|
Global production and local jobs:
new perspectives on enterprise networks, employment and local development policy | International Workshop (Geneva 9-10 March 1998) |
| Global Production and Local Jobs: issues for discussion |
To create and retain good jobs is a central objective of industrial and employment policies at the local, national and international levels. Under the impact of globalization, the context in which such goal is to be achieved has undergone important changes, generating new challenges for policy-makers aiming to promote sustainable growth and job creation.
The development of transnational networks of economic activities generates unprecedented possibilities for accessing new markets and building new capabilities. |
One main challenge is to use globalization as a lever for local development, by helping local firms and workers to take advantage of the opportunities opened up by the global economy. This derives from awareness that the development of transnational networks of economic activities generates unprecedented possibilities for accessing new markets and resources, acquiring new skills and capabilities, and developing international competitive advantage.
Another challenge is to contain the social and economic imbalances resulting from globalization, by spreading the costs and benefits of global integration throughout local industries and communities. This responds to the growing concern that global connections might provide an unstable basis for local growth and development, and contribute to divide and fragment local industries and communities by marginalizing those actors that fail to develop strong global linkages.
Meeting such challenges is likely to involve important transformations in policy-making. It requires to identify the driving forces that shape the development of global networks of economic activities, to assess the opportunities and constraints that these networks create for local firms and institutions, and to devise innovative responses in promoting economic
But globalization might provide an unstable basis for local growth and development, and contribute to divide and fragment local industries and communities |
development. The aim of this paper is to contribute to elaborate new perspectives for policy-makers, by highlighting a number of central themes and issues relating to global production networks and local development.
The first section will set the scene by uncovering the organizational processes underlying globalization in a variety of industries including textiles and clothing, electronics, and automobiles. It will emphasize the emergence of network forms of organization by which firms respond to changes in their competitive environment, and it will explore how global and local dynamics interact in these networks. Focusing on highly internationalized manufacturing industries will serve to identify key dimensions of globalization, keeping in mind that global networks might be less prominent or present distinctive shapes in other industries.
The second section will draw attention to specific issues regarding local industrial upgrading, employment and policy-making. They include: (1) ways in which local firms can not only enter global networks but, more importantly, build up network positions that allow them to achieve sustainable competitive advantage; (2) ways in which both the quantity and quality of local jobs can be improved in that process; and (3) strategies by which local policy-makers can support a sustainable integration of local firms and workers within global networks.
I. Changing patterns of production within global networks
During the decades following World War II, industrialized countries enjoyed a period of exceptional economic growth and social peace, while developing countries made on average historically unprecedented economic and industrial progress (Singh, 1994). Despite a strong expansion of world trade, such developments essentially took place within the context of domestically organized industries. The range of complementary activities involved in designing, producing and marketing industrial outputs was predominantly performed by vertically integrated firms operating within national boundaries. Multinationals expanded their activities by reproducing
In global production networks, activities performed in various locations are closely coordinated through a diverse array of intrafirm and interfirm arrangements. |
this mode of industrial organization through their foreign direct investments (FDI), establishing "stand-alone" affiliates or "miniature replica" of the parent firm in foreign countries (Campbell, 1993). Likewise, the second category of international operations, arms' length sales transactions, involved little functional interdependencies between firms (Oman, 1989).
The 1970s and following decades witnessed a number of structural transformations affecting the organization of industrial activities both within and between firms. On the international scene, transactions increased tremendously: the growth of world trade has been superior to that of world output, and since 1980s the growth of FDI has far exceeded trade expansion (Campbell, 1997). Such increase has been accompanied by substantial changes in the nature of international operations, including (1) a rise in what Oman (1989) called "new forms of international investment" based on a variety of modalities such as joint-ventures, licensing, franchising and subcontracting, as well as (2) a growing functional integration of international activities (Dicken, 1992; UNCTAD, 1993, 1995). These evolutions translated into the emergence of global production networks in which complementary activities performed in various locations are closely coordinated through a diverse array of intrafirm and interfirm arrangements.
In the rest of this section, the rationale underlying the development of enterprise networks will first be highlighted, before drawing on the global commodity chain (GCC) framework to emphasize important structural characteristics of global production networks. It will then be argued that the GCC framework should be combined with other, 'territorially-based' approaches such as the business system, systemic competitiveness and industrial district perspectives, in order to better comprehend the social and institutional context of global networks, and how this context influences network dynamics.
1. The development of network forms of organization
Enterprise networks are transforming the organization of industries from both a domestic and an international perspective, increasingly blurring the line between the two. As Dicken (1992) wondered, what is a 'British' car, or an 'American' computer, when a large number of their components have been made in different countries? Networks are also obscuring the traditional distinction between market and hierarchy, as they are based on a mix of intrafirm and interfirm arrangements that do not strictly belong to either one of these categories. Some observers elaborated on this idea by considering that the shift to network forms of organization introduces elements of market governance within the firm, while infusing elements of hierarchy within market exchanges (Zenger and Hesterly, 1997).
Inside the firm, the shift to network forms of organization involves a decentralization of decision-making and greater reliance on horizontal coordination across functions and units. These principles apply to the coordination of activities between affiliates of multinational corporations (Ghoshal and Bartlett, 1990); between different business functions such as R&D, design, production and marketing (Ernst, 1997); as well as within individual units or functions, as indicated by the growing use of teamwork in manufacturing (Fröhlich and Pekruhl, 1996). Outside the firm,
Whether networks constitute a durable or transient form of organization remains to be seen, but they allow firms to meet a new set of challenges under current competitive conditions. |
conversely, relations become more closely integrated as the principle of horizontal coordination is extended to complementary activities performed by suppliers and customers. These new external links might rely on formal arrangements such as long-term contracts, but their essence is defined by informal interfirm cooperation based on trust, stability, and continuous learning (Badaracco, 1991; Powell, 1990). They become of growing importance in the context of vertical disintegration strategies by which firms increasingly focus on a distinct set of activities and farm out complementary activities to their network partners (Harrison, 1994).
As emphasized by management researchers, the development of network forms of organization constitutes an efficient response to changes in the nature of competition and the sources of competitive advantage (Miles and Snow, 1986; Starr, 1991). Faced with growing complexity, uncertainty and cost pressures in their competitive environment, large firms are moving away from hierarchically organized, vertically integrated structures in order to increase their capacity to innovate, react more quickly to external changes, improve product quality, and cut down operating costs. Whether networks constitute a durable or transient form of organization remains to be seen, but they allow firms to meet this new set of challenges under current competitive conditions.
The decentralization of decision-making within networks makes firms more responsive to external changes. The specialization of individual firms or network units allow them to focus on core competences, and enhance their capacity to continuously adapt and innovate. Such core competences constitute the collective learning of the organization, the experience and knowledge accumulated in a particular group of products and activities (Prahalad and Hamel, 1991). Whereas decentralization and specialization provide firms with the flexibility characteristic of small operating units, belonging to a network grant them many of the advantages associated with size: networks can be used to undertake projects beyond individual firms' capacity; to acquire new skills and capabilities from other firms; and to coordinate interdependent activities, thus providing economies of scale, scope and integration while avoiding the costs and rigidities of vertical integration (Reve, 1990).
2. The structure and dynamics of global production networks
Firms' strategies to develop network forms of organization have led to a reconfiguration of industries along a variety of dimensions including firm size and specialization, interfirm relations, and the spatial distribution of activities. The global commodity chain perspective provides a framework for analysing the resulting organization of activities within highly internationalized manufacturing industries. GCCs are broadly defined as sets of interorganizational networks clustered around one commodity or
The global commodity chain (GCC) perspective provides a framework for analysing the new organization of activities within highly internationalized industries. |
products, linking firms, households and communities to one another in the world-economy (Gereffi et al., 1994, p. 2). They are characterized by four main dimensions:
- - an input-output structure, or sequence of interrelated value-adding activities including product design and engineering, manufacturing, logistics, marketing and sales,
- - a governance structure, or power relations that determine how economic surplus is distributed within the chain,
- - a geographical configuration, referring to the spacial dispersion or concentration of activities within and across locations,
- - and a social and institutional context, formed by the norms, values, and regulatory frameworks of the various communities within which firms operate.
These key dimensions of GCCs can be used as an organizing scheme to highlight important characteristics of global production networks. First, the input-output structure of global production networks encompasses a broad range of activities requiring a variety of competences and capabilities. Writers refer to the 'value chain' (Porter, 1985), the 'value-added chain' (Johnson and Lawrence, 1988), or the 'value stream' (Womack and Jones, 1996), to embody this notion of interlinked economic activities. These value chains comprise activities that may belong to different industries: for example, the apparel chain involves textile producers, apparel manufacturers and retailers.
Adopting a value chain perspective helps to understand the new forms and logic of competition in global industries. In complex and dynamic environments, competitiveness depends less and less on the possession of extensive material assets, and increasingly on firms' ability to master the organizational processes by which customer demands for specificity, quality, and timeliness can be met. Some authors refer to this transformation by pointing to the importance of organizational
In complex and dynamic environments, competitiveness depends less and less on material assets, and increasingly on the organizational processes by which customer demands for specificity, quality, and timeliness can be met. |
competences and capabilities as primary sources of competitive advantage (Teece et al., 1997). Others emphasize the new role of services, or immaterial activities, as superior sources of value creation (Dicken, 1994; Rabach and Kim, 1994; Reich, 1991). Accordingly, those stages of the value chain that predominantly involve immaterial activities, such as product design and development, marketing and brand-building, are gaining strategic importance as compared to manufacturing activities, that primarily involve a material transformation of inputs into outputs. The capacity to coordinate complementary activities across the value chain is also becoming in itself an major source of competitive advantage.
Second, the governance structure plays a key role not only in the distribution of value, but more broadly in the coordination of global production networks. Coordination applies to (1) complementary activities, that must be matched from the perspective of output volume and product characteristics, and to (2) relations between network members, that must be defined on the basis of shared interests in order to allow for cooperation to develop. From a strategic perspective, the coordination of global production networks requires some degree of centralization necessary for an efficient use of resources, a rapidity of decision-making, and a global vision to be achieved within the network. For these reasons, management researchers stress the role of the lead firm, which is continuously engaged in attracting and selecting members, in sustaining network relationships by managing conflict and learning, in positioning the network in the market, and in building the structure and culture of the network (Sydow, 1992, p.114; also see Jarillo, 1988, 1993).
The coordination of global production networks requires some degree of centralization for an efficient use of resources, a rapidity of decision-making, and a global vision to be achieved within the network. |
GCC analysis emphasizes that the governance structure of global production networks takes a variety of forms with regards to lead firms' characteristics and the nature of their relationships to other network members. For instance, Gereffi's (1994) typology highlights the existence of two different network configurations in global industries. Producer-driven chains (PDC) are developed by large multinationals maintaining equity ties with their affiliates across the globe, whereas buyer-driven chains (BDC) are formed by large retailers or branded marketers that arrange for the manufacture of their products through global sourcing linkages. The former are typical of capital and technology intensive industries such as automobiles or computers, while the latter have emerged in labour intensive industries such as footwear and apparel. In both cases, lead firms tend to retain direct control over strategic, immaterial activities such as product design and development, marketing and logistics, and farm
Lead firms tend to retain direct control over strategic, immaterial activities such as product design and development, marketing and logistics, and farm out a substantial part of manufacturing activities to other network members. |
out a substantial part of manufacturing activities to other network members. Such practices have long been adopted in the garment industry, where low-skilled production activities do not provide an important source of competitive advantage, but are also developing in electronics (Ernst, 1997) and automobiles (IMF, 1996), where lead firms increasingly rely on suppliers to perform a growing range of manufacturing activities.
Third, the geographical configuration of global production networks results from a combination of local, regional and transnational dynamics. The global and the local can be seen as stylized ends of a continuum along which regional, national, and other intermediary levels of analysis can be distinguished. These various levels of network dynamics are well documented in the garments, electronics and automobiles industries. At the global level, examples include the linkages developed between American and East Asian producers, which might involve independent firms, joint-ventures and multinationals' affiliates (Dicken, 1992; Henderson, 1997). The global shape of production networks presents important variations depending on the industries considered. For instance, enterprise-based
The global shape of production networks presents important variations depending on the industries considered. |
trade data show that buyer-driven chains such as those developed in the garment industry tend to exhibit greater mobility and spatial dispersion than producer-driven chains (ITC, 1996). At the regional level, Bair and Gereffi (1997) highlight the recent growth of North American networks in the apparel chain. Regional networks established in Europe, North America and Asia are also an important feature of the auto and electronics industries (Dicken, 1992; Gereffi, 1996; Henderson, 1997).
Finally, specialized productive activities tend to be clustered in particular locations within countries that participate in global production networks. Economic geographers such as Scott (1996) and Sassen (1991) argue that the very processes of globalization contribute to a polarization of economic growth at the subnational level. According to this view, global industries are locally anchored within agglomerated production complexes, as illustrated by the poles of Silicon Valley, Penang and Bangalore in
Specialized productive activities tend to be clustered in particular locations within countries that participate in global production networks. |
electronics, Los Angeles and Hong Kong in garments, or Ciudad-Juarez in automobiles, to name just a few. Conversely, students of industrial districts are pointing to a growing penetration of global forces within the most dynamic local clusters (Palpacuer, 1997; Cossentino et al., 1996; Schmitz, 1995). To conceptualize the links between global production networks and local development, it is therefore useful to think of local industrial clusters as forming particular nodes in global production networks. The key dimensions of activity, governance, and social / institutional conditions are combined into specific configurations within each node.
3. The social and institutional dimensions of global production networks
Although it recognizes that networks comprised in global commodity chains are 'socially constructed and locally integrated' (Gereffi et al., 1994, p.2), GCC analysis tends to remain underdeveloped with regard to the fourth dimension of global chains, i.e., their social and institutional context (Henderson, 1996). By contrast, more traditional frameworks for analysing
The social and institutional dimensions of production activities is more location-specific than chain-specific, so that their analysis requires to combine GCC with other, complementary analytical frameworks. |
industrial development fail to capture the global dynamics of production. However, they fully highlight the role of social and institutional forces in explaining the shape and relative success of geographically circonscribed economies. It might thus be argued that the social and institutional dimensions of production activities is more location-specific than chain-specific, so that their analysis requires to combine GCCs with complementary analytical frameworks such as the business system, systemic competitiveness, and industrial district perspectives. Each of these approaches puts emphasis on particular aspects of interactions between social, institutional and economic forces at the local level.
The business system approach draws attention to the influence of social and institutional factors in shaping the organization of production activities. Business systems are defined as 'distinctive ways of coordinating and controlling economic activities which developed interdependently with key institutions that constitute particular kinds of political, financial, labour and cultural systems' (Whitley, 1996, p.406). They include key characteristics of (1) firms, such as their growth patterns, ownership and risk management, (2) interfirm relations, such as the extent of cooperation, and (3) internal systems of coordination and control, such as the division of labour, the nature of authority relations and the nature of employment relations within the firm. This framework has been primarily applied at the national and regional levels, to highlight differences between business systems found in Europe, East Asia and North America. Combined with a global perspective, it can be used to investigate how firms embedded in distinct business systems become involved in particular commodity chains,
The systemic competitiveness framework highlights complementarities between various levels of political and economic action. |
and how the specific role and behaviour of these firms influence the development of these chains.
Ranging from the national to the local, the systemic competitiveness framework highlights complementarities between various levels of political and economic action in promoting successful industrial development (Esser et al., 1996). Key conditions to achieve such goal include: (1) at the meta level, the existence of shared cultural values, a basic consensus and an ability of social actors to jointly formulate a development strategy; (2) at the macro level, policies providing a stable and predictable macroeconomic framework; (3) at the meso level, policies targeted to specific regions and industries, involving government and non-government actors such as business and labour organizations; and (4) at the micro level, dynamic networks of firms oriented towards continuous improvement and learning. As shown by Meyer-Stamer (accompanying paper), this framework can be used to analyse how particular industrial communities respond to changing competitive conditions in the context of globalization, and how political
The industrial district perspective stresses the role of local institutions in supporting economic development, and puts special emphasis on the need to promote trust and social cohesion within local industrial communities. |
action at the national, local and sectoral levels can support or impede their capacity to adapt.
The industrial district perspective similarly stresses the role of local institutions in supporting economic development, and puts special emphasis on the need to promote trust and social cohesion within local industrial communities. As emphasized by Zeitlin (1992), the production networks making up industrial districts are characterized by the existence of recurring tensions between specialized firms, such as merchants, manufacturers and subcontractors, between employers and employees, and between skilled and unskilled workers. In this context, trust and social cohesion are not seen as resulting from a pre-existing cultural consensus, but from the deliberate actions of institutions that provide collective services such as training and marketing support, as well as institutions for collective wage setting and dispute resolution (Cossentino, 1996). Both types of institutions encourage firms to compete on the basis of continuous innovation and upgrading, rather than through squeezing labour costs and jeopardising product quality (Piore and Sabel, 1984). Such perspective can be of particular relevance to explore the role of tripartism, collective bargaining, and other platforms for social dialogue within the context of globalization. It can bring light on the evolution of traditional regulatory systems, as local industries become part of global production networks, as
Whether integration in global networks stimulates industrial development and jobs creation will depend on the interaction between the global strategies of leading firms and the responses of local firms, workers and institutions. |
well as on the need for a more complex articulation between local, national, and international levels of social dialogue and conflict-resolution.
It is thus from a local perspective that the implications of global production networks for industrial development, employment, and policy-making can best assessed. Whether global integration stimulates industrial development and jobs creation, and the kind of jobs and activities created in that process, will depend on interactions between the global strategies of leading firms that drive the development of transnational networks, and the ways in which local firms, workers and institutions respond to the opportunities and constraints generated by this global environment.
II. Implications for local industrial upgrading, employment and development policy
How easily can local producers enter global networks, move up, and achieve sustainable competitive advantage? |
Global production networks constitute new forms of organization which are presumably more open and mobile than traditional forms based on domestic, vertically-integrated production. As such, they offer new opportunities for local firms and industries to participate in the global economy. To assess this potential requires to look more closely at the internal structure of global networks and the factors shaping that structure at the global and the local level. A similar perspective is necessary to assess the impact of global networks on the quantity and quality of local jobs. Finally, networks might provide a new organizational model not only for enterprises, but also for local institutions and actors involved in development policies. These three questions will be further explored by looking at relationships between global networks and (1) local industrial upgrading, (2) local employment, and (3) local development policy.
1. Global networks and local industrial upgrading
To which extent can global production networks provide a vehicle for local industrial development? How easily can local producers enter these networks, move up, and achieve sustainable competitive advantage? Such questions raise a number of issues relating both to the degree of openness of global production networks, and to the learning dynamics by which new network members can increase the value content of their activity and strengthen their network position.
- Open, closed and 'permeable' networks
The openness of global production network can be defined as the ease of entry for both new firms and new locations. Ideally, a totally closed network would be formed by a limited set of linkages developed by a lead firm in a few sites, whereas a totally open network would be characterized by continuous change in the partners involved and their locations. The degree of network openness might depend on industry-specific characteristics, and on the particularities of the business systems within which network firms are embedded. For example, buyer-driven networks in garments and footwear tend to be more open than producer-driven networks in, say, automobiles, as a result of lower entry barriers in the low-skilled,
Global production networks are permeable: they are characterized by an evolving tiered structure in which a first-tier of selected, stable partners are surrounded by a mobile row of lower-tier suppliers. |
labour-intensive production activities of BDCs. Lead firms in the same industry might also exhibit different networking behaviours depending on the idiosyncrasies of their national environments. For instance, Japanese electronics companies have been slower than their American counterparts to diversify their supply base and extend the geographical scope of their production networks in East Asia (Ernst, 1997).
The most successful production networks, however, appear to be neither closed nor open but permeable (Richter and Wakuta, 1993). They are characterized by an evolving tiered structure in which a first-tier of selected, stable partners are surrounded by a more mobile row of second-tier suppliers. The existence of such structure has been documented both at the local level, in Japanese automobiles and electronics networks (Nishiguchi, 1994; Smitka, 1991) and American garment networks (Palpacuer, 1997), and at the global level, in the networking strategies of large lead firms such as Nike (Donaghu and Barff, 1990), Benetton (Harrison, 1994), and other large American retailers (Gereffi, 1994). Second-tier positions primarily involve low-skilled, low-value activities which are relatively easy to enter, but as such they provide a highly precarious basis for local industrial development. Second-tier suppliers compete mainly on costs and lack the organizational capabilities needed to meet lead firms' standards in terms of quality, flexibility and reliability. As a result, they fail to create and retain enough value to support local growth and investment. Beyond a simplified distinction between first-tier and second-tier positions, the number of tiers or subcontracting layers in global production networks can be very high, particularly for the manufacture of simple products where production activities extend into the home of individual production workers.
The challenge is not so much to enter global networks, but to upgrade and reach more profitable positions within these networks. |
- Learning and upgrading within global networks
The challenge, then, is not so much to enter global networks, which might be done relatively easily on the basis of low costs, but to reach more profitable positions within these networks. Such strategies are made possible by the dynamic nature of global production networks: positions within networks are not fixed, but constantly challenged by competition, so that firms might move up or down the tiered structure depending on their performance. Upgrading suppliers' position requires to improve the value content of local manufacturing activities and/or to broaden the range of activities performed at the local level. Gereffi (1995) conceptualizes such evolution as a sequence of export roles that local producers might perform within GCCs, ranging from export-processing assembly to original equipment manufacturing (OEM) and original brand-name manufacturing (OBM). East Asian producers have followed such trajectory in industries such as garments and electronics, in which they have developed sustainable competitive advantage.
Of central importance to the upgrading process are the learning dynamics by which local producers can develop their competences and capabilities. As shown by case studies in the automobiles, electronics and garments industry, learning requires a mutual commitment of lead firms and their
Of central importance to the upgrading process are the learning dynamics by which local producers can develop their competences and capabilities. |
suppliers. The former provide engineering and manpower assistance, as well as financial resources when relationships are based on equity, and the latter invest in equipment and specialization. Through continuous information exchange and joint problem-solving, suppliers can learn to meet lead firms' standards and reach a first-tier position within their production networks. The capabilities developed through such learning dynamics can then be leveraged off to acquire new know how, develop new products and enter new networks, thus opening new growth perspective for local firms. The particularities of the business system within which local firms are embedded plays a role in determining their willingness and ability to engage in a learning process. In the case of East Asian producers, for instance, factors such as the local entrepreneurial culture and state support to local development have been instrumental in helping firms to achieve sustainable network positions (Gereffi, 1995).
- Obstacles to industrial upgrading
Successful cases of learning and industrial upgrading can be found in the development of global production networks, but the difficulties involved in adopting similar strategies within different settings should not be ignored. Obstacles to industrial upgrading can be identified with respect to the nature of activities performed within global networks, the nature of the relationships between lead firms and their suppliers, and the geographical distribution of activities within the network.
Local firms might face substantial entry barriers into the most profitable activities within the value chain. GCC analysis stresses that profits are primarily located within the most concentrated segments of global chains. For instance, strategic services such as marketing and R&D are protected by strong economies of scale and by the complexity of competences required to perform these immaterial activities. As global networks evolve towards greater functional integration, entry barriers might also rise in other network positions that previously provided a port of entry into more
Suppliers face obstacles to industrial upgrading arising from entry barriers into profitable activities, dependency vis-à-vis lead firms, and remoteness from final markets. |
profitable activities, such as first-tier supplying. Humphrey (accompanying paper) uncovers such evolution in the auto component networks of Brazil and India, showing that large automakers increasingly rely on selected first-tier suppliers on a global scale. This strategy favours a trend towards concentration and rising firm size in first-tier supplying, thus reducing local firms' prospect to enter this segment of global production.
A related difficulty is for local supply firms to overcome transactional dependency vis-à-vis lead firms. As shown in Japanese electronics and auto networks (Nishiguchi, 1994), as well as American garment networks (Palpacuer, 1997), the learning process by which suppliers can evolve towards higher value activities often involves a phase of high concentration in which lead firms might account for as much as 80% of suppliers' activity. Exchange concentration facilitates the development of trust and the acquisition of specific competencies (Sako, 1992), but also increases suppliers' vulnerability. The next step for suppliers is thus to diversify their clientele, which requires some degree of standardization of their product and activity. In that perspective, a complex balance must be reached between trust and independence, and between specialization and standardisation, in order to pursue a strategy of industrial upgrading.
Finally, the advantages provided by geographical proximity in strengthening network relations might impede industrial upgrading in distant locations. Scott (1996) argues that transactions based on trust and specific competences can be performed most effectively within local networks, whereas standardized transactions are easily implemented on a global scale. Along similar lines, Doeringer et al. (accompanying paper) consider that the shift to 'lean retailing' based on greater functional integration between retailers and garment producers, is placing a premium on speed and reliability in apparel networks, potentially favouring the development of local and regional networks as opposed to global networks. Global transactions might thus remain limited to standard arms' length exchanges involving little interdependencies between lead firms and their remote suppliers. Such conclusion, however, might overlook other forms of complementarities between local, regional and global networks. In the electronics industry, for instance, American lead firms have transferred a growing range of high-value support functions to East Asian locations, which allowed them to launch more quickly the offshore production of new products (Ernst, 1997). This strengthening of global linkages has happened concurrently with a deepening of regional networks within East Asia (Henderson, 1997). Consequently, remoteness from lead firms' locations might not necessarily constitute a major obstacle to local industrial upgrading. As pointed by Dicken (1994), this does not necessarily mean that every local industry can hope to participate and upgrade within global production networks, as first-tier positions remain few in number and unevenly distributed geographically.
2. Global networks and local jobs
Entering global production networks can be an effective vehicle for local job creation, as illustrated by the substantial increase of employment generated in Export Processing Zones during the last decades (ILO, 1996). However, activities performed in EPZs are typically restricted to the low-skilled, low-value assembly stages of global production chains, in which
Entering global production networks can be an effective vehicle for local job creation, but it is only through industrial upgrading that the quality of jobs can be improved. |
cost-based competition is achieved by 'sweating' labour. The pressures of competition on employment conditions is reinforced by the social and institutional characteristics of such zones, including the week enforcement of labour standards, hostility to trade unions and the subordination of young female workers. As emphasized by Van Heerden (accompanying paper), such forms of integration within global networks are highly unstable and can hardly provide a lever for local development. It is only by increasing the value content of local activities that more sustainable forms of integration within global networks can be achieved and the quality of local jobs improved in that process. Changes in the social and institutional context of local activities are also necessary in order to support a durable and widespread improvement of local employment conditions.
- Improving job quality through upgrading
Since the late 1980s, a new model for competitiveness and human resource management has become prominent in academic and policy circles. To achieve sustainable competitive advantage and preserve or improve living standards in the context of globalization, it recommends to follow the high road, i.e., to compete on product quality and customer service rather than costs, and to develop the skills, involvement and motivation of the workforce instead of minimizing labour costs. Within the developed world, this model refers to the best practices of leading firms in the United States, Japan and Europe (Appelbaum and Batt, 1994; Boyer, 1991). In developing countries, similar patterns of competitive strategies and employment practices are emerging among the most successful East Asian producers (Kuruvilla, 1996;Verma, 1997). Based on case studies of Singapore, Malaysia, the Philippines and India, Kuruvilla (1996) shows
To achieve sustainable competitive advantage and improve living standards, it is necessary to follow the high road: compete on quality rather than costs, and develop the skills, involvement and motivation of the workforce. |
that in countries that moved from a low-cost export-oriented strategy to a higher value-added export-oriented strategy, the focus of industrial relations and human resource policies has shifted from cost containment to skills development and workforce flexibility. Whereas cost-based strategies required a cheap and compliant labour force, higher value strategies rely on teamwork, workers training, and performance-based pay.
Verma (1997) highlights the dynamic process underlying this strategic shift: countries initially attract foreign investment on the basis of low wages and low unionization, but capital inflows generate a transformation of labour market conditions in the form of rising wages, growing labour shortages and mounting demands for unionization and collective bargaining. At this stage, two options are available to local decision-makers. One is to recreate initial conditions through wage control and union repression. The other is to adapt to the new conditions by following a high-road strategy, i.e., upgrading workers skills through training and education, involving workers in the continuous improvement of products and processes, and linking wages to productivity. In a virtuous cycle, higher skilled and motivated workers bring more value to production activities, which makes firms more profitable and allow them to pay higher wages. Two different sets of global pressures might be at work in fostering such trajectory: one coming from growing requirements for speed, responsiveness and quality within global production networks; the other stemming from the emergence lower cost competitors with enormous reserves of cheap labour (e.g., China).
- Obstacles to a sustainable improvement of employment conditions
The upgrading path described above raises a number of issues concerning the extent and sustainability of improvements in employment conditions at the local level. First, in a number of countries such as the Republic of Korea, Singapore and Malaysia, the 'high road' has been combined with elements of a 'low road' including union repression and/or restrictive labour laws (Kuruvilla, 1996; Verma, 1997). Some features of the new employment practices, such as the growing use of performance-based pay, also introduce an element of precariousness in the gains that workers derive from industrial upgrading, by shifting a greater share of business risk from the firm to the workers. Such gains might also spread unequally among different categories of workers that contribute in various ways to the upgrading process. Vulnerable groups might include 'guest workers' imported in response to local labour shortages, as well as workers employed in smaller firms that perform lower value-added activities within local networks.
Drawing from a broad range of developing country cases, Nadvi and Smith (1994) highlight that growth patterns in successful industrial clusters are indeed internally uneven. Local firms that embark in upgrading strategies are typically among the largest, serve export markets and tend to offer better wages and working conditions. They are surrounded by smaller units characterized by low wages, low product quality and low innovation, that
Growth patterns in successful industrial clusters are internally uneven. |
either serve domestic markets or indirectly subsidize large firms by working as subcontractors for the export market. The latter situation is typical of developing countries, but can also be found within developed countries, for example in Japanese clusters and in the New York garment industry within developed countries (Palpacuer, 1997; Smitka, 1991). Accordingly, as some local producers improve their position within global networks through upgrading strategies, others continue to perform low-skilled activities which are more vulnerable to competitive pressures and less conducive to innovative employment practices. The quality of employment thus becomes increasingly differentiated according to local firms' position within the production chain.
Contextual elements such as local labour market conditions might also reduce firms' incentive to share the benefits derived from upgrading. For instance, in clusters characterized by a labour surplus, the largest firms appear to be able to implement an upgrading strategy while maintaining low wages (Nadvi and Schmitz, 1994). In other cases, inequalities among various groups of workers might be consistent with predominent cultural values within the local society. From a systemic competitiveness perspective, a consensus might not exist at the meta level for sharing the benefits of growth across various social groups.
These mixed results concerning the employment outcome of upgrading strategies raise a number of important questions. First, can sustainable advantage be derived from partial or uneven improvements in employment conditions? It might be argued that long-term growth and development require greater participation at the workplace as well as a diffusion of growth dividends within the various social groups making up a local
Can sustainable advantage be derived from partial or uneven improvements in employment conditions? |
community. In that perspective, the recent Asian crisis might signal the limitations of the industrial relations and human resource policies implemented by local producers. Second, if a durable and widespread improvement of employment conditions is a necessary foundation for local development, what role can local institutions play in achieving this goal? Available evidence shows that competitive forces alone are not likely to produce such social outcome, so that firm-based upgrading strategies need to be complemented by a consistent set of supportive policies.
3. Global networks and local development policy
The extent to which local industrial clusters can take advantage of globalization to engage in a process of learning and upgrading largely depends on the social and institutional context of local economic activities. The highly publicized cases of the Third Italy and Silicon Valley show that regional industries that succeed in the global economy have built a culture of learning and innovation supported by local institutions such as governments, community-based, employers' and workers' associations.
If the improvement of employment conditions is necessary for local development, what role should local institutions play in achieving this goal? |
These institutions have developed formal and informal relations with local firms and workers that sustain a dynamic of continuous improvement and reinforce social ties within the local industrial community (Pyke et al., 1990; Saxenian, 1994).
In that perspective, the development of global production networks is placing new demands on local policy-makers, who need to redefine their role in relation to changes in the forms and logic of competition. Just as enterprises are transforming their modes of operation, both internally and in their relations to other firms, in order to build a sustainable competitive advantage, forward-looking institutions are striving to find new, flexible ways of interacting between themselves and with businesses, in order to support industrial competitiveness and social cohesion. The sustainable integration of local firms within global production networks should thus rely increasingly on networking strategies between local institutions, supporting agencies, and enterprises. The role of these innovative policy networks is particularly important at the local level, in specialized industrial clusters where globalization pays more, or hits harder, and where
Innovative policy institutions are striving to find new, flexible ways of interacting between themselves and with businesses. |
consensus about collective interests is easier to achieve.
As emphasized by Morgan (1996), such 'networking model of development' is based on a pragmatic perspective, beyond the traditional opposition between neo-liberal and statist views that respectively give prominence to the market or to the state as primary vehicle for economic development. Operating as policy networks can help local institutions to simultaneously (1) support the acquisition of new knowledge and competences in the industrial community, and (2) ensure that the gains from learning are distributed on a fair basis among local actors.
- Support the development of local competences
The idea of policy networks can be applied in a variety of ways to support skills building and upgrading at the local level. First, while their focus remains primarily local, innovative development policies should be articulated within a global perspective. A vision of how global production networks are structured, and how particular sets of firms areintegrated within them, will provide a useful set of benchmarks for local policy formulation. Local institutions can help firms, SMEs in particular, to successfully integrate into global networks by identifying opportunities and threats in the global environment, and facilitating the establishment of
Innovative development policies should be articulated with a global vision. |
connections to foreign markets and competencies. According to Saxenian (1997), local government agencies have adopted such strategy to promote the development of the Taiwanese semiconductor industry. Local agencies have defined their industrial policies by consulting intensively and continuously with overseas Taiwanese engineers working in Silicon Valley, and supported a transfer of knowledge from US-based Taiwanese engineers back to their home country. By so doing, they have contributed to the development of close social linkages between the industries of Taiwan and Silicon Valley, that proved instrumental in allowing Taiwanese firms to upgrade their position in the global electronics industry.
Second, networks can provide an organizing principle for implementing development policy in a decentralized, flexible and responsive manner. Within institutions, this involves to locate decision-making at the level most closely associated with policy implementation, thus increasing responsibilities at the local or regional level as opposed to the national level. Between institutions, networking calls for a greater reliance on the complementary roles of intermediary organizations such as employers' and workers' associations, as well as other forms of non-governmental organizations. The tacit knowledge and political credibility acquired by these institutions can be instrumental in implementing governmental development policies (Morgan, 1996; Sabel, 1994). Between institutions and enterprises, a network-based policy puts emphasis on continuous
Policy networks can promote development in a decentralized, flexible and responsive manner. |
interaction in the provision of support services. For instance, the effectiveness of training and consultancy services will be greatly improved if their design, implementation and assessment are performed on the basis of close communication between providers and recipients. The Garment Industry Development Corporation (GIDC) operating in the New York garment industry provides a successful example of such networking strategies. Jointly established by the City of New York, employers and workers' associations, GIDC receives funding from the federal and local states and relies on a set of complementary competences to help local suppliers build new capabilities and upgrade their position in the global garment industry. Support services are focused on skills development, organizational improvement and the building of close interfirm linkages between suppliers and lead firms, underscoring the importance of immaterial assets as source of local competitiveness.
- Support consensus-building among local actors
Cooperation between various types of local actors necessarily generates conflicts and tensions within the industrial community. As emphasized by the industrial district perspective, such conflicts should not be seen as obstacles to the building of trust and social cohesion. On the contrary, the expression of divergent interests through debates and social dialogue appears as a important condition for achieving a consensus among the various actors involved. According to Zeitlin (1992, p. 287), 'trust relations in industrial districts seem more a consequence than a pre-condition of practical cooperation among local actors, and social consensus less an antithesis of conflict than an outcome of its successful resolution'. The challenge facing policy-makers is thus to provide a platform for social dialogue, in order to allow for the expression of local divergences, and to channel conflicts into a constructive search for solutions. Such role appears as instrumental in allowing local actors to develop a shared vision of their future as a community, an important condition for achieving sustainable industrial development (Meyer-Stamer, accompanying paper).
As shown by the history of Italian industrial districts, institutions that succeed in governing this process of conflict resolution become the
The policy challenge is to provide a platform for social dialogue and to channel conflicts into a constructive search for solutions. |
embodiment of trust and social consensus among local actors. They gain the legitimacy needed to implement a successful development policy. In that perspective, tripartite mechanisms that regulate relationships between governments, employers and workers can play an important role in sustaining social cohesion. As underlined by Piore and Sabel (1984), these industrial relations systems build on shared values and a sense of solidarity among local actors, underpinning the formulation of policies aimed at promoting cooperative forms of competition, improving wages and working conditions. They can prevent firms from engaging in a type of cost-based competition detrimental to employment conditions, and provide for an equitable sharing of growth dividends among local firms and workers.
However, traditional tripartite systems might find it difficult to sustain their role within the context of globalization. As local industries become part of global networks, industrial relations within these industries might be disrupted, and the underlying norms and values supporting them might be transformed. In that process, local institutions including governments, employers' and workers' associations can be challenged in their ability to unify and aggregate interests in the industrial community. Cossentino
Local actors must develop a shared vision of their future as a community in order to achieve sustainable industrial development. |
(1996) witnessed such evolution in the Italian district of Emilia-Romagna. As the district became embedded into global production networks, new lines of division emerged among local firms and workers that unevenly benefited from global integration. Such evolution has weakened social consensus and hampered the definition of a concerted development strategy at the local level. At this stage, the cluster faces the need to rebuild social cohesion through a new process of conflict resolution.
The above example suggests that in a global and dynamic environment, local interests have to be constantly realigned in order to maintain social consensus within industrial clusters. In such context, the role of policy networks becomes of particular importance to promote a continuous dialogue among local actors. The open, flexible nature of such networks should allow for new lines of interest to be expressed and integrated into the process of consensus-building. Along side traditional actors, new forms of intermediary organizations can become important partners in that process. Within the context of globalization, the process of consensus building should also span across local, regional and international institutions. Local initiatives need to be supported by complementary actions at the national and the global level, as illustrated by recent attempts to promote ethical sourcing and more socially responsible behaviour within global production networks.
What to do when local social actors and intermediary institutions are weakly organized, lack independence, are repressed, or simply do not exist? |
These policy considerations implicitly refer to local clusters in industrialized countries, and as such avoid a difficult question. What to do when the local actors and intermediaries institutions that are assumed to play an essential role in governing industrial development are weakly organized, or lack independence, or are repressed and left with no voice, or simply do not exist? Such question goes much beyond the scope of this paper. Three propositions, however, are worth submitting. First, promoting greater social dialogue might prove a necessary condition for locations to achieve sustainable industrial development. Second, here again initiatives to foster such dialogue should be taken not only at the local but also at the international level. Third, the ILO, with its principles, international standards and technical assistance capacity, has a role to play.
|
