Multinationals and European Integration

Trade, Investment and Regional Development

Nicholas A. Phelps

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136036248
• Edition: 1
• Topic: Architecture
• Subtopic: Urban Planning & Landscaping

This book examines the role of the multinational firms in processes of European integration. It is primarily concerned with the implications of market integration and industrial restructuring for peripheral European regions.
Nicholas Phelps argues that, because of the complex relationship between competition and economies of scale, the persistence of market segmentation, and because of the embeddedness of multinational investment in established production locations, there is considerable inertia in the existing trade and investment patterns of multinationals in the EU. This argument is explored empirically in relation to multinationals operating in Wales. This study suggests that processes of restructuring accompanying market integration are slow to take effect and based on a diversity of motives.

CHAPTER 1

Introduction

Coincident with the rhetorical arrival of the Single European Market (SEM) at the start of 1993, Maytag’s Hoover subsidiary announced a relocation of production from Dijon in France to Cambuslang in Scotland (Taylor, R., 1993a). The relocation provided a vivid example of the dynamic effects of European integration on the activities of a multinational company – the sorts of effects that are supposed ultimately to benefit EU consumers and promote industry competitiveness.¹ However, Hoover’s decision also prompted fierce criticism in France and began a debate regarding the influence of regional, national and EU policy on the location and quality of multinational investment.

Cases like Hoover’s relocation periodically make a spectacle of processes of regional economic integration; processes which are altogether more insidious. The Hoover case focused attention on a quite limited set of issues regarding choice of location and regional, national and supranational policy affecting the competitiveness and mobility of multinational investment (Goodhart, 1993; Ramsay, 1995).² On the face of things, the Hoover case appeared to be a prime example of ‘social dumping’ in the context of national variations in direct and indirect labour costs and in attitudes towards the social chapter of the ‘Maastricht Treaty’ – at least this was how it was widely interpreted at the time. Yet other contingent factors clearly played some part in the decision to relocate and, in particular, to relocate to an area of lower overall labour costs. Virtually at the same time as Hoover’s decision to relocate, Nestlé made a decision to relocate in the opposite direction from Scotland to Dijon, France (Taylor, R., 1993b). Nestlé’s decision appears to have been based on issues of market access rather than labour costs and serves as a reminder of the potential diversity of motives for shifts in production including, for instance, access to markets, skilled labour and certain material inputs. Hoover and Nestlé are just two in a steady, if small, stream of such international shifts most of which receive much less publicity and the motives for which may be less clear.

Furthermore, the impression left by the spectacular shifts of production exemplified by Hoover and Nestlé should not obscure the fact that the majority of multinationals remain attached to existing production locations. For example, there are a large number of intra-national shifts in production which have some connection with processes of European integration. These also receive little attention but constitute an important element in the restructuring of EU industry. Such intra-national relocations and transfers of production highlight the extent to which firms, multinationals included, remain tied to particular locations as centres of consumption. The largest number of relocations are, of course, intra-regional. Whilst few of these may have an explicit connection with European integration, they nevertheless highlight the fact that firms are tied to locations as centres of production; one of the main reasons being to retain skilled labour and avoid re-incurring the non-recoverable sunk costs associated with training.

The integration of national markets within the EU brings with it both pressures, and opportunities to reorganise production within multinationals. In turn, these reorganisations have important implications for the quality of manufacturing investments in, and trade performance of, particular regions and nations.³ Yet relatively little is known about the basis on which companies make decisions regarding restructuring for the Single European Market and the actual and possible impact of regional, national and EU policy to enhance industry embeddedness and competitiveness in particular regional settings. It is with these questions that this book concerns itself.

Background

Regional economic integration is perhaps the most salient feature of the contemporary international economy. It is most accurately conceived as an ongoing economic and political process but is also conveniently interpreted as a state of affairs such that the process can be divided into a number of stages. The differences between the two ways of conceiving of regional economic integration can be illustrated in a couple of ways with reference to Europe. First, what is today referred to as the European Union (EU) was once referred to as the European Community (EC) and before that as the European Economic Community (EEC). This re-titling seems to bear little relation to the state of affairs reached at various times in the EU. The title European Union as applied today is certainly inaccurate. It is instead a signal of future intentions regarding economic union. Second, the Single European Market did not come into existence on the 1st of January 1993. Indeed, with a small number of the original 279 measures (plus a small number of subsequent measures) remaining to be adopted by the Council of Ministers and with a larger number of directives yet to be transposed into national legislation (Barnes and Barnes, 1995: 77) let alone enforced at the start of 1995, it remains to be fully established. In other words, regional economic integration as a process need not be unidirectional.

To a large degree, the contemporary regionalism has been forged from a political will both, in a positive sense, within trade blocs (towards removing barriers to trade) and, in a negative sense, between trade blocs (in terms of a strategic reaction). Naturally, then, there is some concern that the current regionalism is associated with a protectionist turn in international trading relations. However, the carving up of the international economy into such trade blocs and the prospect of increased protectionism is, as Hirst and Thompson (1992, 1994) note, far from inevitable. There are a number of good reasons why the implications and trajectory of regional economic integration are unclear. First, investment has begun to replace trade as the main force behind regional economic integration. Compared to trade, investment is surrounded by less protectionist sentiment and is more susceptible to multilateral regulation. Second, bloc-wide regulatory institutions are in their formative years and their character, scope and powers remain unclear. Third, nation states remain important in the regulation of trade and investment in the emergent trade blocs. As such, whether the current trade bloc centred economic integration is associated with the protectionism alluded to above depends on the form of integration within each of the trade blocs.

However, it is also true to say that a large element in such regionalism is ‘natural’ – deriving from the working out of corporate strategies and structure in relation to appropriate markets. This distinction between politically constructed (strategic) integration and natural integration emphasises the uncertain pace, form and implications of future regionalisation in the world economy. The tri-polar world economy emerging around the three main trade blocs need not herald the end to multilateralism if such integration is in large part natural rather than strategic in origin (Sapir, 1993). Multinationals are especially important within such natural integration – since it is they who are unique in their ability to integrate national territories as centres of consumption and production. Furthermore, it is they who often have the greatest influence on the development of competition and industrial policy of supranational regulatory bodies such as the Commission.

If multinationals are the most important contributors to processes of regional economic integration, then their contribution is growing both quantitatively and qualitatively. Whilst quantitatively the contribution of the stock of world foreign direct investment (FDI) to world output is small and stagnant, the contribution of foreign affiliates to world exports is large and growing (UNCTAD, 1994: 130). In this way multinationals are a very important element in the shallow economic integration embodied in trade flows. The contribution of multinationals to the UK economy may be particularly significant, with 80% of UK exports in 1988 accounted for by multinationals, a third of whom were foreign companies (Ietto-Gillies, 1993). Arguably, just as important, is the contribution of multinationals to regional integration in a qualitative sense. Here there appears to have been some evolution in the organisation of multinational companies away from overseas investment strategies based on stand-alone affiliates towards strategies involving simple and complex integration (UNCTAD, 1994).⁴

This book concerns itself with the role of multinationals in shaping patterns of trade, investment and regional development as part and parcel of processes of regional economic integration. An understanding of these issues involves a number of often quite distinct literatures. Certainly, there is little literature dealing specifically with the contribution of multinationals to regional economic integration (see Dunning and Robson, 1988). Furthermore, if regional economic integration is manifest in patterns of trade and investment then there has been little consideration of the complex relation between the two. Until comparatively recently, trade and investment have been treated as substitutes for one another and as a result there is relatively little literature which analyses the more complex and often complementary relationship between trade and investment, especially as orchestrated by multinationals. There is literature on the local and regional development impacts of multinationals (for a recent review see Young, Hood and Peters, 1994), but this tends to be rather unconnected with issues of trade and regional economic integration. The task of producing some theoretical synthesis of these relevant literatures is well beyond the scope of this book. Nevertheless, through the combination of a focused review of the existing relevant theoretical and empirical literature and the original empirical material on multinationals in Wales, the intention of this book is to offer some insights into the contribution of multinationals to European integration.

In this respect, one initial observation can be made. The two ways of conceiving of regional economic integration noted at the start of this chapter raises immediately two differing tendencies in the interpretation of the spatial implications of European integration. Changes in the geography of investment and industrial activity accompanying European integration cannot be detached from their long-term historical context and appear evolutionary when conceiving of regional economic integration as a process (e.g. see Gertler and Schoenberger, 1992); they might appear radical if regional economic integration is conceived in terms of distinct stages (as is most obvious in the Commission’s own analyses of the SEM). This book tends toward the former interpretation of geographical changes in industrial activity when stressing the inertia inherent in multinational restructuring and economic development in Wales.

Structure of the Book

Chapter 2 provides a general framework for interpreting the metarial presented in the book. It sets European integration in the broader context of the regionalisation of trade and investment in the world economy and the regulation of the activities of multinationals. The chapter suggests that the ownership and vintage characteristics of multinationals are likely to offer some of the more important insights into the main dimensions of the restructuring of trade and investment by multinationals in the EU. It also discusses the influence of various regulatory bodies on multinational embeddedness and competitiveness.

Some of the basic theories and evidence regarding the connection between multinationals, trade, investment and regional economic integration are discussed at the beginning of Chapter 3. Thus, Chapter 3 looks first at customs union theory and issues of trade creation and diversion as a precursor to discussion of the central contribution of multinationals to such patterns of trade and investment in the EU. Finally, the regional development implications of multinational orchestrated trade and investment in the EU are examined. The focus in the chapter is upon European integration up until the 1980s and the attempt to complete the internal market of the EU.

Chapter 4 looks in more detail at the presumed effects of the creation of the Single European Market. The chapter first discusses the Commission’s own analysis of the spatial and aspatial impact of its single market programme. The bulk of the chapter is, however, concerned with elaborating three lines of criticism of the Commission’s analyses which, in turn, form the basis to the research presented in subsequent chapters. The chapter argues that because of the complex relationship between processes of competition and the exploitation of economies of scale, the continued fragmentation of the SEM into numerous distinct markets, and because of the attachment of multinationals to established centres of production, the process of industrial restructuring accompanying market integration will be protracted. These three influences on processes of industrial restructuring in the EU will work themselves out differently according to the ownership and vintage characteristics of multinational investments in the EU.

This book presents original research on the role of multinational manufacturing operations in Wales on patterns of trade and investment in the EU and on regional development. Chapter 5, therefore, provides some initial background to this original research. The chapter provides a review of existing published material on multinational involvement in Welsh manufacturing industry, with a view to detailing some of the historical and persistent, as well as some possibly recent and novel, characteristics of multinational investment over the years.

Chapter 6 briefly introduces the design of the original research into the impact of European integration on multinationals in Wales. Details of a postal survey of the larger multinational manufacturing investments in Wales are provided. Similarly, the basis to a number of case studies of corporate restructuring with a ‘European dimension’ involving Welsh operations is also discussed.

Original empirical material is presented in Chapters 7, 8 and 9. Each of these chapters relates to one of the lines of criticism raised earlier. In Chapter 7 the market orientation of multinationals in Wales is examined empirically. The trading patterns of multinational affiliates give an idea of the character, corporate role and competitive position of those affiliates. The chapter also considers whether the removal of remaining barriers to trade has had any significant impact on the competitive position of multinational manufacturing operations located in Wales.

Since multinational firms are the main orchestrators of trade and investment in the EU, the fortunes of manufacturing operations in different regions of the EU are interrelated. The prospects of Welsh manufacturing operations are therefore, to an extent, related directly or indirectly to the performance and capabilities of other parent company operations in the EU. Chapter 8, therefore, attempts to put the competitiveness of multinational manufacturing operations in Wales in some wider intra-corporate context.

Chapter 9 looks at the question of whether the local embeddedness of multinationals has any bearing on the competitiveness and security of multinational operations. There are contradictory schools of thought on this subject with, on the one hand, a long-standing tradition of empirical research with an underlying suspicion of multinationals as ‘snatchers’ rather than ‘stickers’ and, on the other hand, recent conceptual work which has tended to re-emphasise the local bases to multinational competitiveness. The chapter looks at the linkage patterns of multinational manufacturing operations in Wales as well as the policy infrastructure in support of multinationals in Wales compared to other EU regions.

Finally, Chapter 10 attempts to draw together the earlier conceptual discussions and the research findings contained in the book. The chapter first summarises the prospects for multinational manufacturing investment in Wales. It then reconsiders the extent to which ‘ownership’ and ‘vintage’ are of use in understanding the differential contribution of multinationals to European integration and peripheral region development. This leads on to a more speculative discussion of how processes of market integration and multinational restructuring may currently be working themselves out in the EU. At this point, the chapter argues that processes of European integration, multinational restructuring and their trade and investment implications cannot be separated from an understanding of regionalisation elsewhere in the world economy. It is important, therefore, for future academic research to focus on the precise implications of regionalisation on corporate strategies in terms of the extent and main dimensions of any connections, or trade-off, between integration of activities both within and between trade blocs. The chapter closes with a discussion of the possibilities for institutional infrastructure to enhance the competitiveness and embeddedness of multinational investments in Wales and other peripheral ‘regions’ in the EU.

1 Although the term European Union (EU) is used in the text, this book does not consider the implications of fiscal and monetary union implied in the term. The book concentrates on the implications of European integration culminating in the effort to complete the common market. The expression EU(6) is used to refer to the original six members of the EEC and EU(9), EU(10) EU(12) etc. to refer to successive enlargements.

2 The term multinational is used in this book instead of the term transnational. The latter is certainly more precise than the former in terms of defining the possible range of multinationals in terms of the geographical spread of their operations. However, the term multinational is ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Contents
• List of Tables
• List of Figures
• Acknowledgements
• Foreword
• 1. Introduction
• 2. The Political Economy of European Integration
• 3. From the Customs Union to the Single Market
• 4. The Single European Market and Multinational Restructuring
• 5. Multinationals in Wales
• 6. Background to the Study
• 7. The Market Orientation of Multinationals in Wales
• 8. The Scale and Competitive Position of Multinationals in Wales
• 9. The Local Embeddedness of Multinationals in Wales
• 10. Conclusions
• Bibliography
• Subject Index
• Author Index