Industrial politics and global production networks: first, don’t make things worse

Phil Almond

(originally published December 14, 2016)

Current debates over the future of the UK’s relations with the EU seem to be taking place with a limited appreciation of how international productive capitalism works in a globalised economy. Some on the Right argue that being outside the single European market is likely to be a catalyst to trade with the rest of the world, without explaining how this might be the case. Some in the Labour Party argue for a ‘hard Brexit’ on protectionist grounds.  Both ignore the complexities of how the international production of goods and services works. It is therefore worth recapping what we know about competition between countries and regions in global production networks, and how this has developed. Our focus here is on Europe and North America, as globalisation processes have somewhat different outcomes in the Global South.

The post-war internationalisation of production was done mainly by industrial firms with fairly integrated production systems. They benefitted from national markets which were protected by tariff and other trade barriers. These firms made monopoly rents on their domestic production. Where labour movements, or political pressures, were strong enough, these translated into rising real wages. To differing extents in different places, states and capitalists often came to support rising real wages, in order to boost demand.

Some of these firms sought to expand production beyond their national borders. This was done for a variety of reasons: to exploit national differences in wage levels, to reduce transportation costs, and to avoid tariffs and other trade barriers by opening branch plants. Branch plants basically reproduced domestic production for a foreign market. They did not generally engage in much R&D or other high value-added activities.

“Branches” continue to exist where product market access requires them to. Walmart, for example, obviously needs to open large stores outside the USA. However, in general, ‘production’, whether of goods or services, is increasingly fragmented. This has been enabled by the growth of economies outside the Global North, the liberalisation of global trade, the building of continental markets in Europe and North America, financial globalisation, and by technological advances.  Fragmentation refers to two things:

– organisational fragmentation – lead firms increasingly outsource large parts of the processes by which they create value. Outsourcing once mainly concerned relatively peripheral parts of firms’ value chains. However in recent years it has extended to previously ‘core’ functions such as manufacturing and R&D.

– geographical fragmentation – firms have become increasingly able to locate their production across a wider range of geographies.  This means they can make very fine-grained decisions about where to perform different elements of their production processes. This geographical fragmentation sometimes takes place within multinationals, and sometimes outside them, in wider production networks.

An example of this can be seen in the travels undergone by just one component, a fuel injector for diesel lorries manufactured by the US-owned component maker Delphi. As the FT’s Peter Campbell writes:

“This part uses steel from Europe which is machined in the UK before going to Germany for special heat treatment. The injector is then assembled at Delphi’s UK plant in Stonehouse, Gloucestershire, before being sold on to truckmakers based in Sweden, France or Germany. If the resulting truck is sold into the UK market, the component or materials used in it will have crossed the Channel five times before the lorry is ever driven by the customer”.

Places – countries, regions, cities and towns – then compete to be the best location for specific activities. This is sometimes on a global basis, but perhaps more often at the level of continents. Different countries, and different regions within countries, may have different advantages. These might include, among other things, cost, light regulation, low tax, but also access to skills, to innovation systems, and access to markets.

Specific places may have well-known forms of advantage in this competition. So for instance Germany is often seen as having advantages in complex manufacturing through its high-quality training system, and relatively participative patterns of work organisation. However, being competitive, whether through ‘high road’ high quality, high wage approaches, or low road, low cost approaches, is not as simple as building competitive forms of labour and other regulation. It is also about continual processes of adaptation, as places continually try to boost their competitiveness by building relations with international firms. For example, in our research into multinationals and regional development, we examined an old industrial region in Spain (Asturias). This had excellent engineering education developed through its long history as a mining region. It was able to repurpose this in order to establish a high-end global R&D centre for a German multinational originally attracted to the region to perform lower-value assembly work. This process involved civil servants, a university, trade unions and various employer organisations.

Such processes of adaptation are necessary because lead firms have the capacity to make fine-grained decisions about the geographical and organisational location of their activities. This means that subsidiary units increasingly compete to exercise functions on an international basis. This is sometimes referred to as ‘mandate competition’. Units which are unsuccessful in these contests face dim prospects in cases where access to markets no longer requires the existence of national ‘branches’. This process also occurs, in a slightly different way, in external firms that the multinational has close links to.

In previous work, we have argued that this results in ‘regime shopping’. In other words, firms play the regulations and fiscal regimes of countries and regions off against each other.  It also leads to ‘resource shopping’. This describes the process of firms seeking places where the most ‘positive’ resource combinations are available for specific tasks.

To be clear, ‘regime shopping’ is clearly problematic.  It puts pressure on wages, on trade unions, and on the tax base of nations. Equally, we may object to vital public services being organised in private hands as a result of liberal regulation.

However, identifying that something about contemporary capitalism has bad consequences is quite a long way from finding a remedy for it. Having researched this subject in Canada, it is very clear that the game of attracting firms to countries and regions is very much dirtier in North America. This is because NAFTA is a much less regulated market for state support of firms than the European Union is. This enables overt competition on the grounds of high-subsidy, anti-union arrangements.

Britain is currently embarking on a process of striking a new round of deals with multinationals. It does so in a context of marked uncertainty about regulation. It is difficult to see how opaque deals such as that apparently reached with Nissan are likely to be more socially progressive than what they replace. Such deals are going to have to be reached with any firm with a loud enough voice.  This is likely to happen quite a lot in the case of a ‘hard Brexit’: from the firms’ perspective, gains from these negotiations simply compensate for the lost advantage of single market access.

Avoiding models of international competition built on worse outcomes for workers and the public has to be an international enterprise. This is, of course, difficult at the best of times. However, global production networks are not about to be abolished. The problems of regime shopping in general will be worsened, not cured, by attempts to build ‘walls’.

Some of the arguments here are developed in Almond, Gonzalez, Lavelle and Murray, ‘The Local in the Global: Regions, Employment Systems and Multinationals’, Industrial Relations Journaland in Almond and Gonzalez (2014) ‘Geography and International HRM’ in the Routledge Companion to International Human Resource Management.