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The Enterprise Approach
Galbraith’s modern industrial economy
Corporate strategy and structure
Landscapes of countervailing power
Interdependent pricing behaviour
Sources of countervailing power
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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
‘Factory location is explained in terms of the
factors 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)
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
Corporate
Strategies
Internal /
External
Horizontal
Integration
Horizontal
Diversification
Vertical
Integration
Forwards
Conglomerate
Backwards
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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
Geographic
decentralization
Prod.line
decentralization
Functional
decentralization
Entrepreneurs
and managers
Entrepeneurs
1)Locational Overlap model
◦
◦
1
1,2,3 Rival Firms
2
1
1
2
2

2
1
3
3
Core Region
3
3
Peripheral Regions
Head Office
Branch Plant
2)Exchange of threats model
1
2
1
2
2
1
Core Region
Core Region
3)Collusion: the spatial monopoly model
1
1
2
Regions
2
3
Regions
3
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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
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Rivals
Governments
Labour
Consumer groups
Environmental groups
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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
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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
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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
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Other factors:
◦ Past experiences
(MNC can better predict impact of investments on the local
economy)
Multinational Corporations
Constraints
Degree of
Competition and
Concentration in
the industry
Extent to which HC
government is
important
customer or
distributor
Host Country
Power
Resources
Power
Resources
Technological
complexity,
intensity, rate of
change
Access to domestic
market
Managerial
complexity
Capital
Access to markets
or export potential
Advertising
intensity and
product
differentiation
Control of natural
resources
Negotiating Availability of
Ability of appropriate labour
MNC and
HC
Availability of
suitable
infrastructure
Political climate
Government
incentives
Employment
Relative power of MNC
vis-à-vis HC increases
Change over time in relative bargaining strength
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
Relative power of HC
vis-à-vis MNC increases
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Bargaining power for Home Country
Governments (HCGs) increases once MNCs
invest
◦ MNC has fixed investments in HC
◦ HC knows more about MNC operations
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Focus on specific investment proposals
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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
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New locations – new labour to develop
◦ Threaten current factories and existing unions
◦ Existing work practices are difficult to change
◦ Hire workers with desirable characteristics
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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)
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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.
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MNC bargaining processes are worldwide
◦ Negotiations at one location are compared to others
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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!)
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Regional or community policy which offers
industrial incentives to firms
◦ Tax relief, grants, financing
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A bad idea:
◦ Competition between regions and communities is a
zero-sum game
 Firms can ‘play off’ one region against another
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A good idea:
◦ Firm mobility is limited
◦ Principles of competition can also apply to
communities
◦ Measure local efficacy of incentives through
incrementality:
 Effectiveness of incentives in:
 changing investment preferences (locational incrementality)
 changing timing, scale, and financing of investments (nonlocational incrementality)
◦ 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%?
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Firms can pursue different strategies
Countervailing 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.