Labour Market Flexibility and Foreign Direct Investment

Linked with Mark Baimbridge – England, and with The Bank that rules Europe? The ECB and Central Bank Independence.

EMPLOYMENT RELATIONS, OCCASIONAL PAPER, Labour Market Flexibility and Foreign Direct Investment, by DR. P. WHYMAN, LANCASHIRE BUSINESS SCHOOL, and DR. MARK BAIMBRIDGE, UNIVERSITY OF BRADFORD: 50 pages in pdf, published in August 2006 by the Department of Trade and Industry. URN 06/1797, © Crown Copyright 2006.

(Read the rest of this 50 pages on the Website of the British Department of Trade & Industry).

Excerpt: … Conclusion and Policy Recommendations:

This paper has generated primary data, direct from senior executives of TNCs that have invested in the UK, which indicates that the primary determinants of FDI flows relate more strongly to market-seeking factors, followed by resource- and asset-seeking labour market variables. Although not the most important attractor for inward investment, labour market flexibility was nevertheless identified as representing moderate or high degrees of importance by 59.7 per cent of respondents. Disaggregating the data and testing for association with various company characteristics identifies a number of interesting features of the data. Firstly, small but notable differences in emphasis appear to exist between companies utilising high risk technology upon the quality of national labour force skills base and physical infrastructure, together with the significance of location near a large international market, compared to moderate and lower cost firms who tend to demonstrate a relative predisposition towards primarily national factors, such as size of national market, policy-related variables, including deregulation, tax rates, and the maintenance of a low cost of capital.

The similarity between high risk firms and those companies utilising a differentiated-niche strategy is close, although incomplete, as most respondents identified their enterprises having a moderate level of risk whilst the majority also adopted differentiation-niche strategies, therefore necessitating a substantial over-lap between categories. Thus, it would appear useful for government policy to seek to identify the preferred profile for those firms considering investing in the UK, before determining which factor will prove the most attractive to the potential investor. Examining those characteristics that form the basis for labour market flexibility, this paper has found that respondents identified the existence of a highly trained, skilled labour force as the primary labour market attractor for FDI, followed by elements of numerical flexibility, namely the flexible use of working time and labour mobility, functional flexibility, via the facilitation of multi-skilling and reduction of demarcation in the workplace, together with employment protection regulation and wage flexibility. Thus, these are the elements of labour market flexibility that governments should concentrate their resources upon to maximise the inward flow of FDI. The promotion of a high skilled workforce benefits all companies, but disproportionately favours high risk, differentiation-niche firms, whereas the benefits arising from numerical and functional flexibility are more evenly spread throughout the various clusters of companies analysed in this paper.

A number of features arise from the analysis, however, relating to government policy. Firstly, it is important for policymakers to keep in mind the fact that labour market flexibility is not a single phenomenon, but rather is an agglomeration of multiple individual characteristics, many of which have the potential to conflict with each other in practice. Moreover, respondents have indicated that it is only with certain of these characteristics that they are primarily concerned. Thus, there exists a clear potential for a degree of misdirection inherent within policy reforms
intended to promote FDI by strengthening the less significant aspects of labour market flexibilisation. For example, whilst the introduction of ‘push’ and ‘pull’ initiatives to incentivise the unemployed to seek work may be justified on the grounds that this may facilitate a reduction in unemployment and thereby is warranted as part of an overall flexible labour market strategy, it is of little significance in terms of attracting FDI. Similarly, factors including the cost of labour, wage flexibility, utilisation of incentive pay, industrial relations restrictions upon trade union activity and the decentralisation of wage bargaining act as relatively weak attractors for FDI … (Read the rest of this 50 pages on the Website of the British Department of Trade & Industry).

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