sector in northern Mexico - but it is less important in other industries (e.g., textiles and electronics assembly) or for certain business functions (e.g., data processing).

Whether the issue is the quantity, quality or location of labour, the distinction between inward and outward employment effects becomes less separable and clear. In a simple-integration strategy, by which firms construct a complementary division of work and jobs across borders, inward employment effects (i.e., those in the host country) are appreciably more determined by home-country decisions than in the world of the stand-alone foreign affiliate. The outward employment effects (i.e., those in the home country) of simple-integration strategies are also more debatable than those of stand-alone strategies. In particular, the question of whether simple integration constructs a complementary division of labour across borders or whether, on the contrary, a host-country labour market substitutes for what had been home-country jobs has been a point of controversy (over the issue of the "export of jobs") for the past 25 years.

The need to consider inward and outward effects at one and the same time rises in proportion to the level of integration. It is thus in the emerging model of deep integration that distinctions such as home and host countries, and the various labour-market effects that may attach to these, are least clear-cut. For example, if one of the advantages of deep integration is that TNCs are thereby enabled to gain economies of scale over stand-alone or simple integrated value-adding activities, the most that this might imply for a firm's workforce as a whole is a system-wide reduction in employment. This is because the consolidation of individual business functions in various locations of a firmes integrated system would probably have a rationalizing effect on total firm employment when compared, for example, to the replication of individual activities in a stand-alone strategy. But where, in a firm's system, employment will decline or increase is more difficult to evaluate in terms of the familiar home-versus-host-country distinction. Deep integration implies that the location of value-adding activities is less anchored in that traditional dichotomy. Rather, location (although still in large measure determined by proximity to final markets) has become more responsive to a variety of "created assets", of which employment quality is a key aspect. Since individual value-adding activities might be located anywhere, it no longer seems to make sense to consider the home country as having a particular hold on the firm's highest quality jobs.

As indicated above, the emerging system of integrated international production may be expected to introduce substantial changes in the way in which TNCs influence employment. Obviously, these changes have only just begun, and uncertainty remains as to their magnitude and direction. Nevertheless, recalling the various elements of an integrated strategy, it is plausible to assume that a range of employment effects will result from the major tendencies associated with the new strategies, namely, a fuller or more pronounced separation of production from consumption; a fuller or deeper integration across locations of a firm's value-adding activities; and a greater reliance on "created assets" such as workforce quality and organizational innovation as critical components of the ownership advantages of TNCs.

Subjects:
Employment
Business enterprises
Strategy
Type Classification:
E: Emanations of other strategies