Chapter 9Industrial Relations

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Chapter ObjectivesDiscuss key issues in industrial relations and the policies and practices of multinationals.Examine the potential constraints that trade unions may have on multinationals.Outline key concerns for trade unions.Discuss recent trends and issues in the global workforce context.Discuss the formation of regional economic zones such as the European Union.The focus of the preceding chapters has been on managing and supporting international assignments, post-assignment and the issues in subsidiary operations. In this chapter we:

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IntroductionCross-cultural difference in industrial relations (IR) and collective bargaining The conceptLevel of negotiationsObjectivesIdeologyStructuresRules and regulationsCross-cultural differences also emerge as to the enforceability of collective agreements.(cont.)

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Introduction (cont.)Several factors may underlie the historical differences among nations:Mode of technology and industrial organization at critical stages of union developmentMethods of union regulation by governmentIdeological divisions within the trade union movementInfluence of religious organizations on trade union developmentManagerial strategies for labor relations in large corporations.

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Union StructuresUnion structures differ considerably among countries, e.g. Industrial unions Represent all grades of employees in an industry;Craft unions Based on skilled occupational groupings across industries; Conglomerate unions Represent members in more than one industry; General unions open to almost all employees in a given country.IR policies must be flexible enough in order to adapt to local requirements.

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Trade Union Structures in Leading Western Industrial Societies

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Key Issues in International Industrial RelationsNational differences in economic, political and legal systems produce markedly different IR systems across countriesMultinationals generally delegate the management of IR to their foreign subsidiaries. However, a policy of decentralization should not keep corporate headquarters from exercising some coordination over IR strategy.Generally, corporate headquarters will become involved in or oversee labor agreements made by foreign subsidiaries because these agreements may affect the international plans of the firm and/or create precedents for negotiations in other countries.

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Factors Influencing International Industrial RelationsDegree of inter-subsidiary production integrationNationality of ownership of the subsidiaryIHR management approachMNE prior experience in industrial relationsSubsidiary characteristicsCharacteristics of the home product marketManagement attitudes towards unions

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Degree of Inter-subsidiary Production IntegrationHigh degree of integration was found to be the most important factor leading to the centralization of the IR function within the firms studied.Industrial relations throughout a system become of direct importance to corporate headquarters when transnational sourcing patterns have been developed, that is, when a subsidiary in one country relies on another foreign subsidiary as a source of components or as a user of its output.In this context, a coordinated industrial relations policy is one of the key factors in a successful global production strategy.

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Nationality of Ownership of the SubsidiaryUS firms tend to exercise greater centralized control over labor relations than do British or other European firms.US firms tend to place greater emphasis on formal management controls and a close reporting system (particularly within the area of financial control) to ensure that planning targets are met.Foreign-owned multinationals in Britain prefer single-employer bargaining (rather than involving an employer association), and are more likely than British firms to assert managerial prerogative on matters of labor utilization.US-owned subsidiaries are much more centralized in labor relations decision making than the British-owned, attributed to:More integrated nature of US firmsGreater divergence between British and US labor relations systems than between British and other European systems, andMore ethnocentric managerial style of US firms

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IHR Management ApproachAn ethnocentric predisposition is more likely to be associated with various forms of industrial relations conflict.Conversely, more geocentric firms will bear more influence on host-country industrial relations systems, owing to their greater propensity to participate in local events.

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Prior Experience in Industrial RelationsEuropean firms tend to deal with industrial unions at industry level (frequently via employer associations) rather than at the firm level. The opposite is more typical for U.S. firmsIn the U.S., employer associations have not played a key role in the industrial relations system, and firm-based industrial relations policies are the norm.

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Subsidiary CharacteristicsSubsidiaries formed through acquisition of well-established indigenous firms tend to be given much more autonomy over industrial relations than are greenfield sites. Greater intervention would be expected when the subsidiary is of key strategic importance to the firm and the subsidiary is young. Where the parent firm is a significant source of operating or investment funds for the subsidiary a subsidiary is more dependent on headquarters for resources there will tend to be increased corporate involvement in industrial relations and human resource management.Poor subsidiary performance tends to be accompanied by increased corporate involvement in industrial relations.

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Characteristics of the Home Product MarketLack of a large home market is a strong incentive to adapt to host-country institutions and norms. If domestic sales are large relative to overseas operations (as is the case with many US firms), it is more likely that overseas operations will be regarded as an extension of domestic operations. For European firms, international operations are more like to represent the major part of their business. Since the implementation of the Single European Market, there has been growth in large European-scale companies (formed via acquisition or joint ventures) that centralize management organization and strategic decision-making. However, processes of operational decentralization with regard to industrial relations are also evident.

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Management Attitudes towards UnionsKnowledge of management attitudes or ideology concerning unions provides a more complete explanation of multinational industrial relations behavior than relying solely on a rational economic model.Competitive/confrontational versus cooperativeCodeterminationWorks councilUnion density in western industrial societiesDenmark has the highest level of union membershipU.S. has the second lowestFrance has the lowest in the western world.

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Industrial Disputes and Strike PronenessHamill examined strike-proneness of multinational subsidiaries and indigenous firms in Britain across three industries. Strike proneness was measured via three variables:Strike frequencyStrike sizeStrike durationThere was no difference across the two groups of firms with regard to strike frequency.But multinational subsidiaries experienced larger and longer strikes than local firms. Foreign-owned firms may be under less financial pressure to settle a strike quickly than local firms possibly because they can switch production out of the country.

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Trade Unions and International Industrial RelationsTrade unions may limit the strategic choices of multinationals in three ways: By influencing wage levels to the extent that cost structures may become uncompetitive; By constraining the ability of multinationals to vary employment levels at will; andBy hindering or preventing global integration of the operations of multinationals.

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Influencing Wage LevelsAlthough the importance of labor costs relative to other costs is decreasing, labor costs still play an important part in determining cost competitiveness in most industries.Multinationals that fail to manage their wage levels successfully will suffer labor cost disadvantages that may narrow their strategic options.

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Constraining the Ability to Vary Employment Levels at WillIn Western Europe, Japan and Australia, the inability of firms to vary employment levels at will may be a more serious problem than wage levels. Many countries now have legislation that limits considerably the ability of firms to carry out plant closure, redundancy or layoff programs unless it can be shown that structural conditions make these employment losses unavoidable.Plant closure or redundancy legislation in many countries frequently specifies that firms must compensate redundant employees through specified formulae such as 2 weeks pay for each year of service. In many countries, payments for involuntary terminations are substantial, especially in comparison with those in the USA.

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Constraining the Ability to Vary Employment Levels at Will (cont.)Trade unions may influence this process in two ways: Lobbying their own national governments to introduce redundancy legislation, andEncouraging regulation of multinationals by international organizations such as the Organization for Economic Cooperation and Development (OECD).Multinational managers who do not take these restrictions into account in their strategic planning may well find their options severely limited. Recent evidence shows that multinationals are beginning to consider the ability to dismiss employees to be one of the priorities when making investment location decisions.

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Hindering Global Integration of MNE OperationsMany multinationals make a conscious decision not to integrate and rationalize their operations to the most efficient degree, because to do so could cause industrial and political problems. One observer of the world auto industry suggested that car manufacturers were sub-optimizing their manufacturing networks partly to placate trade unions and partly to provide redundancy in sources to prevent localized social strife from paralysing their network, e.g. General Motors as an example of this sub-optimization of integration. GM was alleged in the early 1980s to have undertaken substantial investments in Germany at the demand of the German metalworkers union (one of the largest industrial unions in the Western world) in order to foster good industrial relations in Germany.

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Trade Unions Response to MultinationalsSeeing the growth of multinationals as a threat to the bargaining power of labor because of the considerable power and influence of large multinational firms.Multinationals are not uniformly anti-union, but their potential lobbying power and flexibility across national borders creates difficulties for employees and trade unions to develop countervailing power. There are several ways in which multinationals have an impact upon trade union and employee interests.

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Seven Characteristics as the Source of Trade Union Concern about MultinationalsFormidable financial resourcesAlternative sources of supplyThe ability to move production facilities to other countriesA remote locus of authorityProduction facilities in many industriesSuperior knowledge and expertise in industrial relationsThe capacity to stage an investment strike, whereby the multinational refuses to invest any additional funds in a plant, thus ensuring that the plant will become obsolete and economically non-competitive.

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The Response of Trade Unions to MultinationalsThe response of labor unions to multinationals has been threefold: Form international trade secretariats (ITSs)Lobby for restrictive national legislation, andTry to achieve regulation of multinationals by international organizations.International trade secretariats (ITSs).There are 15 ITSs, which function as loose confederations to provide worldwide links for the national unions in a particular trade or industry (e.g. metals, transport and chemicals).The secretariats have mainly operated to facilitate the exchange of information.

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The Goal of the ITSsOne of the fastest growing ITSs is European Regional Organization of the International Federation of Commercial, Clerical, Professional and Technical Employees (Euro-FIET), which is focused on the service sector.The long-term goal of ITSs is to achieve transnational bargaining through a similar program, involving:Research and informationCalling company conferencesEstablishing company councilsCompany-wide unionmanagement discussions, andCoordinated bargaining

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Limited Success of ITSsOverall, the ITSs have limited success, due to several reasons:Generally good wages and working conditions offered by multinationalsStrong resistance from multinational firm managementConflicts within the labor movement, andDiffering laws and customs in the industrial relations field

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Lobbying for Restrictive National Legislation.On a political level, trade unions have for many years lobbied for restrictive national legislation in the U.S. and Europe. The motivation for trade unions to pursue restrictive national legislation is based on a desire to prevent the export of jobs via multinational investment policies.

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Regulation of Multinationals by International OrganizationsAttempts by trade unions to exert influence over multinationals via international organizations have met with some success. The International Labor Organization ILO has identified a number of workplace-related principles that should be respected by all nations: Freedom of associationThe right to organize and collectively bargainAbolition of forced labor, and Non-discrimination in employment

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Regional Integration: the EU Social DimensionRegional integration such as the development of the EU has brought significant implications for industrial relations. In the Treaty of Rome (1957), some consideration was given to social policy issues related to the creation of the European Community. The terms social policy or social dimension are used to cover a number of issues, such as: labor law and working conditions, Aspects of employment and vocational trainingSocial security and pensions.The social dimension aims to achieve a large labor market by eliminating the barriers that restrict the freedom of movement and the right of domicile within the SEM.

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The EU DirectoratesThe EU has introduced a range of Directives related to the social dimension. The most contentious Directive is the Seventh (Vredeling), which requirement of disclosure of company information to unions.Strong opposition led by the then conservative British government and employer representatives argued that employee involvement in consultation and decision-making should be voluntary. The European Works Councils (EWC) Directive was approved on 22 September 1994 and implemented 2 years later.

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Implications from the EUThe EU aims to establish minimal standards for social conditions that will safeguard the fundamental rights of workers.Obviously, all firms operating in the EU need to become familiar with EU Directives and keep abreast of changes. While harmonization of labor laws can be seen as the ultimate objective, the notion of a European social community does not mean a unification of all social conditions and benefits or, for that matter, of all social systems.

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Pan-European PensionsThe EU Council of Ministers has approved the pension funds Directive that sets standards for the prudential supervision of pension plans in the EU. Member States will need to implement the Directive by the middle of 2005. The Directive covers employer-sponsored, separately funded pension plans. The Directive provides pension funds with a coherent framework to operate within the internal market and allows European companies and citizens the opportunity to benefit from more efficient pan-European pension funds. Once implemented, the Directive will ensure a high level of protection for both members and beneficiaries of pension funds.

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Difficulty in Implementing the EU Social PolicyTaxation differences among Member StatesMany Member countries tax laws do not recognize contributions to foreign pension plans. This creates unfavourable tax circumstances for employees working outside their home countries and contributing to pension plans in their host countries.The issue of social dumpingThe impact of SEM on jobs Member States that have relatively low social security costs would have a competitive edge and that firms would locate in those Member States that have lower labor costs. The counter-alarm was that states with low-cost labor would have to increase their labor costs, to the detriment of their competitiveness.There are two industrial relations issues here: the movement of work from one region to another, and its effect on employment levels; and the need for trade union solidarity to prevent workers in one region from accepting pay cuts to attract investment, at the expense of workers in another region.

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The Impact of the Digital EconomyKnowledge acquisition used by MNEs are an emerging issue in the U.S., where newly trained professionals from overseas replace their trainers (expatriates or domestic workers), e.g. U.S. non-immigrant visa programme particularly the L-1 classification allows companies to transfer workers from overseas offices to the U.S. for as long as 7 years. Importantly, this visa classification allows companies to pay these workers their home-country wage.

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The Digital DivideThe International Labor Organization noted that The digital divide exists not only between societies but within societies. Only 15 per cent of the worlds population (living mostly in industrialized countries) has access to ICT.80 A majority of the worlds population is technologically disconnected. Internet usage is stratified and is much more common among Younger rather than older peopleMen rather than womenUrban rather than rural dwellers, and People with higher levels of education and income.

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Chapter SummaryIn this chapter, we have reviewed and discussed differences in industrial relations across borders, and highlighted the complexity in international IR.Combining recognition of the overt segmentation effects of international business with an understanding of the dynamics of FDI yields the conclusion that general multinational collective bargaining is likely to remain a remote possibility.

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Chapter Summary (cont.)Trade unions should opt for less ambitious strategies in dealing with multinationals, such asStrengthening national union involvement in plant-based and company-based bargainingSupporting research on the vulnerability of selective multinationals, andConsolidatingWith regional economic integrations, it is likely that trade unions and the ILO will pursue these strategies and continue to lobby where possible for the regulation of multinationals via the European Commission and the United Nations.

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