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Ch. 7
The Location of Factories as a Strategic Process
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The Enterprise Approach Galbraith’s modern industrial economy Corporate strategy and structure Landscapes of countervailing power Interdependent pricing behaviour Sources of countervailing power
Content
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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
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‘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’
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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
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Corporate Strategy: Ansoff (1965)
Corporate Strategies
Internal /External
Horizontal Integration
Horizontal Diversificati
on
Vertical Integration
Conglomerate
ForwardsBackwar
ds
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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)
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‘Structure follows strategy’:
Chandler (1963)
Entrepeneurs
Entrepreneurs and managers
Functional decentralizatio
n
Prod.line decentralizatio
n
Geographic decentralization
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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
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2)Exchange of threats model
Core Region Core Region
Landscapes of countervailing power cont.
21
2
12
1
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3)Collusion: the spatial monopoly model
Regions Regions
Landscapes of countervailing power cont.
1 2 32 31
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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
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Rivals Governments Labour Consumer groups Environmental groups
sources of countervailing power
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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◦ 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
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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