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Ch . 7 The Location of Factories as a Strategic Process

Ch . 7 The Location of Factories as a Strategic Process. Content. 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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Ch . 7 The Location of Factories as a Strategic Process

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  1. Ch. 7The Location of Factories as a Strategic Process

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

  3. 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

  4. ‘The Enterprise Approach’ ‘Factorylocation is explained in terms of the factors thatinfluencestrategyformulation’ The factors that influence strategy are: ‘internal’ long-termmotivations, accumulated expertise and establishedcorportatestructures and the ‘external’ strategies and structures of other business organizations, especiallyrivals and otherinstituatioanlforms and interest groups (labour organizations and governments)

  5. Technostructures 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

  6. Corporate Strategy: Ansoff (1965) Corporate Strategies Internal / External Horizontal Integration Horizontal Diversification Vertical Integration Conglomerate Forwards Backwards

  7. Corporate strategy: Freeman (1982) • 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

  8. ‘Structure follows strategy’: Chandler (1963) Geographic decentralization Prod.line decentralization Functional decentralization Entrepreneurs and managers Entrepeneurs

  9. Landscapes of countervailing power 1)Locational Overlap model • 1,2,3 Rival Firms • Head Office Branch Plant Core Region Peripheral Regions 1 2 1 1 2 1 2 2 3 3 3 3

  10. Landscapes of countervailing power cont. 2)Exchange of threats model Core Region Core Region 2 1 1 2 2 1

  11. Landscapes of countervailing power cont. 3)Collusion: the spatial monopoly model Regions Regions 1 2 3 1 2 3

  12. Interdependent pricing behaviour in countervailing landscapes • 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

  13. sources of countervailing power • Rivals • Governments • Labour • Consumer groups • Environmental groups

  14. Corporate Strategy:Bargaining Over Location • 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

  15. Bargaining between MNCs and Nation States • 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

  16. 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)

  17. Multinational Corporations Host Country 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 Constraints Degree of Competition and Concentration in the industry Extent to which HC government is important customer or distributor Negotiating Ability of MNC and HC Change over time in relative bargaining strength Relative power of HC vis-à-vis MNC increases Relative power of MNC vis-à-vis HC increases

  18. Bargaining between MNCs and Nation States • Bargaining power for Home Country Governments (HCGs) increases once MNCs invest • MNC has fixed investments in HC • HC knows more about MNC operations

  19. 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

  20. Bargaining between MNCs and Labour • 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)

  21. 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

  22. Industrial Location Policy - National Level • 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!)

  23. Industrial Location Policy - Regional 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

  24. Issues with Assessing Incentives • Measure local efficacy of incentives through incrementality: • Effectiveness of incentives in: • changing investment preferences (locationalincrementality) • changing timing, scale, and financing of investments (non-locationalincrementality) • 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%?

  25. Conclusion • Firmscanpursue different strategies • Countervailingpowers in the external environment of the company have a big influenceonfirmlocation • 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.

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