Corporate Strategy: Bargaining Over Location

Ch. 7

The Location of Factories as a Strategic ProcessWelcome everyone, Jesper and I will explain today chapter 7 to you.

1The Enterprise ApproachGalbraiths modern industrial economyCorporate strategy and structureLandscapes of countervailing powerInterdependent pricing behaviourSources of countervailing power

Content2Corporate Strategy: Bargaining over LocationBargaining Between MNCs and Nation StatesBargaining Between MNCs and LabourIndustrial Location Policy National & Regional LevelsIssues with Assessing IncentivesConclusion

Content3Factory 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-In this approach, factory location is explained in terms of the factors that influence strategy formulation.

-Factors that influence the strategy and thus the location of factories can be internal and external. Internal factors can be long-term motivations, accumulated expertise and established corportate structures of the company. External influences can be the strategies and structures of other business organizations, especially rivals and other instituational forms and interest groups, notably labour organizations and governments.

4Definition: professional, specialized management bureaucracies, who have power to influence the behaviour and performance of other agents.

Galbraiths modern industrial economy(1967):invisible hands of the Neoclassical theory are replaced by technostructures and by the very visible strategies and structures of large corporationsTechnostructures-MNCs are governed by technostructures which means: professional, specialized management bureaucracies, who have power to influence the behaviour and performance of other agents. but although these technostructures have so much power, they are constrained by countervailing powers of equally large rivals, labour, governments and increasingly environmental groups

-Galbraith says that: Neoclassical theory represents conventional wisdom but not contemporary wisdom.-In Galbraiths modern industrial economy invisible hands of the Neoclassical theory are replaced by technostructures and by the very visible strategies and structures of large corporations. -This idea of Galbraith that economic agents have power is a more radical concept of the firm, the environment and their respective relations than what the neoclassical and behavioural location theory says.

5Corporate Strategy: Ansoff (1965)Corporate StrategiesInternal /ExternalHorizontal IntegrationHorizontal DiversificationVertical IntegrationConglomerateForwardsBackwards-Firms can pursue a range of goals. Today,the desire for growth is deep-seated goal, So a location is chosen with respect to the strategic goals of the company.

-Each strategy can be done by internal or external growth which means:internal: investment in new plant and equipmentexternal: acquisition of existing plant and equipment

-Ansoff (1965) the range of corporate strategies firms can pursue is extremely wide:-vertical integration = can be Backwards and Forwards which means that the firms expands to internalize inputs and/or markets in their company. (internal + external growth)-horizontal integration = expansion of existing products to new markets (internal + external growth)-horizontal diversification = entry of new products in the same markets-conglomerate growth = (simultaneous diversification of) new products, markets and technology (mainly external growth) achieve superior fin. Performance by moving funds from declining to growing businesses rapidly not really used anymore

6Offensive = leading product innovatorsDefensive = catch up with leadersImitative = copying successful technologyDependent =purchase off the shelf technologyTraditional =rely on old technology

Strategies of Ansoff and Freeman are not mutually exclusive

Corporate strategy: Freeman (1982)-Freeman (1982) distinguishes strategy in terms of technological innovativeness:

Technologically offensive = firms on leading edge of industrial R&D, leading product innovatorsTechnologically defensive = also invest in large R&D in an effort to catch up with the leadersTechnological imitation = firms copying the successful technology developed by others dependent = firms purchase off the shelf or lease mature technology which they adapt to local circumstancestraditional = firms rely on technology that has not changed for at least one Kondratieff cycle.

7 Structure follows strategy: Chandler (1963)EntrepeneursEntrepreneurs and managersFunctional decentralizationProd.line decentralizationGeographic decentralization-You can say that corporate strategies define corporate structures but in practice, they are closely interlinked because strategies emerge from structures but then strategies also modify the structures.

-Chandler (1963) says that corporate structures are adapted following the implementation of corporate strategies: In an Idealized form: Fig. 7.2As firms grow, entrepreneurial functions are decentralized and bureaucratized as individual entrepreneurs are progressively replaced by:-groups of specialized managers with supporting departments-divisions based on functions-divisions based on functions and product lines-divisions based on functions, product lines and geographic spheres of operation

In the US particular emphasis has been placed on the hierarchical multi-divisional form of organization.

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

Head Office Branch Plant

Core Region Peripheral Regions

Landscapes of countervailing power123312321321-In a neoclassical landscape populated by numerous small firms, Economic behaviour is regulated by competitive forces and the invisible hand butIn landscapes of countervailing powers the big businesses dominate and their behaviour is interdependent. Thus, in countervailing landscapes dominated by a few big firms, strategies implemented by one firm, inevitably draws reactions from rivals

Within Oligopolies, interdependent corporate investment strategies can range from competitive to collusive. 1)Locational Overlap Model: In a competitive situation, equally large rivals may be encouraged to pursue locationally overlapping branch plant investments in order to gain a share of each market fig. 7.3 (a) > studies have shown that corporate investment strategies move in a geographically parallel manner.

92)Exchange of threats model

Core Region Core RegionLandscapes of countervailing power cont.212121

2)Exchange of threats thesis: Firms in the same industries, but based in different core countries, establish branch plants in the other country Fig. 7.3 (b) this occurs because the leading firms in both countries see foreign-owned companies establishing branch plants in their home market and respond to this by establishing branch plants in the invading firms home markets.

103)Collusion: the spatial monopoly model

Regions Regions

Landscapes of countervailing power cont.123231

3)Collusion: the spatial monopoly model: -Collusion can take the form of shared participation in which supposed rivals agree to invest in a region only if they do so together.-Most obvious examples of spatial collusion occur when firms agree to carve up markets among themselves to create market cartels and regional monopolies Fig. 7.3 (c)

11Basing-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 locationInterdependent pricing behaviour in countervailing landscapesIn landscapes of countervailing power, the price behaviour of firms may be interdependent and organized by or within dominant companies as well in various ways Fig. 7.4-Basing-point pricing system: price charged to a customer is the price of the good at the designated basing point plus transportation charges from the basing points, regardless of where the good is actually produced7.4 (a)

-Price fixing in a regional market: producers will secretly collude to fix prices in particular markets even if this is illegal 7.4 (b)

-Administered prices: significant levels of transactions in todays economies occur within large corporations. The prices charged 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.12RivalsGovernmentsLabourConsumer groupsEnvironmental groups

sources of countervailing powerCorporate power is not only constrained by rivals but also by the strategies of:-governments: both support and regulate business and mediate among a wider range of social interests.

-labour: at international and national scales there are significant geographies of labour power. Management-labour relations have evolved on different lines

-consumer groups

-environmental groups: Environmental opposition increased Because there has been growing social concern over environmental values but in every country/region environmental regulation of and opposition to industrial development is different!!!!!

In the 1990s, environmental groups came up and have a big power nowadays who mount increasingly effective campaigns against business behaviour that destroys environmental values.

13Location a strategic investment decisionSpatial mobility of new capitalWider location options not geographically fixed bargaining powerBetween MNCs and Nation StatesBetween MNCs and Labour RelationsCorporate Strategy:Bargaining Over Location14MNCs are increasingly powerful and influentialopinions differ!Yes, increasingly able to influence nation statesNo, nation states remain influentialFew MNCs are truly stateless

Bargaining between MNCs and Nation States15Korbin: 3 Dimensions of Bargaining PowerRelative demand for each others resourcesConstraints on organization that affect the translation of bargaining power into control over outcomesBargaining ability

Other factors:Past experiences(MNC can better predict impact of investments on the local economy)Bargaining between MNCs and Nation States16Constraints

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

EmploymentPower Resources

Access to domestic market

Control of natural resources

Availability of appropriate labour

Availability of suitable infrastructure

Political climate

Government incentivesConstraints

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 uncertaintyMultinational CorporationsNegotiating Ability of MNC and HCChange over time in relative bargaining strengthRelative power of MNC vis--vis HC increasesRelative power of HC vis--vis MNC increasesHost Country17Bargaining power for Home Country Governments (HCGs) increases once MNCs investMNC has fixed investments in HCHC knows more about MNC operationsBargaining between MNCs and Nation States18Focus 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 alternativesBargaining between MNCs and Nation States19New locations new labour to developThreaten current factories and existing unionsExisting work practices are difficult to changeHire 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 Labour20MNCs may want to enhance worker participation and responsibility and not just control.

Threat of Closure:Alters bargaining position, create new alliancesMay encourage changing the existing employment relation.Concessions granted by unions may not save the factory.

MNC bargaining processes are worldwideNegotiations at one location are compared to others

Bargaining between MNCs and Labour21Regional policy which offers incentives to locate in designated regions:A good social bargain by promoting regional economic equality and political social stabilityNational & social cohesion

Policy may generate positive externalities (new site)Absorption of unemployedBetter 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 Level22Regional or community policy which offers industrial incentives to firmsTax relief, grants, financing

A bad idea:Competition between regions and communities is a zero-sum gameFirms can play off one region against anotherA good idea:Firm mobility is limitedPrinciples of competition can also apply to communitiesIndustrial Location Policy- Regional Level23Measure 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 postSignificant 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 Incentives24Firms can pursue different strategiesCountervailing 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.

Conclusion25