Assessing the impact MNCs' have had on the employment relationship and labour relations

University Degree Business and Administrative studies

How significant a role do multinational corporations (MNCs) play in today’s UK economy in terms of their impact on employment relations (ER) and labour conditions? This is the question the paper attempts to evaluate through drawing on academic literature and empirical evidence from the 2004 Wers survey The first section profiles MNCs in the UK, currently dominated by US and German firms. Following this, there is a brief analysis of employment relations in the UK. The third section reviews literature from leading commentators on the subject, highlighting contrasting views and evidence of foreign IR and ER practices. The fourth section looks at key factors that influence the way labour is managed within MNCs subsidiaries. The country of origin effect, the home country effect, the global dominance effect and a global interaction effect as identified by Edwards and Ferner. This is important to assess to what extent MNCs use these factors in the management of labour. Finally, a conclusion will be drawn and a consideration whether MNCs have diffused home country employment relations practices to their UK foreign subsidiaries and if they have affected labour conditions for the UK workforce.

Introduction

Foreign direct investment (FDI) as a percentage of GDP (Ferner Industrial) in the UK is the highest of any developed country in the world. Since the deregulation of the labour market in the 1980’s the UK has seen a rise in foreign owned companies. According to the WERS 2004 survey, 19 per cent of private sector workplaces with 10 or more employees had some degree of foreign ownership, an increase of 4 per cent on the 1998 survey. Similarly, a rise from 8 per cent to12 per cent of companies were predominantly foreign owned and controlled. For what reason do MNCs choose to set up subsidiaries in the UK? Could it be to take advantage of the nature of the open and deregulated national business system and transfer home country ER practices?

Margaret Thatcher and the conservative government came to power in 1979 and in favour of capital markets rather than labour markets; legislations were put in place to weaken the power of unions. The national business system has changed dramatically resulting in an institutionally weak British system. These factors have altered the employment relationship, weakening the statutory and long established support for collective representation. A small proportion of the UK workforce is now covered by collective bargaining (McDonalds) in the employment relationship, although remains the principal form of pay setting (Primarily in the public sector). Union membership has decreased from 13.2 million members at its peak in 1979 to 6.7 million in 2005 and union density has declined from 32 per cent in 1995 to 29 per cent in 2005.

Commentators suggest that MNCs are an important source of innovative work practices, such as a specialist HRM functions. Moreover, that they are able to transfer business models from parent companies, the ‘country of origin effect’ to UK subsidiaries with relative ease. This has been described as a ‘forward diffusion’ of practices. However, evidence suggests that some MNCs, dependant on their country of origin, will adhere to the host country practices even though they conflict with the parent companies policies and practices. This will be explored in more detail further into the paper. The following section of the paper will profile MNCs in the UK.

Profile of MNCs

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Profile of MNCs

MNCs are not homogeneous but are now heterogeneous and are spread across sectors, although are dominant in the fast food and manufacturing industries in the UK. At the turn of the century there were 18000 foreign subsidiaries (Contemporary Employment Relations) operating in Britain, with 5000 of these employing more than 1000 employees. They stem from the US, Europe and Asia. The US is dominant with 25 per cent of total FDI to the UK followed by Germany (Bach) with 21 per cent. Foreign subsidiaries employ 18 per cent (Warwick) of the workforce in the production sector in the UK and the incidence of foreign-ownership of UK workplaces has risen since 1998 (Wers 2004) by approximately a quarter. They tend to have commonality it its products and services across its subsidiaries with 52 per cent (Warwick) having an international product. It could be argued that for these reasons they have significant economic and political power and the potential to significantly impact UK employment relations and labour conditions.

Employment Relations and Labour conditions in the UK

Throughout the 1980’s the Thatcher government and the neo-liberal labour movement stripped unions of their power, collapsing the traditional IR pluralist system under the previous labour governments. Historically unions played a powerful role in the UK economy, with the emphasis on centralised collective bargaining over the employment relationship. Union recognition and membership has since been on the decline. Although, sectorial shifts from manufacturing industries were unionization was predominant to an increase in the services sector is a possible conclusion. Moreover, the increase in small enterprises were unions find it hard to organise is another possible answer. It is evident that unionisation in the UK has lost its appeal and there is a marked shift towards alternative means by firms to regulate the employment relationship. The emphasis is shifting away from the pluralist view to the unitarist view on the role of the individual. Successive Labour government under Tony Blair supported the regulative reforms of the conservative government, although amended the union recognition procedure. This stipulates that unions must be recognised in a workplace if there is a majority consensus of employees. The UK is now under EU directives, most recently the information and consultative directive (ICE) which came into force in 2005. This stipulates that companies with more than 1000 employees must establish a works council. This gives the workers rights to information and consultation on company decisions. Employees are also protected by many employment legislations in areas such as discrimination, unfair dismissal, minimum wage and working time regulations, directives from both the EU and the UK. With the general trend away from union involvement and collective agreements there has been a rise in union substitution strategies in the form of HRM policies in domestic firms.

ER in Foreign Subsidiaries

The following section reviews business systems of different countries that have foreign subsidiaries in the UK and their stance towards trade unions and practices and policies on employment relations. The US is similar to the UK with respect to the national business system. The framework for union representation in the US is weak and the support for collective bargaining is declining. Throughout the 1990’s unionization rates have declined rapidly from 30 to14 percent (Policies) in US firms leading to widespread non-unionism and anti-unionism. Do US firms then transfer this stance to their subsidaireis? One argument is that many US MNCs, especially in the services sector, with low paid, low skilled workers will use strong union avoidance strategies, the ‘low road’ approach to industrial relations. McDonalds is a key example of this with union membership (MCDonalds) bordering at zero. UK unions find it impossible to organise in the company. According to Royle, a possible reason is the strength of the corporate culture disseminated by management. The chief executive of McDonalds stated that ‘unions do not bring much to the equation of the company’s philosophy of service and employee motivation’. To many US MNCs unions are seen as conflicting with their corporate strategy, the philosophy geared towards shareholder value. This gives them the competitive edge in terms of financial markets in the ever increasing globalising world. However, this has only been observed in certain sectors and it is argued that strong anti-unionism is only existent in few MNCs. If it is existent then exploitative HR policies are commonplace (Policies) which is a ‘Bleak house’ model.

Non-union US MNCs use innovative union substitution polices, introducing incentives such as favourable pay and conditions to gain commitment from employees. US firms are characterised by centralised decision making and formalised procedures stemming from the HQ. There is a high degree of employee participation involving direct communication and individualised HR function and pay is predominantly performance related.

In contrast to the US and UK, Germany has a strong institutional framework to protect the rights of workers. Collective bargaining in firms is under the force of the law (Royle) and 80 to 90 per cent of the workforce is covered by collective agreements. Conversely to the US, German MNCs tend to adapt to their host country environment, not recognising unions in their subsidiaries, which is divergent to their home country practices.

Influences on Labour Management

According to Ferner and Edwards there are key influences that affect the way labour is managed in MNCs. Firstly, the ‘country of origin’ effect as mentioned earlier. This is when the MNC exerts its parent company’s management style to their foreign subsidiaries. This contends that MNCs transfer ER practices to subsidiaries in order to converge the firm’s practices and policies across international boundaries. This comes under the convergence theory, were globalisation is pressurising companies to standardize ‘best practice’ policies across its international operations. According to Bach, the pace of convergence is increasing with growth of international trade and integrated financial systems, resulting in the erosion of distinctive national differences in the field of ER and industrial relations. This theory is argued by Traxler, who states that national differences remain intact and national variances will always occur due to differing cultural approaches. This is important as it determines the way employees are managed. Autonomy is not left to the subsidiary and policy making is in the hands of the parent company. This is evident in the report by Warwick that identified 61 per cent of MNCs having a worldwide philosophy on the management of employees.

With a loosely regulated framework in the UK it is possible for MNCs do ‘forward diffuse’ certain practices and are able to circumvent the national business system if it is in their interests. The characteristics of a flexible workforce and the ease of dismissal in the UK is an example. This is taking advantage of the host country’s business system. Whether this is a positive or negative impact is dependant on the parent company’s country of origin, the culture of management and the sector of operations and of course their strategic objectives. The extent to which they are able to impact on UK ER through the country of origin effect is questionable. US MNCs are the most likely to diffuse home country practices such as union avoidance and ant-unionism, as evidence suggests. It is argued that US MNCs will challenge traditional pluralist industrial relations. Although, it is evident that union recognition has been declining in the UK over the last twenty years so to suggest that US MNCs are at the forefront of this change is unsound. Companies are finding alternative methods of managing the employment relationship without the need for intermediaries (unions). A further example of forward diffusion is that of Japanese work practices transferred in the 1980’s. Renowned for the innovative work practice of lean production which was successfully transferred to their UK subsidiaries in the manufacturing industry. The ‘host country effect’ is when the MNC is influenced by the country of operation. Certain factors attribute to the extent to which subsidiaries adopt host countries practices. The regulatory framework of the UK is weak compared to its European counterparts so; therefore, open to MNCs devising policies to suit their strategies and the environment.

The global dominance effect is associated with how dominant the MNC is and its country of origin in the global economy. It may either enable or constrain (Edwards, Ferner) MNCs to implement ER practices to foreign operations. This has an effect alongside the home country effect. The US is dominant in the global economy thus its practices of ER are seen as influential and innovative, as did the Japanese form of work organisation. There is evidence to suggest that European countries will adopt such characteristics of this liberal model in order to compete effectively in the ever increasing competitive global economy. The US has brought specialised HRM practices, such as recruitment and training and implemented them across foreign sites.

The global intergration effect

Conclusion

It is apparent that MNCs have the economic and political power to impact UK employment relations and labour conditions. Foreign direct investment is crucial in ensuring a progressive economy and creating employment. Margaret Thatcher favoured capital thus deregulated the labour market to encourage FDI. The institutional framework of the UK is now weak and open to the transfer of MNCs IR policies. There is evidence that foreign companies will take on union avoidance strategies but there are few that openly challenge the UK IR system. A possible reason to adhere to the national system could be to ‘keep the peace’ with employees and to maintain good community relations within the areas they operate. The UK environment is such that models of unionisim, non-unionism and the ‘Bleak house’ exist in MNCs in the UK and that a cross fertilization of these strategies are forming. There is little impact on the UK framework for IR as it is already evolving from collectivism since the 1980’s towards individualism. Although there is an increase in the services sector were MNCs are dominant and non-unionism is the preferred strategy.

References

Alpin, C, Kersley, B (2006) Inside the Workplace: Findings from the 2004 Workplace Employment Relations Survey, Routledge Chapter 2, 11.

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Edwards, T., Ferner, F, (2002) ‘The renewed ‘American Challenge’: a review of employment practice in US multinationals’. Industrial Relations Journal, Vol.33 No. 2, pp. 94-108.

Edwards, T and Ferner, A (2005) ‘Managing Human Resources in Multinational Companies’. Managing Human Resources: Personnel Management in Transition (4th Edn), Oxford: Blackwell, Chapter 3.

Edwards, T and Ferner, A (2002) ‘The renewed ‘American Challenge’: a review of employment practice in US multinationals’. Industrial Relations Journal, 33:2.

Ferner, A (2003) ‘Foreign Multunationals and Industrial Relations in Britain’, in Edwards, P (2003) Industrial Relations Theory and Practice (2nd Edn), Oxford: Blackwell, Chapter 4.

Ferner, A et al (2005) ‘Policies on Union Representaion in US Multinationals in the UK: Between Micro-Politics and Macro-Institutions’, British Journal of Industrial Relations, 43:4.

Lee, E (1997) ‘Globalisation and Labour Standards: a review of the issues’, International Labour Review, 136:2.

Royle, T (1999) ‘The reluctant bargainers? McDonalds, unions and pay determination in Germany and the UK’. IRJ, 30:2.

Tuselmann, H., McDonald, F., Heise, A. (2002). ‘Globalisation, nationality of ownership and employee relations – German multinationals in the UK’. Personnel Review, Vol. 31 No. 1, pp. 27-43.

Williams, S and Adam-Smith, D (2006) Contemporary Employment Relations: A Critical Introduction, Oxford, Oxford University Press, pp 61-82.

http://www.berr.gov.uk/files/file11423.pdf

http://www2.warwick.ac.uk/fac/soc/wbs/projects/mncemployment/conference_papers/voice_in_mncs.pdf

http://www.certoffice.org/annualReport/index.cfm?pageID=annual

The unionised workforce expressed as a percentage of potential membership