INTRA-EU FOREIGN DIRECT INVESTMENT AND DIRECT EMPLOYMENT IN HOST REGIONS. Frank McDonald, University of Plymouth and Heinz-Josef Tüselmann, Manchester

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1 INTRA-EU FOREIGN DIRECT INVESTMENT AND DIRECT EMPLOYMENT IN HOST REGIONS Frank McDonald, University of Plymouth and Heinz-Josef Tüselmann, Manchester Metropolitan University 1 Corresponding author: Frank McDonald, Plymouth Business School, University of Plymouth, Drake Circus, Plymouth, Devon, PL4 8AA, ; frank.mcdonald@plymouth.ac.uk Abstract Economic integration in the European Union (EU) has stimulated foreign direct investment (FDI) flows leading to changes to European industrial structures that should induce changes in employment patterns. According to resource based theories of multinational corporations (MNCs) these FDI developments should lead to the evolution of subsidiaries that are increasingly embedding into host locations to gain access to desirable assets that are available in these locations. The strategic/operational autonomy granted to subsidiaries should also be increasing due to the granting of mandates to enhance local sourcing and to expand control over many of the operations of subsidiaries. However, there is evidence that suggests that European subsidiaries based in European countries tend to grant limited mandates to their subsidiaries and they also have low levels of embeddedness in host locations. This paper uses a survey of French and German subsidiaries in the UK to investigate the relationship between embeddedness and strategic/operational autonomy and employment. The results are used to assess the implications of the development of French and German subsidiaries for employment in host locations. 1

2 INTRODUCTION The integration programmes of the European Union (EU) such as the Single European Market and European monetary union are reducing the trading costs of engaging in intra- EU trade and are thereby providing incentives to rationalise production and distribution systems to reap economies of scale, gain access to desirable assets, and to expand and develop markets. These integration programmes are supposedly inducing changes to industrial structures leading to a break down of nationally based structures, replacing them with pan-eu systems, albeit with significant variations according to industry and member state (European Commission, 1996). This process is also inducing geographical concentration which is most pronounced in industries that have strong economies of scale and these industries tend to be located near to large markets (Amiti, 1998, Brülhart, 1996a). However, geographical concentration is not as pronounced in Europe as it is in the USA (Brülhart, 1996b) indicating that European economic integration programmes have not yet delivered the type of single market that exists in the US. The operations of MNCs are crucial to the process of industrial restructuring as their FDI flows play a crucial role in the creation and evolution of European industrial structures (Dunning, 1997). Modern theories of multinational corporations (MNCs) suggest that many companies seek to develop subsidiaries by establishing links with other firms and agencies in host locations to access desirable assets that help to promote the strategic objectives of companies (Bartlett and Ghoshal, 1989). These theories also highlight the incentives that 1 This research was funded by the Anglo-German Foundation for the Study of Industrial Society 2

3 exist for subsidiaries to be granted strategic/operational autonomy in many areas (Birkinshaw and Hood, 1998; Birkinshaw et al, 1998; Holm and Pedersen, 2000). However, studies in the EU do not suggest that these types of factors are important incentives for FDI inflows in the EU. The main factors found to induce FDI inflows are benefits from increasing returns to scale, costs advantages stemming from labour, tax/subsidy and government policies, and advantages that permit the development of markets in host locations (Brülhart, 1998; Scott-Green and Clegg, 1999; Pearce and Poponastassiou, 1998). A study that sought to discover if the Single Market Programme had led to FDI becoming more sensitive to acquiring desirable assets in host locations found no evidence that there had been a significant move in this direction (Mold, 2003). There is also evidence that European MNCs are less likely than non-european MNCs to develop core competencies in subsidiaries that are located in Europe (Chesnais et al, 2000). A study of foreign owned subsidiaries in Wales and North East England found no evidence that foreign owned subsidiaries were becoming more embedded in their host locations due to institutional improvements in host locations that were intended to improve the desirability of local assets (Phelps et al, 2003). A study of Irish FDI found that the subsidiaries of non-european MNCs (American, Australian, Canadian and Japanese) and from smaller European countries were more likely to supply the rest of Europe than MNCs from large European countries and the Netherlands. MNCs based in the latter countries tend to focus on sales to the domestic market with FDI flows strongly linked to export enhancing activities from parent companies. The study also found that subsidiaries of non-european MNCs and from 3

4 small European countries were more likely to source their Irish subsidiaries from the rest of Europe. However, those from large European countries and from the Netherlands primarily sourced from the home country (Egelhoff et al, 2000). This branch plant syndrome was also discovered in a survey of 452 foreign owned subsidiaries in the UK that revealed that European MNCs were less likely to make significant purchases in the UK than North American or Asian firms and that many European MNCs made no or only very small purchases in the UK (Williams, 1999, Williams, 2003). Studies of German FDI in the UK and Ireland found that German owned subsidiaries tended to focus on sales to domestic market and that there was little evidence that large numbers of subsidiaries where evolving into more diversified operations that embrace high valueadded operations in host countries (Hood and Taggart, 1997, McDonald et al, 2003a and 2003b). These studies suggest that intra- EU FDI from large European economies does not lead to large numbers of subsidiaries that are deeply embedded into their host locations, neither do they possess significant mandates associated with high levels of strategic/operational autonomy. This is likely to have implications for the development of host regions, especially in the area of employment. This paper examines the importance of the embeddedness and the strategic development of the subsidiaries for employment by French and German subsidiaries in the UK. This is done by firstly reviewing the literature on FDI and regional development and employment. This followed by a review of the literature on the impact of embeddedness 4

5 and the strategic/operational autonomy of foreign owned subsidiaries. The reviews provide the basis for the development of hypotheses on the links between embeddedness and strategic/operational autonomy and employment. The hypotheses are tested using a survey of French and German subsidiaries in the UK. Finally, the findings are used to assess the likely employment effects arising from French and German subsidiaries in the UK. FDI AND REGIONAL DEVELOPMENT The literature on regional development and employment effects of FDI inflows has been focussed on macroeconomic with a much lesser emphasis on microeconomic studies. The macroeconomic studies are generally based on econometric studies using regional and national data on wages, productivity and employment. These studies have centred on the direct and especially the indirect employment effects of FDI. The microeconomic studies, generally based on surveys and case studies, have been less concerned with employment effects but have considered employment as part of wider concerns with regional development issues. Macroeconomic Studies A number of macroeconomic econometric studies have established that FDI leads to positive employment effects (Barrell and Pain, 1997; Driffield, 1999a). The direct employment benefits are enhanced by spillover effects arising from technology transfer 5

6 and demonstration effects to other firms (Blomström and Kotto, 1998; Hubert and Pain, 1999; Liu et al, 2000). If the spillover effects are small and if subsidiaries obtain much of their labour from existing domestic firms and from the use of expatriates, FDI will have only a marginal impact on employment in host regions (Driffield, 1999b). Some studies have found a slight tendency for FDI to boost the employment of skilled workers in host countries leading to higher wage levels in domestic firms (Aitkin et al, 1996; Driffield and Taylor, 2000; Wakelin, et al, 1999). A study on the regional employment effects of FDI in the UK found that the employment effects in host regions arising from FDI spillovers are positive, but small and normally take a long time to materialise (Gillespie, et al, 2000) Some macroeconomic econometric studies have found conflicting evidence on the beneficial impact of FDI on employment (Aitken and Harrison, 1999; DeMello, 1999). These studies find that the spillover effects are often small and the displacement of domestic firms by more competitive foreign entrants combined with the transfer of skilled labour from domestic to foreign owned firms reduces the productivity of large parts of the national or regional economy and thereby, in the long-run, undermines the positive employment effects of FDI inflows. The macroeconomic studies suggest that DFI between developed economies are likely to have a small and positive impact on employment in host economies. There is also some evidence that DFI inflows boost wages and the skill level of jobs in host regions. However, most of the macroeconomic studies have concentrated on the implications for employment 6

7 growth rather than investigate the repercussion for the type of jobs that are associated with DFI inflows. Moreover, the main emphasis of these studies is on spillover effects that lead to indirect employment effects in other firms within the host location. Microeconomic Studies Microeconomic studies have focused on entry mode, markets supplied, organisational aspects of foreign owned subsidiaries, benefits of locations (such as low labour costs and tax advantages), and stages theories of internationalisation (Dunning, 1992; Love et al, 1996; Young, et al, 1994). The microeconomic factors traditionally associated with the development of host economies have been entry mode (greenfield or brownfield), type of activity (manufacturing, services, sales and distribution, and R&D), size and age of subsidiaries, markets supplied, and technology transfer. These studies have generally found that greenfield sites, those with significant technology transfer and cases where subsidiaries are important for exploiting domestic markets usually have beneficial employment effects (Love et al, 1996). However, particularly in peripheral regions, much of FDI can be footloose and to generate low skilled jobs (Young et al, 1994). Some evidence has been found that higher levels of strategic autonomy led to improved employment effects (Taggart, 1996). More contemporary literature has focussed on the development of local sourcing (the development of local supply chains), the use of local networks (formal and/or informal connections between firms and supporting organisations) and the development of the 7

8 strategic/operational autonomy of subsidiaries. The contemporary literature is focused on the concept of embeddedness or the level at which subsidiaries are rooted into their local base and on the granting of mandates in the areas of strategic decisions and operations. The employment implications of such DFI inflows have not been subject to systematic study. Embeddedness and Strategic/Operational Factors Embeddedness and strategic and operational developments are largely determined by four main factors. 1. The level of local sourcing based on intra-firm connections with host country suppliers. 2. Use of local networks founded on connections and relationships between firms and supporting organisations that aid in gathering, processing and disseminating information and knowledge useful for the operations of subsidiaries. 3. The strategic development of subsidiaries by granting higher level autonomy in the strategic decisions of subsidiaries. 4. The scope of main operations in terms of expanding and extending the type of operations connected to the main activity the subsidiaries. Local Sourcing Studies indicate that beneficial employment outcomes are positively related to the level of domestic sourcing (Ashcroft and Love, 1989; Scott, 1983, Williams, 1999 and 2003). 8

9 Most of the jobs connected to local sourcing will be in supplying firms, but the purchasing firm will also required skilled workers who can manage and operate a supply chain that is more independent from the parent company. Moreover, subsidiaries that have high and increasing levels of host country sourcing will require more skilled labour to manage and operate production systems that are connected to complex domestically based supply chains. Conversely, high levels of host country sourcing should lead to a decline in semi skilled/unskilled jobs as subsidiaries outsource low-level work to external suppliers. This leads to the hypothesis. H1a H1b Growth of employment is positively related to host country sourcing. The change in skilled jobs is positively related to host country sourcing and this factor is negatively related to semi skilled/unskilled jobs. Local Networks The importance of MNCs locating within local networks (such as universities, R&D agencies, quality clubs and trade associations) has been highlighted in work investigating the role of geographical factors for developing competitiveness (Dunning, 2000; Porter, 1990 and 1994). These local networks enhance the ability to attain collective learning and innovation benefits (Lundvall, 1999) and to acquire spillover benefits associated with proximity (Porter and Sölvell, 1999). These network benefits, together with the advantages from effective local supply chains, form the basis for agglomeration benefits (Driffield and Munday, 2000). Local networks that provide such benefits are at the core of clusters or industrial districts that have been shown to deliver competitive advantages to foreign owned subsidiaries that locate in these geographical concentrations (Enright, 1998 and 2000). 9

10 Membership of locally based networks should enhance the effectiveness of subsidiaries and thereby enhance employment in terms of the number and skill level of jobs because collective learning and innovation, that is enabled by such networks, allows for expansion of both the size and complexity of operations. Subsidiaries that have high usage of local networks are likely to have lower demand for semi skilled/unskilled workers as they become involved in higher quality operations engendered by use of local networks. This leads to the second hypothesis. H2a H2b Growth of employment is positively related to the use of local networks. The percentage change in skilled jobs is positively related to the use of local networks and this factor is negatively related to semi skilled/unskilled jobs. Strategic Autonomy Mandates Resource-based theories of MNCs regard them as international networks of subsidiaries that blend firm specific resources into effective units capable of conferring competitive advantages to MNCs (Bartlett and Ghoshal, 1989). Therefore, MNCs take advantage of the different cultures and business environments in which their subsidiaries operate to develop intra-firm networks that make the best use of the resources available to them. The conferment of mandates to subsidiaries to pursue strategic objectives is normally regarded as a key requirement to allow them to maximise the ability to exploit locally available assets and opportunities. Some subsidiaries can be selected to be centres of competence where subsidiaries are granted mandates to provide outputs that are used in 10

11 all parts of the MNC or substantial parts of the operations of the MNC (Birkinshaw, et al, 1998; Holm and Pedersen, 2000). In general, it is expected that the higher the level of mandates that are granted, the more subsidiaries will need to employ skilled labour in order to carry out specialised and high value added operations. Moreover, mandates that restrict subsidiaries to low level assembly or low level processing of services and/or that are primarily connected to sales and distribution are likely to create fewer and less skilled jobs than subsidiaries that have mandates to supply a wide range of markets with a variety of complex products. This leads to the third hypothesis. H3a H3b Growth of employment is positively related to the granting of mandates. The change in skilled jobs is positively related to the granting of mandates and this factor is negatively related to the change in semi skilled/unskilled jobs. Scope of Operations The expansion and extension of the scope of the main area of operations as subsidiaries developed has been found in a number of studies (Taggart, 1996; Hood and Taggart, 1997). Such developments should lead to an increased need for skilled labour with a reduced emphasis of semi skilled/unskilled workers as subsidiaries increase the type and intensity of their operations. Some evidence of this view has been found in German subsidiaries in the UK (McDonald et al, 2003a). Consequently, the final hypothesis is based on this link. 11

12 H4a Growth of employment is positively related to the scope of the main area of operations. H4b The change in skilled jobs is positively related to the scope of the main area of operations and this factor is negatively related to the change in semi skilled/unskilled jobs. Model of Embeddedness and Strategic/Operational Factors The literature on embeddedness and strategic/operational factors suggests that there are connections between them and employment in terms of employment growth and type of jobs that are directly created by foreign subsidiaries in host locations. The hypotheses derived from this literature are summarised in Figure 1. This figure indicates that employment effects are related to both the high use and growth in these factors. The basis for this view is that the potential to increase demand for skilled labour is dependent on the level of use and increase in use of embeddedness, strategic autonomy and the scope of operations factors. Thus, firms that have high use of, for example, networks will be involved in activities that require more and higher skilled workers than those with low use of networks. Moreover, increasing use of networks is likely to further induce growth of demand for skilled labour as the benefits of being in networks increase stimulating new opportunities to add value to the operations of the subsidiaries. (Figure 1 about here) 12

13 METHOLODOGY To test the hypotheses and to gage the main microeconomic characteristics of subsidiaries a survey of German and French subsidiaries in the UK was carried out in The database of the German-British Chamber of Commerce and Industry was used to identify the German subsidiaries. The French subsidiaries were identified from the database of the Anglo-Franco Chamber of Commerce and Industry. These databases covered most of the known French and German subsidiaries in the UK. The questionnaires were piloted with 10 German and 10 French subsidiaries and were amended in the light of the comments from respondents. The databases identified the name of the managing director of the subsidiaries, therefore, the questionnaires were sent to the named head of the subsidiary. This led to 275 replies (24.2% response rate) from German subsidiaries and 178 replies (15.9% response rate) from French subsidiaries. The returns compared to the total population revealed that there were no major differences between the respondents and non-respondents in terms of sector and region. The data to assess the hypotheses for the subsidiaries was analysed by OLS regressions for change in employment, and change in skilled and semi skilled/unskilled jobs. The regressions were run for three cases. 1. Subsidiaries in all sectors. 2. Subsidiaries excluding those establishments where the main activity was sales and distribution. 13

14 3. Subsidiaries in traditional and/or footloose industries, and new and/r sticky industries. Footloose industries are those that can easily be relocated to other areas, for example, much of traditional manufacturing whereas sticky industries refer to those that are closely tied to their location, such as service industries. Traditional and/or footloose industries (hereafter referred to as traditional industries) were defined as mechanical and electrical engineering, automotive, chemical and chemical engineering, retailing, wholesaling and logistics, energy and utilities, textiles, and wood and construction products. New industries and/or sticky growing industries (hereafter referred to as new industries) were defined as pharmaceutical, IT and telecommunication equipment, business services, and financial services. The regressions were run with and without sales and distribution to check if the large number of subsidiaries that specified this activity as their main area of business masked significant evidence of employment effects among subsidiaries that are centred on manufacturing or services. The split into traditional and new industries was used to see if new industries had a different profile in terms of employment effects. Change in employment and the percentage change in skilled and semi-skilled/unskilled jobs were the dependent variables. The explanatory variables were high use of embeddedness, strategic autonomy, and scope of operations factors (host country sourcing, use of local networks, granting of strategic autonomy mandates) and increase in scope of main operations. The scope of operations was measured using only the increase in main area of activity because the data gathered on the high use of scope of operations 14

15 was suspect due to evidence that many respondents had confused this with decision making autonomy. However, the data on the increase in the scope of main activity did not display any evidence that respondents had confused this with change in decision making autonomy. The control variables were size [turnover], age, main activity (manufacturing, services, sales and distribution), entry mode, market supplied, and technology transfer. The definitions of the variables that were used are shown in Table 1. (Table 1 about here) The results were tested for heteroscedasticity (Cook-Weisberg test), omitted variables (Ramsey Resit test) and multicollinearity (Variance Inflation Factor test). None of the regressions displayed multicollinearity, but some tested positive for hetroscedasticity and for omitted variables. In the cases were the tests proved positive, remedial action was taken to correct the problems (Weisberg, 1985). Most of the categorical non-metric variables are dichotomous and are denoted by dummy variables. Where they are significant and positive the yes version of the variable is significant. Where they are significant and negative the no version of the variable is significant (Hair et al, 1998). MAIN CHARACTERISTICS OF THE SUBSIDIARIES The characteristics of the respondents in terms of size (turnover and employment) are similar for both German and French subsidiaries. However, more French subsidiaries are larger, except for those with a turnover greater than 250 million and French subsidiaries are younger with more German subsidiaries that are over 11years and many more over 20 years. French subsidiaries were more likely to have been acquired by mergers and 15

16 acquisitions (49.7%) compared to 32.5% for German subsidiaries. Nearly 60% of German subsidiaries were greenfield whereas only 36.4% of French subsidiaries fell into this category. More German subsidiaries are primarily engaged in sales and distribution and French subsidiaries are more involved in services activities. About half of the workforce of the subsidiaries is skilled. The proportion of skilled workers in German subsidiaries is slightly higher than in French subsidiaries but the latter have a higher rate of growth of skilled jobs (Table 2). French and German subsidiaries reveal similar levels of decision making autonomy and use of networks but German subsidiaries have higher growth in these areas. French subsidiaries have higher use of domestic sourcing and they have a similar rate of growth as German subsidiaries. The increase in the scope of operations in main activity is slightly higher in French subsidiaries (Table 2). Disaggregated data on embeddedness and strategic/operations factors reveals that in many areas these factors are experiencing slow or no grow and some of them are not considered to be very important. For example, 60% of German subsidiaries have had no change in the scope in manufacturing in the five years covered by the survey. In terms of R&D activities, 50% of German and 48% of French subsidiaries have had no change in the scope of this activity. Decision making autonomy has not changed in manufacturing for 60% of German subsidiaries and 65% in R&D. Of the top three networks used (universities linkages, trade associations, quality clubs) only trade associations are considered to be important by subsidiary managers (McDonald et al, 2003b). 16

17 (Table 2 about here) EVIDENCE ON EMPLOYMENT EFFECTS The adjusted R 2 and F statistics reveal that few of the regressions have a high level of goodness of fit. The regressions that excluded sales and distributions provided the best fit for German subsidiaries. The regressions for French subsidiaries excluding sales and distribution and for traditional industries revealed no significant variables. No significant relationships were found in the regressions for both German and French subsidiaries in the category new industries (see Table 3). (Table 3 about here) There is some support for H1a as dhcs is significant for German subsidiaries in traditional industries. However, this variable is significant but has the wrong sign in the case of German subsidiaries whose main activity is not sales and distribution. Increase in domestic sourcing is significantly related to change in skilled jobs for German subsidiaries but there is no evidence of a negative relationship with semi skilled/unskilled jobs except for French subsidiaries where source is negative in the case of all French subsidiaries. Hence, support for H1a is very weak and for H1b is weak. French subsidiaries reveal positive linkage between dnet and employment growth for all subsidiaries thus providing very weak support for H2a. Skilled jobs are positively related to dnet for all German subsidiaries but there are no significant relationships between 17

18 network variables and semi skilled/unskilled jobs. Thus, the evidence for H2a and H2b is very weak. Importance of decision making autonomy is only positively linked to employment growth for German subsidiaries not primarily involved in sales and distribution indicating very weak support for H3a. There are no significant relationships, with the correct signs, between strategic autonomy variables and type of jobs, indicating no support for H3b. Change in employment is positively related to dscope for all French subsidiaries and for German subsidiaries that are not primarily engaged in sales and distribution. This independent variable is not significantly associated with the correct sign for change in the type of jobs. Thus, there is limited support for H4a but no support for H4b. Summary of evidence German subsidiaries are generally older and more likely to be greenfield than French subsidiaries. Both French and German subsidiaries displayed low levels of embeddedness in terms of domestic sourcing and use of networks but they have high levels of strategic autonomy (Table 2). The results of the regressions reveal very limited support for the hypotheses with only increased domestic sourcing and increased scope of operations displaying any consistent links to beneficial employment effects (Table 4). (Table 4 about here) 18

19 DISCUSSION The level of embeddedness of French and German subsidiaries revealed in this study confirms other research that also found low levels of embbededness in foreign owned (especially European owned) subsidiaries in Europe (Egelhoff, 2000; Phelps et al, 2003; Williams, 1999 and 2003). The extent of strategic/operational autonomy is similar to that found by other studies that have focussed on German subsidiaries in the UK (Hood and Taggart, 1997; McDonald et al, 2002 and 2003b). The evidence confirms the view that foreign owned subsidiaries have a tendency to be lightly embedded into their host locations but to have high levels of strategic autonomy in key areas. Growth and the importance attached to embeddedness factors appears to be low in many areas and increase in scope of main activities is also low in areas such R&D and manufacturing. However, the high level of strategic autonomy found in this and other studies contradicts the stereotype of the branch plant syndrome. The high proportion of French, and especially German subsidiaries, that are primarily engaged in sales and distribution indicates that many of these subsidiaries are unlikely to generate large numbers of skilled jobs in the UK. Indeed, the displacement of output from UK firms caused by increased penetration of the British market from French and German sales and distribution outlets is likely to have led to the loss of employment in some sectors (McDonald et al, 2002 and 2003b). The evidence suggests that many French and German subsidiaries in the UK are mainly supply channels for exports from the home 19

20 base. Although many subsidiaries have high strategic autonomy in their main area of activity, for most German subsidiaries this involves autonomy in sales and distribution and this is the case for nearly half of French subsidiaries. Thus, the high levels of strategic autonomy that has been granted to subsidiaries are not being substantially increased. Consequently, high levels of strategic autonomy may not lead to significant employment benefits for the host regions. This study found little to support the view that European multinational corporations are developing high levels of embbededness in their European subsidiaries. However, the resource based literature on MNCs suggests that subsidiaries should be becoming more embedded in their host location and be developing higher levels of strategic/operational autonomy (Birkinshaw and Hood, 1998; Dunning, 2000; Holm and Pedersen, 2000). The results of this study confirms the view that new locational factors such as access to desirable locally available assets do not seem to be very important. Traditional locational factors such as size of the market, developing markets, tax/subsidy benefits and labour cost advantages may still be more important than these new factors despite the many changes that have been induced by European economic integration programmes and new institutional and policy arrangements that have sought to enhance the importance of these new locational factors (Scott-Green and Clegg, 1999; Mold, 2003; Phelps et al, 2003). Intra-EU FDI appears to continue to be driven by traditional location factors such as market seeking and market developing motives and cost advantages. In this respect the main motivations for intra-eu FDI does not seem to be significantly different from extra- EU FDI. Indeed, if extra-eu FDI leads to higher levels of embeddedness and 20

21 strategic/operational autonomy the beneficial employment effects from such investment could be greater than from intra-eu FDI. The evidence on the links between embeddedness and strategic/operational factors and beneficial direct employment effects is not strong. A weak link exists between increase in domestic sourcing and growth of employment and increasing skilled jobs for German subsidiaries. Weak support was also found for increased scope of main activity and growth of employment for both French and German subsidiaries. There is no consistent link between embeddedness and strategic/operational factors and semiskilled/unskilled jobs. Interestingly, no links were found for new industries. Given the prominence attached to embeddedness factors for these industries in the literature (Bartlett and Ghoshal, 1989; Birkinshaw and Hood, 1998; Birkinshaw et al, 1998) this result is quite surprising. However, less than 30% of French and German subsidiaries are located in the new industries sector (McDonald et al, 2003b). It seems that the direct employment effects of French and German subsidiaries are not closely connected to embeddedness and strategic/operational factors. German subsidiaries appear to have more links between these factors and employment than French subsidiaries. This may be explained by the fact that more German subsidiaries have been German owned for more than 11 years, thus allowing more time for embeddedness and strategic/operational autonomy to be developed. However, the higher proportion of mergers and acquisitions by French MNCs should mean that their subsidiaries are more embedded and have higher strategic/operational autonomy than 21

22 German subsidiaries because of inherited linkages to the host location. Overall both French and German subsidiaries seem to exhibit strong symptoms of the branch plant syndrome. The combination of low levels of embeddedness, high use of subsidiaries as channels for exports from the home base and low presence in new industries by French and German subsidiaries makes the branch plant syndrome a continuing problem in terms of promoting the creation of significant numbers of high skilled jobs in host locations. This study confirms that results of other research that found European MNCs tend to be lightly embedded and to use low levels of domestic sourcing (Chesnais et al, 2000; Egelhoff, 2000; Williams, 1999). Even were high levels of embbededness and strategic/operational autonomy were evident the study found that there was no consistent beneficial employment effects. It seems that European integration programmes have not yet had any dramatic impact on the branch plant syndrome in terms of the development of subsidiaries that are strongly embedded and in the granting of mandates that lead to strong and beneficial employment effects in host locations. CONCLUSION Many French and German subsidiaries in the UK seem to display key characteristics of the branch plant syndrome. The development of the UK market by subsidiaries whose main activity is sales and distribution is a major motivation for much of French and especially German FDI into the UK. Most subsidiaries have low levels of domestic 22

23 sourcing and use of networks and low growth in these areas. Moreover, many subsidiaries that use networks report that use of networks is not very important. In important areas of manufacturing and more importantly R&D the increase in the scope of operations is very limited. Strategic autonomy/operational autonomy is high but this does not seem to lead to significant beneficial employment effects in host regions. In the cases where embeddedness and strategic/location factors are high and increasing the link to increasing demand for skilled workers by subsidiaries is weak. Thus, even where beneficial employment effects based on new location factors is to be expected the evidence for such effects is weak. It appears that European economic integration programmes have not yet made a significant impact on the branch plant syndrome. Similarly, the efforts to reform institutional structures and to develop policies to attract FDI based on new locational factors also seem to have not yet made any significant impact. This research needs to be developed to help to increase our understanding of the employment effects of foreign owned subsidiaries and thereby provide useful information to aid in improved policy and institution building to help to overcome the dominance of the branch plant syndrome. In particular, better goodness of fit of the regressions is required. Improved measurement of embeddedness and strategic/operational factors as well as a more disaggregated link to the employment effects should improve the goodness of fit. More sophisticated estimating techniques could also be used if data measurement was improved. In depth case studies where beneficial employment effects connected to the new locational factors have been found would also help to identify the 23

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30 Table 1 Definition of Variables High Importance Embeddedness and Strategic Autonomy Independent Variables Variables High Decision-Making Autonomy (aut) High Host Country Sourcing (source) High Use of Networks (net) Definition Yes - if the subsidiary has decision-making autonomy within its main activity. Yes - if the subsidiary makes purchases of 30% or greater from its local region or if it purchases 50% or greater from the whole of the UK. Yes - if the subsidiary engages with two or more local networks. Change in Embeddedness and Strategic Autonomy Independent Variables Variables Increase in Decision-Making Autonomy If there has been an increase in decision-making in the main (daut) activity accompanied by an increase in two other areas. Increase in Host Country Sourcing If the level of UK purchases has increased by more that the (dhcs) average for all subsidiaries. Increase in Use of Networks If use of local networks has increased. (dnet) Increase in Scope of Operations in Main If there has been an increase in the scope of the main Activity (dscope) activity. Control and Dependent Variables Control Variables Dependent Variables Change in sales turnover Change in employment (demploy) Sales turnover % Change in skilled jobs (dhskill) Firm age % Change in semi-skilled/unskilled jobs (dlskill) Entry mode Technology transfer Manufacturing Services Services Sales & distribution Market supplied firms with the main market not the UK or at least two non-uk markets regarded as important 30

31 Table 2 Characteristics of Subsidiaries Characteristics German (%) French (%) Main Activity Manufacturing Services Sales and Distribution Age > 20 Turnover ( m) > 250 Employment > 500 Entry Mode Greenfield M&A Joint Venture Type of Jobs 1 Skilled Semi/unskilled (2.1) 48.2 (6.4) (10.4) 53.9 (-0.5) High Decision-Making Autonomy High Host Country Sourcing High Use of Networks Increase in Decision- Making Autonomy Increase in Host Country Sourcing Increase in Use of Networks Increase in Scope of Activity Data is the mean percentage of employment in the categories skilled and semi/unskilled for all subsidiaries. Data in brackets are the percentage change in type of jobs ( ) 31

32 Table 3 Summary of Significant Explanatory Variables Level & Change Variables All Subsidiaries Excluding Sales & Distribution Traditional Industries G F G G Change in Employment (demploy) dhcs* adj R F 1.71 dscope** dnet* adj R F 2.28 aut* dscope* -dhcs** adj R F 8.77 Change in Skilled Jobs (dhskill) dhcs* dnet** adj R F 4.67 dhcs** adj R F 1.66 Change in Semi Skilled/ Unskilled Jobs (dlskill) dscope** -source* adj R F 1.93 aut* adj R F 3.87 Level of significance is denoted by: * (1% level), ** (5% level). 32

33 Figure 1 Embeddedness and Strategic/Operational Factors and Employment Embeddedness Factors Increased Domestic Sourcing High use of Networks High Domestic Sourcing Increased use of Networks High Decision Making Autonomy Employment Effects + for employment growth + for change in skilled jobs - for change in semi skilled/unskilled jobs Increased Decision Making Autonomy High Scope of Operations in Main Activity Increased Scope of Operations in Main Activity Strategic/Operations Factors 33

34 Table 4 Summary of Evidence on Hypotheses Hypotheses Support H1a Very Weak H1b Domestic sourcing H2a H2b Networks H3a H3b Strategic autonomy H4a H4b Scope of operations Weak Very Weak Very Weak Very Weak None Limited None Comments dhcs is positively related to employment growth but only for German subsidiaries and in one case has the wrong sign. dhcs is positively associated with skilled jobs for German subsidiaries in two cases but no link to semi skilled/unskilled jobs. No link with importance of domestic sourcing in any case. dnet is positively associated with employment growth but only for French subsidiaries in one case. dnet only linked to skilled jobs for German subsidiaries in one case and no link to semi skilled/unskilled jobs in any case. No link with importance of networks in any case. aut is positively linked to employment growth only for German subsidiaries in one case. No link (with correct sign) between aut or daut and type of jobs No link with increase in use of decision making autonomy in any case. dscope linked to employment growth for German and French subsidiaries in some cases. No link with correct sign in any case. 34