Employee Relations in Foreign-owned Subsidiaries

Employee Relations in Foreign-Owned Subsidiaries German Multinational Companies in the UK

Heinz-Josef Tüselmann, Frank McDonald, Arne Heise, Matthew M.C. Allen and Svitlana Voronkova

Employee Relations in Foreign-Owned Subsidiaries

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Employee Relations in Foreign-Owned Subsidiaries German Multinational Companies in the UK

Heinz-Josef Tüselmann Manchester Metropolitan University Business School, UK

Frank McDonald Bradford University School of Management, UK

Arne Heise Universität Hamburg, Germany

Matthew M. C. Allen Manchester Metropolitan University Business School, UK

Svitlana Voronkova Trinity College, University of Dublin, Ireland

© Heinz-Josef Tüselmann, Frank McDonald, Arne Heise, Matthew M. C. Allen, Svitlana Voronkova 2007 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1T 4LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published in 2007 by PALGRAVE MACMILLAN Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N.Y. 10010 Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–0–230–00696–6 hardback ISBN-10: 0–230–00696–5 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 16 15 14 13 12 11 10 09 08 07 Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham and Eastbourne

Contents List of Tables and Figure

vii

Preface

viii

Abbreviations 1

xi

Institutional Environments and Employee Relations in German Firms Background The role of multinational companies Rationale and objectives Approach and structure Headline findings Overview of book structure

1 1 4 7 9 11 12

2 Overview of Employee Relations in Germany and the United Kingdom

14

Introduction Employee relations in Germany Employee relations in the United Kingdom Conclusion

14 14 19 23

3 Employee Relations in Multinational Companies Introduction Employee relations systems: theoretical issues Studies of ER systems in German and US subsidiaries Possible outcomes in the ER systems of subsidiaries Conclusion

25 25 26 30 32 35

4 Firm Performance and Employee Relations

37

Introduction Trade unions Non-union management-initiated representative structures Non-union, independent collective voice: works councils Direct voice (high-involvement systems)

37 38

v

47 49 57

vi

Contents

Partnership approaches Limitations of previous studies Conclusion 5 Voice in Employee Relations Systems Introduction Unitary and holistic voice mechanisms Collective and direct involvement employee relations systems Typologies of employee relations systems Conclusion 6 Data and Methodology Questionnaire design and data collection Measures, classifications and operationalization Variable transformation and categorization Regression analysis Modelling ordinal variables Estimation issues Particularities of the comparative German-US study 7 The Characteristics of Voice Mechanisms in German Subsidiaries

63 69 72 75 75 76 77 81 81 84 84 86 92 94 98 101 101

104

Preliminary remarks The dimensions of employee relations Employee relations approaches Summary and concluding remarks

104 105 106 109

8 Voice Mechanisms and Performance

112

Preliminary remarks and observations Representative channels and individual direct practices Voice mechanisms and employee relations dimensions Collective and individualistic employee relations patterns Employee relations approaches Summary

112 113 115 126 132 146

9 Conclusions and Policy Implications

155

Appendix

167

References

184

Index

201

List of Tables and Figure

Tables 5.1 6.1 6.2 7.1 8.1 8.2 8.3 8.4 8.5

Collective and direct involvement ER systems Profile of survey respondents (in per cent) Definition of the variables Country-of-origin differences Performance outcomes and employee relations – individual practices Performance outcomes and voice mechanisms Performance outcomes and trade union recognition in comparison Trade union recognition without a partnership model in comparison Performance outcomes and trade union recognition with a partnership model in comparison

82 86 90 105 114 115 127 134 136

Figure 1.1 Employee relations and subsidiary performance in context

vii

10

Preface Heightened globalization pressures, characterized, inter alia, by rising capital mobility and increasing international competition have focused the attention of business leaders, policy-makers, and academics on the institutional environments in which firms operate. A great deal of this attention has been drawn towards the effects that labour-market institutions have on the performance of companies, broadly defined. Whilst some see the relatively high levels of labour-market regulations that characterize some economies as a burden for companies, others see them as important means by which companies can gain competitive advantage. In short and put simply, whilst some argue that high levels of regulations will have a detrimental effect on firm performance, others contend that they can help companies operate more effectively. Against this background, there have been repeated and strident calls for labour markets in many countries to be deregulated. One country that would benefit, it is often said, from a wide-ranging deregulation of its labour market is Germany. Although reforms have undoubtedly been undertaken there, they have often been seen as piecemeal and tentative. Whilst some see this sclerosis as a symptom of Germany’s policy-making structures, others view it as evidence of the continuing resilience of the once highly regarded German economic model. One way to assess these competing arguments is to examine the actions of German companies abroad. In short, if German companies view their home-country labour-market institutions as deleterious constraints, they will be highly reluctant to establish similar ones in their overseas subsidiaries. In other words, are German companies seeking to flee the constraints that they face at home? If they are, what approach to employee relations do they adopt in the host country? Do they seek to minimize the influence of workers and their representatives in the subsidiary’s decision-making process and do they, thereby, exhibit a preference for allowing managers to exercise their unfettered prerogative? Alternatively, do they seek to emulate the best practices of US multinationals and employ a range of measures that seek to engage employees on an individual rather than a collective basis? Or do they, in a further alternative, combine measures that allow employees to voice their concerns and to make suggestions on an individual and on a collective basis? viii

Preface ix

It is these pressing questions that this study seeks to address. It examines the approach to employee relations adopted in the UK-based subsidiaries of German multinational companies (MNCs). The United Kingdom provides the ideal environment in which to examine these issues more closely. This is because it allows companies to experiment with different approaches to employee relations. Unlike Germany, there are far fewer regulations that prescribe the form that these approaches should take. In other words, German MNCs are relatively free to implement their preferred approach to employee relations in the United Kingdom. They could sideline unions or they could seek to build constructive relationships with them. They could provide employees with little or no influence within the subsidiary’s decision-making process. They could grant employees, as individuals, some influence in that process. Finally, they could implement an approach to employee relations that relies on a combination of engagement with unions and participation by individuals. An analysis of the approaches to employee relations that German MNCs adopt in the United Kingdom should, therefore, reveal their preferences. The analysis within this study does not, however, stop there. It goes on to assess the links between these different approaches to employee relations and subsidiary performance. For instance, it may well be the case that the approach to employee relations that many German MNCs implement within their UK-based subsidiaries is unsuited to the conditions that those subsidiaries have to face. This could lead to the subsidiaries of German MNCs being at a disadvantage vis-à-vis their counterparts that adopt policies more congruent with the UK’s business environment. Any such disadvantage should be clearly discernable across a range of measure used to assess firm performance. Any difference in performance amongst the UK-based subsidiaries of German MNCs that can be linked to variation in employee relations may have a number of ramifications. For instance, the results of this research could demonstrate that the German economic model is likely to be undermined by some of its largest companies. In other words, if German MNCs find that the approaches to employee relations that they adopt in their UK-based subsidiaries boost their competitiveness, they may use their flagship roles in the German economy to change the employee relations system of their home country. This could result in aspects of the German economic model being undermined. In other words, if the UK-based subsidiaries of German MNCs that operate with an approach to employee relations that offers employees or their representatives little say over the day-to-day running of the business perform better than those that grant their workers or workers’

x

Preface

representatives a voice in this area, German MNCs may seek to dismantle the system of co-determination in Germany. That system provides employees with an indirect voice in the mundane operations in many companies. Alternatively, the UK-based subsidiaries of German MNCs may find that better performance is linked to approaches to employee relations that rely on workers being able to voice their concerns and to make suggestions on both an individual and on a collective basis. If this is the case, German MNCs may seek to extend their use of such a hybrid approach to employee relations in their home country. The implications of this research are not, however, confined to Germany. The latter analysis could also provide key insights into the ways in which managers in indigenous UK companies could improve the performance of their companies. Despite the seemingly widespread criticisms of trade unions, this study may show that one of the ways that indigenous UK firms could improve their competitiveness could be to engage with unions more closely. Moreover, this study could also reveal whether such an approach is – or is not – more effective, in terms of firm performance, when unions form part of a partnership approach with management that also relies on individual employees being able, first, to voice their concerns and, second, to put forward efficiency-enhancing suggestions. The arguments put forward in this book may be controversial to some. It should, however, be noted that this book does not claim to provide definitive answers to the questions posed above. Instead, it is construed as a complement to existing research. It is an attempt to open up new lines of enquiry and analysis in a number of related areas. We hope that this study is read in that spirit. We are deeply indebted to a number of people and organizations who have helped with various aspects of this project. We would like to acknowledge the kind support of the Hans Böckler Foundation without whose assistance this research would not have been possible. The individual companies that responded to requests to complete the surveys that lie at the heart of this research are, similarly, due a great deal of thanks. Heinz-Josef Tüselmann, Manchester Frank McDonald, Bradford Arne Heise, Hamburg Matthew M. C. Allen, Manchester Svitlana Voronkova, Dublin

Abbreviations CBI EIRO ER FDI HISs HRM HWWA IAB IPA IR IW JCCs MNCs QMLE TUC

Confederation of British Industry European Industrial Relations Online Employee relations Foreign direct investment High-involvement systems Human resource management Hamburgisches Welt-Wirtschafts-Archiv Institut für Arbeitsmarkt- und Berufsforschung Involvement and Participation Association Industrial relations Institut der deutschen Wirtschaft Joint consultative committees Multinational companies Quasi-maximum likelihood estimator Trades Union Congress

xi

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1 Institutional Environments and Employee Relations in German Firms

Background Heightened globalization pressures, characterized, inter alia, by rising capital mobility and increasing international competition have led to a growing interest in the institutional environments in which firms operate. These environments include the labour-market system (Coates, 2000; Hall and Soskice, 2001; Whitley, 1999). At the policy level, there have, in recent years, been many calls for far-reaching reforms of more regulated economies, such as Germany’s, along the lines of the AngloAmerican model of capitalism (Berthold and Stettes, 2001; Siebert 1997). This has, at least in part, been spurred by the superior macro-economic performance, in terms of economic growth, unemployment rates and employment creation, of deregulated neo-liberal economies, such as the United States and the United Kingdom, throughout the 1990s and the early 2000s. Some analysts expect there to be a process of convergence in the structures of national economies – from social security to industrial relations systems. This process of convergence is said to be driven by a performance-induced imperative and is argued to lead to the adoption of a global best-practice model. This best-practice model is frequently regarded to be the Anglo-American model of capitalism. Such thinking underpins many of the debates on the international competitiveness of Germany as a business location (Standort Deutschland) and the future direction of the German industrial relations (IR) system. Many of the criticisms of the German variety of capitalism have focused on its supposedly rigid labour-market institutions (Yamamura and Streeck, 2003). Although a number of studies show that countries with 1

2 Employee Relations in Foreign-Owned Subsidiaries

deregulated neo-liberal labour markets do not exhibit superior performance over the long term (Hall and Soskice, 2001; Heise, 1999; Kittel, 2000), the institutions of the German business system have, as a result of calls for fundamental reforms from powerful neo-liberal academics (Berthold and Stettes, 2001; Franz, 2001), employers’ interest groups (BDA/BDI, 2004; DIHK, 2002) and from within the CDU and FDP (Deutscher Bundestag, 2001), come under intense legitimacy pressures. Against this general backdrop, the German IR system is frequently singled out for criticism (Barysch, 2003; Steingart, 2004; von Rimscha, 2003). In other words, doubts have been raised about the ‘international competitiveness’ of the German model of labour relations. Alongside the sectoral collective bargaining system, the firm-level institution of co-determination (the works council system) has increasingly moved into the centre of the critique. It is frequently considered to be at least partly responsible for Germany’s continuing unemployment problems and for undermining the ability of its firms to respond to the pressures of globalization and technological advances. In light of the amplified competitive challenges facing firms, the reform of the Works Constitution Act, which, inter alia, extended the rights, scope and influence of works councils, has triggered a new wave of attacks on the German representative model. Critics of German works councils focus on their direct and indirect costs (for example, restrictions on the decision-making powers of management, protraction of the decision-making process, and inefficient compromises), as well as on the redistribution of surpluses within companies (Addison, Schnabel and Wagner, 2004; Henkel, 1999; Financial Times, 2004). In short, critics expect works council to have an adverse effect on firm performance. The corresponding prescriptions of politicians and employers’ associations range from a rollback of legal codetermination rights (CDU and FDP: Deutscher Bundestag, 2001), to a replacement of the codified system with a voluntary one (BDA/BDI, 2004), through to an abandonment of collective employee relations (ER) altogether in favour of individualistic ER (IW, cited in Klikauer, 2002). Beyond the German landscape, analogous independent representative bodies in other Western countries, such as trade unions, have similarly been impugned (Esping-Andersen and Regini, 2000; Lindbeck and Snower, 1988). Critics of works councils, in particular, and of representative structures, in general, either implicitly or explicitly argue that individual firms should be free to decide what form ER should take in their firms (Furubotn and Richter, 1998; Pejovich, 1998). Analogous to the macro-economic

Institutional Environments and Employee Relations 3

performance imperative, the performance advantages associated with the business and ER models of firms that are based in the US economy – which occupies a dominant position in terms of its competitiveness in the world economy – are thought to exert pressures on firms from nondominant economies to emulate the practices and approaches of leading US firms (Smith and Meiskins, 1995; Whittington and Mayer, 2000). With regards to labour relations, the advantages connected with individualistic Anglo-American ER patterns compared to traditional collective ER patterns in German firms are assumed to provide a performance imperative at the firm level for a more Anglo-American approach to ER to be adopted. Such individualization opens up two broad possibilities for firms: they can either pursue a ‘high road’ strategy in the form of a comprehensive human resource management (HRM) style direct employee involvement system or they can adopt a ‘low road’ strategy with neither representative nor direct employee involvement. In the latter scenario, the paucity of voice mechanisms means that management’s prerogative is untrammelled. The former, which is connected with leading US MNCs and frequently ascribed the status of global best practice (Ferner, 2003). It is also sometimes viewed as a functional equivalent to, and substitute for, representative firm-level structures. Moreover, considerable performance advantages in terms of both labour productivity and profits have been attributed to it (Pfeffer, 1998; Webb, 1996). Aspects of this approach, such as performancerelated pay or direct employee-involvement programmes, are already attracting increasing interest from German employers (Frick, 2001a; Kurdelbusch, 2002). This approach is, undeniably, often seen as an attractive alternative to collective IR (for a discussion, see Cappelli and Neumark, 1999; Wood and Fenton-O’Creevy, 2005). In contrast to this productivity-enhancing strategy, the financial performance advantages of the ‘low road’ variant of the Anglo-American model arise from cost minimization. Many of the studies by Addison and his co-authors into the economic effects of works councils in Germany and trade union representation in British firms should be seen against this backdrop (see, for example, Addison and Belfield, 2002; Addison, Schnabel and Wagner, 2004). These papers would appear, in general, to favour a neo-liberal perspective. In the wake of the reform of the Works Constitution Act (2001), these studies have gained increasing prominence in providing support for the deregulation prescriptions espoused by neo-liberal economists, politicians, and by certain circles in employers’ organizations (see above).

4 Employee Relations in Foreign-Owned Subsidiaries

On the other hand, a large study by the Hans Böckler Foundation and the Bertelsmann Foundation (Bertelsmann Stiftung/Hans Böckler Stiftung, 1998) into the effects of co-determination highlighted that it, especially in relation to international competitiveness, could be regarded as economically beneficial for companies. Nevertheless, in an era of heightened international competition and in light of the oft-cited waning consensus on the benefits of the German model of labour relations among the German business community, the institution of codetermination has come under more pronounced legitimacy pressures to provide not only social benefits, but also to demonstrate its economic advantages. This is especially true in terms of any advantages relative to those of Anglo-American-type models. Against this backdrop of system competition, MNCs play an important role. They operate, by definition, in a variety of national IR systems and are able to compare the institutions and structures of the ER models of their home country to those of their host countries. This comparison can include the performance aspect of alternative ER practices and approaches.

The role of multinational companies German MNCs are frequently ascribed a flagship function in determining the future direction of the German model of labour relations. Because of their leading industry positions and their prominent role in employers’ associations, they are thought to occupy a pilot function, influencing ER developments in other German companies and acting as a catalyst for change in the German IR system (Lane, 2000). In fact, MNCs are widely viewed as the key agents in the market-driven or competitive convergence process. In this process, the global terms of competition are thought to lead to convergence within the MNC group towards a single ‘best way’ business and ER model (Strange, 1997). Because of the supposed performance advantages ascribed to the US model, the direction of such a transnational convergence trend is frequently assumed to lead in the direction of Anglo-American business and ER patterns. Here, the combination of increasingly integrated MNC structures with an enhanced role for foreign-owned subsidiaries as sources of innovation and as reference points for the dissemination of best practice across the MNC’s different sites (Edwards and Ferner, 2004) has profound implications for ER patterns in home-country operations. These changes within the MNC’s home-country workplace have, in turn, an impact upon the wider transformation process of the national business system, including the IR component. MNC sites located in

Institutional Environments and Employee Relations 5

Anglo-American IR contexts may, thus, acquire a key role in disseminating such a global best-practice approach across the MNC. In fact, the increasing use of performance benchmarking, coercive comparisons and the creation of competitive relationships between the various sites at home and abroad for investment and other resources are important mechanisms for inducing such changes in parent-country operations; such practices can potentially undermine or weaken pre-existing institutional arrangements and structures (Ferner and Varul, 2000). In this process, a comparative performance advantage connected with the ER approaches of their Anglo-American subsidiaries may give parent companies the performance-based legitimacy to introduce far-reaching changes; these may have corresponding and wider knock-on effects on other companies in the home economy and may, subsequently, filter through to impact upon the IR system as a whole. Indeed, over recent decades, German MNCs have experienced wider and deeper integration into the global economy. This has been highlighted, since the mid-1980s, by the high and rising outflow of foreign direct investment (FDI), the increasing geographical spread of their international activities and internal restructuring, and the integration of their activities and structures – along the lines of US and UK MNCs – across national borders, as well as by the emergence of a measure of shareholder value orientation into the traditional stakeholder governance model (Ferner, Quintanilla and Varul, 2001; Tüselmann, McDonald and Thorpe, 2006). In light of the above elaborations, these developments have moved the German firm-level representative system centre stage in the debate on the international competitiveness of the German model of ER. They have also led to greater scrutiny of its economic effects, and relatedly, its suitability as a role model for an international integrated ER approach. Here, German FDI and subsidiary ER in other highly developed countries, such as the United Kingdom, have received much attention. This is, in part, because the United Kingdom, for instance, has, in comparison to Germany, lower labour costs and a permissive, deregulated labour-market regime. German FDI in such countries is frequently connected with a desire amongst German firms to flee the perceived constraints and the associated negative economic effects of the German model (Modell Flucht) to pursue more flexible and lower-cost ER approaches (IW, 2000). The exercise of the ‘exit option’ via FDI, or the strategic use of the threat of FDI and locational flexibility, provides employers with a direct route to secure far-ranging concessions from works councils, in order to preserve employment and investment in domestic workplaces ( Jackson,

6 Employee Relations in Foreign-Owned Subsidiaries

2005). Despite most of the empirical evidence on German investment into the United Kingdom, and elsewhere, showing that labour costs and labour-market aspects are generally not important location factors that explain German outward FDI (Hoppe et al., 2003; Klodt, 2004; Tüselmann, McDonald and Heise, 2001), employers have, nevertheless, successfully used the FDI lever to gain far-reaching concessions from works councils on wages, working-time flexibility and working conditions. These concessions mean that the minimum standards of the sectoral agreement are under-cut. Indeed, such pacts, known as Standortsicherungsverträge, Beschäftigungssicherungsverträge, betriebliche Bündnisse Arbeit, have become a common ER feature in many German MNCs (Max Planck Insititut für Gesellschaftsforschung, 2002; StumpfFekete, 2001). In contrast, the indirect avenue to bring about change in German locations via the design of ER in their Anglo-American subsidiaries and the generation spill-back effects from such sites has so far received far less attention in the public debate. However, this issue is gaining increasing importance in the academic community (Dickmann, 2003; Edwards and Ferner, 2004). If German MNCs were inclined to flee the ‘straitjacket’ of the German model, it can be expected that they will seek to avoid a German-type collective approach and adopt AngloAmerican-style individualistic approaches when operating in liberal market economies such as the United Kingdom, where the deregulated and permissive IR context imposes relatively few barriers on the design of ER approaches. In short, the UK’s business system provides employers with a significant amount of room for manoeuvre in terms of ER practices. Deregulated IR settings, such as the United Kingdom’s, which permit firms to use a wide variety of ER approaches, may provide German MNCs with a place to experiment with ER patterns. These trials may help them to develop new systems for their Germany-based workplaces; such innovations may enable them to improve performance. Despite these theoretical considerations, the link between subsidiary ER and performance has not been addressed so far. On the one hand, German MNCs can be expected to have an incentive to transfer homecountry practices and approaches across borders if they attribute a positive economic effect to their home-country ER model (Taylor, Beechler and Napier, 1996). On the other, they may refrain from exporting home-country ER patterns if these are deemed to have a detrimental effect. If neo-liberal critics of the German works council system, in particular, and of representative ER structures, in general, are correct, German MNCs may be expected to avoid a German-type collective approach in their overseas subsidiaries. In other words, they may seek to

Institutional Environments and Employee Relations 7

gain the performance advantages that have been ascribed to individualistic Anglo-American ER patterns. This should be particularly visible in deregulated IR regimes such as the United Kingdom’s. It can be expected that those German MNCs that, nevertheless, implement similar representative voice mechanisms to those in their home base will have to accept, in comparison to subsidiaries that operate with Anglo-American ER patterns, inferior subsidiary performance. If there are indeed substantial comparative performance advantages to be had from the current global best-practice prescriptions, which advocate an individualistic USstyle HRM approach, it may be expected that German MNCs would have an incentive to use their subsidiaries in Anglo-American contexts as a source of cross-national corporate learning and as reference points for the introduction of US-style innovations in their German workplaces. The nature of such spill-back effects, which could then be legitimized by the performance imperative, could potentially undermine the German works council system. If such a qualitative change were to arise in key German MNCs, this could generate corresponding and wider knock-on effects on the whole German business community. This would provide neo-liberal critics of the German representative model with a performance-based platform on which to advocate far-reaching deregulation. Conversely, if proponents of the German IR system are correct that the German representative system provides economic advantages to MNCs, this could provide an incentive for the cross-border diffusion of German-style collective ER. If these benefits were to arise in an international context and if they were to be associated with a performance advantage compared to subsidiaries that operate with individualistic Anglo-American ER patterns, potential spill-back effects would work to reinforce rather than weaken the German representative model. Such a constellation would provide a performance-based foundation for advocates of the continuation of the current path-dependent and system-internal reform process of the German IR system.

Rationale and objectives Answers to the issues raised above are urgently sought, especially in light of, first, the increasing criticisms of the German representative model and the associated forceful voices calling for deregulation; second, the wider and deeper integration of German MNCs into the world economy; third, the flagship function ascribed to German MNCs in influencing ER developments and the IR reform process in Germany; and, finally, the intensification of the wider debate on the future of the German model

8 Employee Relations in Foreign-Owned Subsidiaries

in an era of heightened global competition. However, there is a paucity of information on these issues in the empirical literature. Although several qualitative studies, as well as some small-scale quantitative studies relating to the HRM/IR aspects of German MNC operations in the United Kingdom and elsewhere, have recently appeared, large-scale representative studies are non-existent. Similarly, there are no noteworthy studies into the ER–performance link in overseas subsidiaries of either MNCs, in general, or German MNCs, in particular. Furthermore, many of the previous studies that have investigated the performance effects either of works councils in Germany or, similarly, trade union structures in the UK- or of US-style HRM suffer from methodological problems. This raises doubts about the robustness of their statistical results (see Chapter 4). Moreover, the focus of these studies tends to be too narrow, as they neglect to capture not only the whole variety of ER patterns, but also recent changes and emerging ER patterns. Such shortcomings in highly influential studies of German works councils are particularly unfortunate, as these studies figure prominently in arguments propounding deregulation. Such arguments have been advanced by neo-liberal economists and politicians and by employers’ interest groups (see above). Detailed and large-scale representative studies into, first, the ER practices and approaches of German MNCs in an Anglo-American setting and, second, the relative performance records of alternative ER patterns are of great importance because they will either support or refute (explicit or implicit) claims made by critics of works council and union structures. These critics aver the economic supremacy of individualistic AngloAmerican ER patterns. In other words, an examination of the different performance records of subsidiaries of German MNCs that draw on the German collective model and those that adopt Anglo-American ER approaches within the context of the same host country will provide important evidence as to whether German-style ER, which can offer a relatively powerful voice for workers’ representatives, are associated with better or worse performance compared to their counterparts that operate with individualistic Anglo-American ER. Such evidence can also provide potential insights into the development of the German model of labour relations. The United Kingdom presents an ideal host location to shed light on these issues. The United Kingdom is, after the United States, the second most popular destination of German FDI both in terms of FDI stock and accumulated FDI flows in the 1985/2004 period (Deutsche Bundesbank, 2005a, 2005b). Thus, subsidiary ER may reveal the general preferences of a large percentage of German MNCs. Furthermore, the United Kingdom, with its deregulated IR context, very closely represents

Institutional Environments and Employee Relations 9

not only the hegemonic real-world US economic model (Hall and Soskice, 2001), but also the theoretical neo-liberal ideal type. The major objectives of this study are to examine the characteristics of the ER systems used in German-owned subsidiaries in the United Kingdom and to investigate the link between these systems and performance. The overarching research question is whether German subsidiaries that adopt German-style collective ER patterns, either in the form of the traditional or the emerging collective approach, perform better or worse (across a range of performance measures) than subsidiaries that operate with individualistic Anglo-American-type ER patterns. These latter ER models can take the form of either a HRM-style ‘high road’ approach or a cost-minimizing ‘low road’ approach. A secondary objective is to seek information on how ER in Germany may develop. In this connection, the aim is to shed light on the question of whether there is a performance-related imperative being exerted on German MNCs. Any such imperative will promote potential spill-back effects to their German workplaces so that ER systems there will have to become more Anglo-American – with all that this implies for the German representative model. However, these issues can only be addressed in a somewhat speculative manner, since they are outside the methodological and empirical foundations of this study (see below), and would require either a matched sample survey of subsidiaries and parent companies or in-depth interviews at, in particular, the German parent company.

Approach and structure This study, drawing on the database of the German–British Chamber of Commerce and Industry in London, is based on a postal survey of all known German subsidiaries in the United Kingdom. This is the only large-scale study of ER in international operations of German MNCs and the first meaningful study to investigate the ER-performance link in MNCs’ overseas affiliates. This study, unlike many previous studies, first, of ER in foreign-owned subsidiaries; second, of the effects of works councils in Germany; and, finally, of the effects of trade unions in the United Kingdom, has been designed to provide a more detailed picture that captures the whole variety of ER patterns and takes into account emerging ER in Germany. This is done by developing a holistic approach in order to establish a conceptual framework that integrates both the IR and HRM strands of the performance literature. Furthermore, the study redresses the methodological shortcomings

10

Employee Relations in Foreign-Owned Subsidiaries

of many previous studies in providing a more rigorous and robust statistical analysis. Additionally, this report includes a background study that compares and analyses ER patterns in German subsidiaries to those of UK-based subsidiaries of US MNCs. This is done, first, to assess the extent to which German MNCs in the United Kingdom draw on the collective German model and, second, to elucidate signs of possible convergence towards Anglo-American ER patterns. In this connection, international sites of US MNCs present the most suitable reference group, since they should be the key bearers of global best practice. Importantly, the background study allows the relative performance records that are associated with alternative ER systems in German subsidiaries to be positioned within the context of key forces that influence subsidiary ER (see below). To this end, a postal survey of a sample of US subsidiaries was also conducted. Compared to an examination of the ER-performance link in indigenous firms, an investigation of such an association in host-country subsidiaries of foreign MNCs is far more complex. Figure 1.1 sets out the contextual framework within which to locate the analysis of subsidiary ER and performance; it highlights the direct and indirect effects, as well as the potential performance-based spill-back linkages to the parent company’s ER model. It also shows the potential effect that changes in ER in the MNC’s home workplaces may have on the homecountry’s IR system. Although these aspects will be discussed in more detail in the relevant sections of the literature review, the performance outcomes of ER in MNCs’ international sites are influenced by an

Dominance Effect

National Business System Institutions

Industrial Relations System

Parent Company Employee Relations Model

Country of Origin Effect

Subsidiary Employee Relations System

Performance

Host Country Effect

Figure 1.1

Employee relations and subsidiary performance in context

Institutional Environments and Employee Relations 11

interaction between country-of-origin effects, host-country effects, and dominance effects. These country-of-origin effects consist of the transfer of elements of the parent company’s ER model. This is, in turn, influenced by the embeddedness of the parent company in the IR system and the other, wider institutions of its home-country business system. Host-country effects reflect the permissiveness/constraints of the hostcountry IR context as well as its absorptive capacity for a transfer of home-country ER patterns. Dominance effects incorporate pressures to adopt a global best-practice template associated with the business and ER models of US MNCs. Importantly, the country-of-origin effects on subsidiary ER patterns may occur at various levels: at the level of the firm, home-country ER institutional arrangements and structures; at the level of the general principles of the home-country model, in terms of ER philosophy and outlook, as well as at a more intangible level in terms of management style, ethos and mindset. The interplay of the home-country effect with the host-country and dominance effects at the different levels of ER may produce a multitude of potential ER outcomes in overseas affiliates, including nationally distinct hybrid solutions. This brief sketch serves to highlight the complexities involved in analysing the performance effects associated with ER practices and approaches in MNCs’ foreign subsidiaries; this analysis requires a two-pronged approach to address the objectives of this project. First, an investigation of ER practices and approaches in German subsidiaries is undertaken along the lines of the contextual framework outlined above. Second, the performance outcomes associated with such practices and approaches are investigated.

Headline findings Two core findings emerge from this study. The first finding is that there is no indication that German MNCs, in general, use the opportunities of the deregulated industrial relations environment within the United Kingdom, a liberal variety of capitalism, to implement ER approaches based solely on management’s prerogative. They do not, in other words, use the United Kingdom to escape the ‘straitjacket’ of the German model. There is no evidence of ER patterns converging towards Anglo-American-type ones; there is, however, strong support for the view that the German collective ER approach, which is based on works councils, provides a suitable model for international operation. This mainly takes the form of integrating US-style ER innovations within a collective ER approach in partnership with the representative structures

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of labour and has affinities with an emerging collective ER approach in Germany, rather than with the classical German model. The second finding is that there is no evidence that German MNCs that draw on the collective German ER model in the deregulated UK host-country setting suffer a performance disadvantage compared to those that operate with individualistic Anglo-American type approaches. Indeed, those subsidiaries that have developed ER approaches that reflect the emerging collective ER approach in Germany exhibit superior performance compared to all other subsidiaries, regardless of their ER approach. The results of this study in no way support assertions by neo-liberal critics of independent representative structures and by proponents of the competitive convergence theory that there is a performance imperative operating at the firm level to adopt Anglo-American type ER approaches.

Overview of book structure The book is organized as follows. The next chapter, Chapter 2, provides an overview of the salient features and developments in the IR systems and ER approaches of both Germany and the United Kingdom. That chapter is followed by one that discusses the literature on ER in MNCs’ international operations. Chapter 4 reviews the theoretical and empirical literature on the effects on performance of firm-level representative structures and collective ER approaches in Germany and the United Kingdom. It also examines the links – both theoretical and empirical – between US-style HRM and firm performance. Chapter 5 establishes a framework for analysing ER. It brings together the discrete industrial relations (IR) and human resource management (HRM) strands of the literature and develops a typology of ER approaches. Chapters 2 to 5 serve a number of important purposes. First, they highlight the fact that there is a paucity of large-scale, representative studies into the link between ER and firm performance in the overseas subsidiaries of MNCs. Second, they draw attention to the fact that ER in the UK-based subsidiaries of German MNCs is likely to be located at the intersection between the German and UK business models. Third, they set out the theoretical reasons for concluding that ER in the UK-based subsidiaries of German MNCs are also likely to be influenced by the global best-practice prescriptions that are predicated on the supposed strengths of American businesses and the US business model. In sum, these chapters serve as a platform for the interpretation and discussion of the empirical results. Chapter 6 presents information on how the data were collected and how they were analysed. The empirical results of the analysis are

Institutional Environments and Employee Relations 13

discussed in Chapters 7 and 8. Those chapters examine both the approaches to ER that are adopted by the UK-based subsidiaries of US MNCs and the possible links that these might have to firm performance. The final chapter contains the conclusions, the broader inferences of the results, and the policy implications; it also maps out areas for future research.

2 Overview of Employee Relations in Germany and the United Kingdom

Introduction At the macro-economic level, the importance of employee relations (ER) in contributing to countries’ economic success has recently been highlighted by a number of authors (see, for instance, Hall and Soskice, 2001; Whitley, 1999). The focus of much of this literature is on the differences in ER in groups of countries. The contrasts between the United Kingdom and Germany are regarded as being particularly stark. Given the importance of the differences between the two countries, this chapter will set out the broad developments in ER, first in Germany, and then in the United Kingdom. It should, however, be noted that accounts of ER at the national level may overlook significant developments at either the sectoral or the firm level. This chapter will also, therefore, cover developments in direct employee involvement systems in both countries. Whilst these directvoice systems have received a great deal of attention within the HRM literature (Pfeffer, 1994), they tend to be downplayed within that on the varieties of national capitalisms (Allen, 2006). One possible reason for this is that direct involvement systems do not rely overtly on legislation for their establishment. The omission of direct involvement systems in the literature on national varieties of capitalism is a serious one as these mechanisms may have a positive effect on firm performance.

Employee relations in Germany The German economic model is often portrayed as one that, first, is distinct from Anglo-American, or more neo-liberal models (Coates, 2000), and, second, forms a coherent system. In the portrayals of the German 14

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15

economic model as a coherent system, one part of that model, for instance, financial markets, complements firms’ activities in another, such as industrial relations (IR) (Hall and Soskice, 2001; Whitley, 1999). In the depictions of national economic models, these sub-systems are also assumed to be relatively uniform across companies. For instance, in Germany the IR system is said to be characterized by an encompassing institutional infrastructure. This infrastructure is marked by a high degree of regulation that has traditionally imposed a relatively uniform template of institutional arrangements and characteristics on firms. In combination with the other constituent parts of the German business system, it is argued to have created an incentive structure that helps companies in Germany to achieve economic success in certain product markets (Hall and Soskice, 2001). A corollary of this is that companies should, on the whole, accept these regulations, even if companies from other countries may view them as a hindrance. The IR system in Germany is also said to be highly integrated with other parts of the German economic model that are assumed to be equally uniform. For instance, banks and other sources of ‘patient capital’, which are prepared to invest money over the long rather than the short term, are argued to provide many German companies with finance. ER in German MNCs have traditionally been collectivist, with the overwhelming majority of such firms subscribing to the key elements of the German model (IAB, 2003). These key elements include centrally coordinated sectoral collective bargaining and employee representation at the workplace level through a works council. Whilst such institutions may well characterize the German economic model at the aggregate level, they are not uniformly present in every firm or workplace. Although it is estimated that around 90 per cent of German employees are covered by collective agreements, and here mainly by sectoral ones (EIRO, 2005), a representative gap exists at the firm level. The Kommission Mitbestimmung (Bertelsmann Stiftung/Hans Böckler Stiftung, 1998) estimates that 60 per cent of employees work in establishments without a works council. The gap is mainly accounted for by small establishments, with works councils being a common feature in medium-sized firms and almost universal in large ones (Allen, 2006). Density rates of works councils – in terms of the numbers of workplaces and employees who are ‘covered’ by a works council – also vary significantly by sector (Allen, 2006). Works councils are the most important pillar of collective ER at the firm level and are the cardinal institution of collective voice in the German IR system. Works councils can be established by employees in workplaces with at least five employees. They enjoy a set of legally

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Employee Relations in Foreign-Owned Subsidiaries

defined participation rights, ranging from information and consultation, to veto/assent (co-determination). However, as a quid pro quo they are legally required to conduct their duties in the interests of the company. Moreover, they are not permitted to resort to industrial action if disagreements arise. In such situations, works councils have to petition the labour courts. Negotiations over issues of co-determination lead to the conclusion of works agreements, which have the force of law. The participation rights of works councils are incremental in nature; in other words, the powers of the works council, both in depth and breadth, increase as firm size increases. The Works Constitution Act (2001) recently extended the rights and scope of works councils. Although the statutory participation rights of works councils curtail the scope for unilateral management decisions and managers’ strategic choice, the defined rights and restrictions on the power of works councils (e.g., the obligation to act in the interests of their firm, and the nostrike clause) ensure that employers retain sufficient control. However, by combining various issues in what might be termed a package deal, works councils are able to negotiate voluntary agreements beyond the ambit of their closely defined de jure co-determination rights. Furthermore, the dual structure of interest representation formally and legally separates the roles and functions of works councils and trade unions, but in reality both sets of actors are highly interdependent. In short, trade unions are responsible for collective bargaining and works councils for relations at the workplace level. Works councils are legally prohibited from conducting negotiations over issues that are regulated by collective agreements, such as wages, unless the collective agreement contains either an opening or a hardship clause. The separation between production and distribution ensures that management–works council relationships are largely detached from conflicts over wider issues of income distribution. Evidence shows that this unique constellation has fostered long-term perspectives and relationships of a trustful and cooperative nature between works councils and employers (Behrens, 2003; Frege, 2002). However, these positive outcomes are thought to be largely contingent upon the embeddedness of the works council system in the wider IR environment, such as the collective bargaining system, as well as the business system as a whole. In the wider business system, the links between the IR system and other institutions of the German business system, such as ‘patient’ capital and inter-firm relations, are seen as being particularly important. The resulting long-term perspectives of employers and labour as well as the generally cooperative ER approach

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have delivered a competitive advantage to firms that has helped them to succeed internationally (Casper and Matraves, 2003; Hall and Soskice, 2001). However, since the early 1990s, the effectiveness of the German model has been increasingly called into question. The twin pressures of German unification and heightened international competition seem to have weakened the employers’ consensus on the benefits of the traditional approach and have led to some erosion in the German IR system (Schroeder and Weinert, 2003; Streeck and Hassel, 2003). There has also been some erosion in the traditional corporate governance system, which has seen the introduction of a degree of short-term shareholder value (Almond, Edwards and Clark, 2003). In response, an incremental reform process in the sectoral collective bargaining system has progressively broadened the scope for firm-level flexibility in the type of solutions that they find to problems. This has increased not only the differences between companies, but also firms’ strategic choice (EIRO, 2005; Seifert, 2003; Tüselmann and Heise, 2000). These changes have taken the form of centrally coordinated decentralization, whereby the sectoral bargaining parties determine the parameters within which management and works councils can negotiate firm-specific solutions under so-called opening and hardship clauses. Current ER may be described as a flexible collective approach. Despite the fact that these path-dependent reforms have enhanced the opportunities for flexibility in ER, they have remained, even now, under-utilized in many firms (Bahnmüller, 2002; Tüselmann, 2001). Moreover, this increased flexibility has not prevented influential voices either in the employers’ camp or neo-liberal economists from calling for far-reaching Anglo-American style deregulation and decentralization (Berthold and Stettes, 2001; DIHK, 2002; Ochel, 2005). In a similar vein, and especially in the wake of the reform of the Works Constitution Act, corresponding prescriptions with regard to the works council system have ranged from a rollback of legally enshrined participation rights, to a replacement of the codified system with a voluntary one, through to the complete individualization of ER (BDA/BDI, 2004; CDU and FDP, cited in Deutscher Bundestag, 2001; IW, cited in Klikauer, 2002; Franz, 2001). There has also been an increasing interest among employers in USstyle HRM innovations (Kurdelbusch, 2002), such as performancerelated pay and direct employee involvement programmes. Although the adoption of the whole spectrum of direct-involvement techniques has so far been comparatively modest, and although firms with such comprehensive high-involvement systems (HISs) remain rare (Gill and

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Krieger, 2000; Wolf and Zwick, 2002a), the use of direct involvement practices has increased in recent years (Muller, 1999). This indicates the development of a nascent dual approach in which companies use both direct and collective forms of voice. However, unions seem anxious that a more widespread and comprehensive use of direct employee involvement may undermine the German representative system. Here, the main issue is whether emerging HISs might lead to the erosion of the importance of works councils with the former being used to circumvent and marginalize the latter, or whether HISs will be integrated into the representative system in a complementary manner in the form of a partnership model (Frick, 2001a; Weitbrecht, Mehrwald and Motzkau, 2002). Another issue is whether the development of HISs will be used as a means to dissuade employees to invoke the establishment of a works council, by pursuing a direct high-road ER approach as a functional equivalent to a collective ER approach. That this is a possibility is shown by the recent debate amongst employees within SAP, a leading German MNC in the software industry, about the establishment of works councils in its workplaces. With regard to the issue of HISs being used to marginalize works councils, the evidence is mixed (Frick, 2002b; Muller, 1999; Müller-Jentsch, 1998). Albeit somewhat reluctant to extend participation rights to works councillors in these new forms of direct employee involvement, a significant number of firms have involved works councils in the introduction (though to a lesser degree in the operation) of direct practices. This suggests that a dual approach based on a partnership model in these firms is emerging. On the other hand, in a significant number of firms, works councils are not involved in direct voice practices and they coexist side by side, carrying the potential of a de facto substitution of collective labour relations. Nevertheless, the evidence suggests that companies that subscribe to the key elements of the German collective model have made more progress in adopting US-style ER innovations than those that do not. For instance, firms that are subject to sectoral collective agreements are more likely to have introduced performance-related pay (Bahnmüller, 2002). Moreover, firms with works councils, and particularly those that integrate them with direct voice practices, have introduced a larger number of direct involvement practices (Frick, 2002a). Thus, despite much of the rhetoric on the inability of the German model to adapt to the requirements of ‘modern’ business, firms that adhere to the German collective model seem more innovative than their ‘un-traditional’ counterparts.

Employee Relations in Germany and the UK

19

Employee relations in the United Kingdom The contemporary UK business system, which is, in many respects, institutionally close to that of the US within the general category of ‘liberal market economies’, is generally regarded as a polar opposite to the German business system, which conforms to the precepts of ‘co-ordinated market economies’ (Hall and Soskice, 2001; see also, Coates, 2000; Whitley, 1999). The contemporary laissez faire and deregulated IR context, with its light regulatory framework and its ‘thin’ institutional infrastructure, impose relatively few constraints on companies; this gives employers great latitude in determining ER practices and approaches in their workplaces. The largely unfettered ability of employers in the United Kingdom to determine the system of ER within their workplaces has also been seen as a necessary part of the wider UK variety of capitalism. For instance, the wider business system is said to make it necessary for managers to be able to adapt their company’s strategy both rapidly and thoroughly to changing market conditions. One of the main reasons for this is that company owners (often several large institutional investors) are argued to exert pressures on companies to post good financial results over the short term (Hall and Soskice, 2001). A long-standing feature of the UK IR system has been its history of voluntarism. This voluntarism has been amplified by the lack not only of government legislation, but also of codified regulations in general. Voluntarism has also been promoted by the attitudes of British trade unions who, traditionally at least, have generally been chary of regulations (for a detailed treatment of these issues, see Addison and Siebert, 2003; Edwards, 2003; Heise, 1999). Trade union recognition, both for collective bargaining and for the associated workplace union representatives, has traditionally been at the discretion of employers. In contrast to Germany, the weak coordinating abilities of individual unions as well as the peak organizations, which are the national-level organizations that encompass the various sectoral unions and employers’ associations, has resulted (as was the case in the 1960s and 1970s) in decentralized pay bargaining, alongside multi-employer bargaining. The UK government has adopted the European Works Council Directive; this, however, only applies to large pan-European companies and its provisions only stipulate weak powers of consultation and the right of European works councillors to be provided with certain information. Despite this, there is no generally applicable system of employee representation through national-level works councils or similar bodies established by law or collectively agreed bargains. There are also no legally entrenched participation rights. In ER

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terms, this has meant that, traditionally, a traditional collective approach to ER has characterized British firms. In this approach, trade unions channels are the pivotal workplace institution of collective voice. The absence of a formal distinction between the collective bargaining system and representative employee participation in workplaces – combined with the decentralized nature of pay bargaining – means that, unlike the German situation, there is no separation between issues surrounding production and those linked to distribution. In other words, in many workplaces issues connected to the distribution of the firm’s profits (such as pay) and those linked to the organization of production have become intertwined. Therefore, firm-level union–employer relations are embroiled in wider and potentially contentious issues of income distribution. These are likely to dominate, ab initio, issues connected to the organization of production and work. This, together with the inability of the peak union and employers’ organizations to coordinate and control wage settlements, meant that union-employer workplace relations were traditionally characterized by arm’s length, adversarial, low-trust relations that were dominated by opportunistic, short-term gain-maximizing behaviour. In such situations both sides relied on their workplace strength to support their bargaining positions. This situation was exacerbated by the absence of a statutory IR framework. Furthermore, the stock market-dominated financial system in the United Kingdom, with its emphasis on short-term financial results, also exerts a systemic bias against the development of high-trust ER relationships where both sides can afford to take a long-term view of ER (Hall and Soskice, 2001; Gospel and Pendleton, 2004). The neo-liberal labour-market policies, the IR reforms and the wider economic deregulations of the Conservative governments in the 1980s and 1990s reduced the power of trade unions; this tilted the balance of power in favour of employers. The reforms also encouraged employers to move from collective to individualized labour relations. Indeed, ultimately, the reforms have led to the collapse of the traditional ER model based on union recognition (for a detailed overview, see Edwards et al., 1998; Zagelmeyer, 2003). Contemporary, private-sector ER approaches are dominated by an emphasis on direct employee involvement. Union recognition and, with it, the numbers of workplace-level union representatives have collapsed. By the beginning of the 2000s, trade union recognition and collective bargaining were confined to a minority of private-sector firms (Cully et al., 1999; Labour Force Survey, 2001). In firms where a collective ER approach does still occur, it takes place within the context of a changed balance of power between employers

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and unions. This change in the balance of power has enhanced management’s prerogative in the workplace (Bacon and Storey, 2000; Heise, 1999). Furthermore, multi-employer pay bargaining has all but disappeared and collective bargaining, where it still occurs, is now essentially decentralized to the company or establishment level (Millward, Forth and Bryson, 1999). Additionally, the structures of trade union recognition and collective bargaining, which have traditionally been characterized by multi-unionism, have been simplified and rationalized (Cully et al., 1999). However, despite the altered power balance, there have been few efforts on the part of management to foster more cooperative relations with unions (Bryson, 2004; Howell, 2004). Instead, many employers seem to have used the weakened position of unions to marginalize representative channels. Recent legislative changes by the current Labour government, such as statutory provisions for union recognition, have not significantly altered the IR framework. Similarly, they have not altered either employers’ policy orientations or the general nature of IR (Godard, 2001). Furthermore, non-union channels of representation, such as management-initiated JCCs, are rare and also in decline (Terry, 1999). Moreover, these bodies, which are, at best, a weak form of collective involvement (see Chapter 4) are mainly concentrated in unionized firms. Thus, it can be argued that a large representation gap exists in the UK’s private sector. As collective ER has retreated and as direct ER patterns have gained prominence, there have been high expectations that HRM-style direct involvement systems based on unitaristic principles would evolve as a distinct alternative and substitute for collective ER and would become a major feature of British ER. Although direct involvement methods are increasingly common in UK workplaces, companies with comprehensive HISs are far from the norm (Cully et al., 1999; Dundon et al., 2004). Furthermore, findings in the United Kingdom (and the United States) suggest that these often have only a limited lifespan (for an overview, see Delaney and Godard, 2001). In light of the considerable performance advantages ascribed to HISs by its proponents (Becker and Huselid, 1998; Pfeffer, 1998), the low take-up of these systems and their relatively high ‘mortality’ rate is puzzling. The effective operation of HISs is likely to require a long-term approach to ER; however, the wider institutions of UK business system, such as stock market-based financing, exert pressures on a large section of firms to pursue a cost-minimizing route of competition and, therefore, to emphasize short-term perspectives (Whitley, 1999). Hence, there may, paradoxically, be systemic constraints that prevent the successful pursuit of this high-road variant of

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the Anglo-American model in the United Kingdom (and, indeed, in the US) (Clark and Almond, 2004). Nevertheless, where such systems exist, they are often found in unionized firms. Despite the Labour government’s efforts to foster voluntary partnerships, UK firms with such a dual approach do not, generally, conform to the expectations of the partnership or mutual-gains model (Kochan and Osterman, 1994). Collective channels and HISs tend to coexist rather than be integrated into a single system. Indeed, less than 20 per cent of unionized workplaces exhibit a partnership approach in which HISs are supported by a relatively weak, but formalized joint governance system (EIRO, 2005; Gill and Krieger, 2000). Such systems involve a partial surrender of the managerial prerogative and the integration of bargaining over distribution and production issues. There is also evidence that partnerships tend to erode over time because of managers’ lack of commitment and their unwillingness to cede a sufficient degree of control to unions (EIRO, 2005). Indeed, employers’ interest groups, such as the Confederation of British Industry (CBI), that initially endorsed the TUC version of partnerships (TUC, 1999) now oppose partnership arrangements if they lead to a greater influence for unions (CBI, 1999); such influence is, however, likely to be a necessary condition for the effectiveness and long-term viability of partnership models. These institutions that might need to be changed include, amongst other things, management attitudes towards unions and joint regulations. Without these changes, more cooperative and trustful relationships with unions are unlikely to be forthcoming (Dundon et al., 2004). Furthermore, changes may well need to be made to the United Kingdom’s broader political economy if the preconditions for developing long-term perspectives and trust are to be met (Heery, 2002; Howell, 2004). Therefore, the long-term viability of the voluntary UK partnership model may be in jeopardy, unless changes are made to the broader institutional framework. Perhaps not surprisingly, the majority of British firms have not developed a coherent alternative to collective ER, other than a cost-minimizing lowroad approach to the individualization of ER, with a significant number of firms falling into the ‘Bleak House’ (Marginson, 1993) category. These latter firms do not have any meaningful voice mechanisms and have few, if any, constraints on management’s prerogative (Guest and Conway, 1999; Millward, Forth and Bryson, 1999). The presence of such companies indicates that pressure to reform the UK’s IR system away from its current market- or transaction-based form is lacking. One of the main reasons for this is the macro-economic success of the United Kingdom over the last decade and more. This macro-economic success has seen the United Kingdom

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outperform many of its economic rivals – especially those on the Continent, such as Germany and France – in terms of growth rates, (un)employment levels and GDP per capita. In these areas, the United Kingdom has a better recent record than both France and Germany. It should, however, be noted that the United Kingdom does not have a superior performance record in one or more of these areas than the Netherlands and the Nordic countries. These countries with equally good, if not better, economic records than the United Kingdom have reformed their IR systems in ways that encourage partnership approaches. This might suggest that companies in the United Kingdom could benefit from similar government reforms to promote workplace partnerships. There have not, however, been any significant moves in this direction. Indeed, even though the United Kingdom has performed well on many macro-economic indicators, there are concerns, which are shared by some in government, about the low labour productivity rates in many industries in the United Kingdom. Although it might be suspected that the performance of UK firms could be improved by the adoption of reforms to promote partnerships, the primary solution to the UK’s poor productivity record has not, generally, been sought in that system, but in education and training instead. Despite this, there are some indications that the UK government is keen to promote improvements in IR, in order to encourage the greater use of partnerships between employees and employers. The UK government has done this primarily by exhorting employers, employees and unions to adopt such an approach rather than by implementing extensive legislation. Of course, some legislation has been enacted in this area; see, for instance, the Employment Relations Act 2004.

Conclusion In spite of these recent legislative changes, the United Kingdom has a very different institutional framework to that of Germany. The United Kingdom has a far more lightly regulated labour market and employment system than Germany. In the United Kingdom, legislation does not facilitate the establishment of powerful committees to represent employees’ interests within workplaces. The opposite is, of course, true in Germany. There, works councils can be readily established in most private-sector workplaces if the employees so wish. These works councils have considerable powers over the way in which the production process is organized. It is not only works councils that help to differentiate Germany from the United Kingdom: other areas of collective representation are more

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pronounced in Germany than they are in the United Kingdom. For instance, the system of co-determination at the supervisory-board level provides employee representatives with some influence over the company’s strategy, including investment decisions. Moreover, collective bargaining at the sectoral level covers a far higher percentage of privatesector workers in Germany than it does in the United Kingdom. These features of the German economic model have been highlighted as strengths by some (Hall and Soskice, 2001; Streeck, 1997a). These IR aspects of the German economic model have been linked to a more consensual and long-term approach to ER; this, in turn, has been associated with success in certain product markets (Hall and Soskice, 2001; Casper and Matraves, 2003). In spite of these arguments in favour of Germany’s existing IR system, there have been numerous calls from various organizations and individuals (BDA/BDI, 2004; Deutscher Bundestag, 2001; DIHK, 2002; Franz, 2001) for Germany’s labour market to be deregulated. Indeed, some have suggested radical reforms of the German IR system that would leave it resembling the United Kingdom’s. Although this might suggest that the UK’s IR system provides clear benefits to companies, there are, as noted above, potential weaknesses that have been attributed to it. For instance, productivity in many UK industries is low. One reason for this might be the short-termism amongst managers that is, arguably, fostered by the UK’s IR system and its financial markets (Hutton, 1995). Partnerships might be one possible way to overcome this shortcoming. However, the UK government has not enacted strong legislation to facilitate the establishment of partnerships within workplaces in the United Kingdom. Indeed, there are few pressures on the UK government to increase or strengthen legislation in the field of IR or ER. Of course, it can be argued that legislation is not needed in this area as companies will be able to pursue ER policies that best suit their needs (Pfeffer, 1994; Williamson, 1985). According to this latter view, the United Kingdom – precisely because of its comparatively weak institutional framework in the area of IR – offers an ideal setting for companies to develop a wide range of ER policies. This is likely to be of particular importance to those MNCs that might be seeking to distance themselves from the typical ER policies associated with their home country. German MNCs are one such group. Therefore, it will be important to examine not only the effects of different ER approaches on subsidiary performance, but also, at a more basic level, the types of approaches that are adopted within the UK-based subsidiaries of German MNCs.

3 Employee Relations in Multinational Companies

Introduction As outlined in Chapter 2, employee relations (ER) in different national economies are often portrayed as being distinct. This raises a number of issues when a company from one country establishes a subsidiary in another with a different ER infrastructure. In short, do the subsidiaries conform to the prevailing institutional logic of the host country or do the investing firms attempt to ‘export’ some of their home-country ER practices to their subsidiaries abroad? Or, indeed, do investing companies attempt to establish what might be termed ‘best practice’ ER policies in their subsidiaries abroad? In the literature, an emphasis tends to be placed, very broadly, either on country-of-origin effects or on best practices. In the former, distinct patterns of ER will emerge in MNCs based on nationality of ownership; in the latter, ER practices will be expected to converge towards the best-practice model. Convergence towards best practice should lead to the adoption of ‘global best practice’ ER systems in MNCS. If country-of-origin effects are dominant over global best practice effects, ER systems in foreign-owned subsidiaries are likely to display complex interactions between national institutional frameworks and ER practices that come from the home country of the MNC. Differences in competitive environments also affect the adoption and evolution of ER systems in foreign-owned subsidiaries. In order to compete in tough market conditions, MNCs often face strong pressures to adopt global best practice systems, despite national institutional constraints that hamper the reform of ER systems. Organizational and industry cultures are likely to exert an influence on both the types of ER practices adopted and the evolution of ER systems in foreign-owned subsidiaries. Differences in organizational 25

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Employee Relations in Foreign-Owned Subsidiaries

and industry cultures are clearly important for explaining many of the company and industry differences in ER systems. This book focuses on the effects of institutional frameworks and competitive environments and is, therefore, not directly designed to investigate the impact of company and industry cultures in isolation on ER systems. An understanding of the importance of company and industry cultures is, however, important to gain a fuller understanding of the ER systems used in particular companies or industries. This chapter sets out the main arguments as they relate to German and US MNCs with subsidiaries in the United Kingdom. It, therefore, provides background information on ER patterns in German- and US-owned subsidiaries in the United Kingdom. It offers the background information that is needed to understand the findings of the main study on the ER-performance link in German subsidiaries in the United Kingdom. The overseas subsidiaries of US MNCs present the most suitable reference group, as proponents of the competitive convergence thesis would expect the pressures of international competition to promote convergence towards some form of global best practice; this, in turn, is frequently associated with the ER model of leading US MNCs (Whittington and Mayer, 2000). Thus, US subsidiaries in permissive institutional systems that allow for a wide range of ER systems to be adopted should be the principal bearers of such global best practice. The comparative analysis between German and US subsidiaries can, thus, shed light on whether, and to what degree, German MNCs in the United Kingdom draw on the collective German model of labour relations, or alternatively whether and to what extent ER in German subsidiaries exhibit signs of converging towards individualistic Anglo-American ER patterns, and in particular towards the global best practice approach that is associated with leading US MNCs. A further alternative is that the UK-based subsidiaries of German MNCs may use the opportunities afforded to them by the UK’s IR context to attempt to escape the perceived rigidities of Germany and exploit the perceived cost and flexibility advantages of the host location by adopting a low-road cost-minimizing individualistic ER approach (Tüselmann, McDonald and Thorpe, 2006).

Employee relations systems: theoretical issues One strand of the literature emphasizes the pressures towards homogenization that arise from international competition. This strand of the literature also posits that MNCs’ structures and behaviour will converge around a set of policies, including IR/HRM measures, typically associated

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with highly internationalized MNCs from the United States (Whittington and Mayer, 2000). These pressures do not, however, impact upon all MNCs with equal force. They are thought to have a particularly strong influence on MNCs that, first, are based in national business systems, such as Germany’s, that are currently experiencing significant pressures for reform as a result of changes in the international economy and that, second, are relative latecomers to the globalization process (Streeck, 1997b). Subsidiaries in Anglo-American contexts may act as sources of innovation that provide an important avenue to promote such change throughout the MNC (Edwards and Ferner, 2004). Such a notion is implicit also in the enhanced role of subsidiaries in resource-based models in which some subsidiaries provide information, knowledge and assets for a wide range of the activities of MNCs (Birkenshaw and Hood, 1998). The convergence perspective has been criticized for neglecting the effects that the wider institutional matrix in which MNCs are embedded has on their behaviour. These criticisms draw most prominently on analyses that focus on the importance of institutions in influencing the activities of firms. This institutionalist strand of the literature, therefore, stands in sharp contrast to that outlined above stressing convergence in MNCs’ ER policies. The institutionalist approach to MNCs highlights the embeddedness of economic actors in their home country’s institutional framework (Ruigrock and van Tulder, 1995; Whitley, 1999). According to this approach, firms acquire enduring and distinctive characteristics as a result of their embeddedness in national institutional frameworks, including the IR system. These nationally specific characteristics are likely to influence the way MNCs manage their international activities, including ER issues. In other words, institutional factors are likely to give rise to a country-of-origin effect where the nationality of the MNC exerts an influence that alters the ER systems of its foreign-owned subsidiaries. However, this literature has been criticized for not adequately taking into consideration changes in the dynamics of the wider international economy. This, it is argued, has led to tensions between the home-country’s institutional framework and the global terms of competition (Smith and Elger, 1997). An increasing body of evidence shows that neither the country-oforigin nor the global best practice literature is complex enough to capture the intricacies of ER outcomes in international workplaces (Child, Faulkner and Pitkethly, 2001; Ferner, Quintanilla and Varul, 2001; Harzing and Sorge, 2003; see also Ferner, Almond and Colling, 2005). In an attempt to overcome some of these shortcomings, several studies

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have been developed that incorporate the evolution of national institutional frameworks along with changes in other environments (Edwards and Ferner, 2002; Smith and Meiskins, 1995). Edwards and Ferner’s (2002) model identifies the following as being important: country-oforigin effects, host-country effects, dominance effects and pressures for international integration. This model raises important theoretical issues and provides a broad framework that can incorporate a number of supplementary conceptual aspects. It can, therefore, build on more basic institutional frameworks.

Country-of-origin effects – willingness and transferability With regard to the country-of-origin effect, the concepts of willingness and transferability are useful in helping to clarify the conditions under which the transfer of home-country ER policies may occur (Dickmann, 2003; Taylor, Beechler and Napier, 1996). The willingness factor depends on whether the parent company attributes positive outcomes to its own model of ER in its home country. In instances where this is not the case, there may be a strategic desire to ‘flee’ certain aspects of the home-country ER model. The incentive to transfer home ER patterns also depends on whether or not these are perceived as providing a suitable model for its subsidiaries abroad. The transferability of ER patterns is also determined by the extent to which they can be successfully implemented in different countries. For instance, the home-country model may not be transferable if it is highly dependent on a specific national institutional and regulatory infrastructure (Clark and Almond, 2004). This raises questions about the fundamental sources and characteristics of the country-of-origin effect. For example, the specific ER measures of the home-country model, in terms of actual firm-level ER institutional arrangements and structures, may not be exportable, but the general principles of the home-country model, in terms of ER philosophy and outlook (pluralist or unitarist), may be transferred more readily. Hence, at a more intangible level, management style, ethos and mindset may be transferable (Dickmann, 2003). Moreover, the homecountry effect is not fixed, but evolves in line with changes in the broader institutional infrastructure (Edwards and Ferner, 2002).

Host-country effects, dominance effects and international integration Host-country effects can be conceptualized in terms of constraints, receptiveness and strategic intent. A deregulated host-country IR context, such as the United Kingdom’s, potentially provides a wide margin to

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design ER along the lines of the home-country model, if the willingness to transfer it exists. However, those host countries that impose fewer direct constraints on the ER options for companies do not necessarily have the absorptive capacity for a transfer of home-country models that are developed in more regulated and institutionalized IR settings, such as Germany’s (Lam, 1997). In other words, certain ER policies may not work in deregulated settings because the wider supporting institutions are not present. For example, such economies may lack the broader institutional framework necessary to support the ER structures and policies associated with the home model. Where the parent company does not associate positive outcomes with its home-country model, it may have the strategic desire to shed its constraining elements. It may, for example, pursue a distinctly local strategy in deregulated host countries. This might be done to externalize flexibility and cost pressures (Guest and Hoque, 1996). Dominance effects arise from the competitive strength associated with MNCs from countries that have recorded strong economic growth rates over prolonged recent periods and that occupy a leading position in the world economy (Smith and Meiskins, 1995). The competitive advantage attributed to their home-country business and ER models leads to the status of global best practice. In the ER area, this is often assumed to be the individualistic high-road variant of the US model. The economic advantages attributed to these practices may encourage MNCs from other countries to emulate elements of the best practice approach used by leading US MNCs (Edwards and Ferner, 2004). This may be most visible in subsidiaries in deregulated and permissive IR contexts because they provide space for experimentation with global best practice prescriptions. Pressures for international integration arise from the imperative for the effective management of activities across national borders. This entails the encouragement of a greater degree of co-ordination and integration of MNC activity. This, in turn, creates incentives to develop common policies and approaches across the MNCs’ various workplaces around the world. These common approaches include ER policies. Thus, an influence can be exerted by either dominance or home-country effects. Greater cross-border integration may be achieved either on the basis of a home-country model or a global best practice template. Although it is frequently assumed that the pressures for international integration favour the latter, these pressures do not work in isolation, but interact with the other key influences in a complex way in determining ER patterns in subsidiaries abroad.

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The interaction between home, host and dominance effects and international integration points to a multitude of potential ER outcomes in subsidiaries abroad (Edwards and Ferner, 2002). These may comprise nationally distinct hybrid solutions that embody a selective transfer from the home model and/or a selective appropriation of global best practice prescriptions (Boyer et al., 1998). Depending on the degree of internal coherence, such hybrid ER patterns may signify either accommodation or tensions and contradictions between home-country and dominance effects. Empirical studies in this area have provided mixed results (for an overview, see Tüselmann, McDonald and Heise, 2003). However, on balance, the evidence suggests that ER in MNCs’ overseas subsidiaries are indeed influenced by a complex interplay between home, host and global best practice effects. The net effect is likely to be a matter of degree; it will also probably be dynamic in nature. A range of structural factors, such as the degree of globalization within the industry and the subsequent pressures for the integration of activities across borders, will further influence the final outcome. Additionally, an important aspect seems to be the economic benefits to MNCs from the home-country ER patterns and the extent to which these may lead to a competitive advantage in their subsidiaries abroad.

Studies of ER systems in German and US subsidiaries The current body of quantitative studies into ER in German overseas subsidiaries is sparse compared to those on US MNCs’ foreign subsidiaries. The host of studies on HRM/IR in US MNCs generally confirm, first, the distinctive features of the high-road variant of the individualistic AngloAmerican approach in the overseas subsidiaries of US MNCs and, second, a corporate-driven policy of avoiding independent collective arrangements (such as unions) as part of a deep-seated anti-union philosophy (Child, Faulkner and Pitkethly, 2001; Geary and Roche, 2001). Even in strongly institutionalized IR settings, such as Germany’s, US MNCs are either exploiting the room for manoeuvre to avoid collective arrangements or trying to weaken their influence in preference for direct communication (Muller, 1999; Royle, 1999; Schmitt, 2003). In the case of the latter, this, in turn, indicates a strategy of de facto substitution of collective channels in situations where these cannot be avoided. Conversely, most quantitative studies find no distinctive German patterns in the subsidiaries of German MNCs based in the United Kingdom, or indeed elsewhere. Instead, they find a tendency towards accepting local practices (Child, Faulkner and Pitkethly, 2001; Guest and Hoque, 1996).

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However, reservations remain as to the generalizability of these findings. None of the survey-based studies of German and US subsidiaries in the United Kingdom, or elsewhere, has been representative of the nationality groups included, and many have small sample sizes that lead to problems with sample idiosyncrasies (Bae, Chen and Lawler, 1998; Guest and Hoque, 1996). Nearly all quantitative studies, even those based on large databases (Gooderham, Nordhaug and Ringdal, 2004; Walsh, 2001), are heavily skewed towards particular nationality groups leading not only to a small number of cases for some particular groups, but also to large discrepancies between the groups. This impugns the statistical robustness of the results. Quantitative studies have also been criticized for only assessing individual practices and policies in isolation rather than developing systematic and holistic typologies of ER approaches (Dickmann, 2003). In response to some of these concerns, and as part of a research project funded by the Hans Böckler Foundation, the current authors conducted a small scale, but regionally representative study of German subsidiaries in North-West England. The findings from that study suggested that ER patterns, although not conforming to the traditional stereotypical German ER pattern, may reflect an emerging Germanic approach. This approach was characterized by the increasing adoption – within a pluralistic framework – of the best practice elements of the Anglo-American approach (Tüselmann, McDonald and Heise, 2002). However, the small sample size precluded not only the use of multivariate analysis, but also a more in-depth investigation of subsidiary ER. Therefore, in contrast to recent qualitative work, these quantitative studies have been unable to deal with more deeply rooted country-of-origin traits. A number of recent qualitative studies have painted a multifaceted picture of HRM/IR aspects in German operations in the United Kingdom and elsewhere (Ferner, Quintanilla and Varul, 2001; Geppert, Matten and Williams, 2003) These studies investigated the interplay between country-of-origin, host-country and dominance effects, as well as the organizational effects connected with pressures for international integration. This work highlighted the existence of a more concealed home-country effect. This took the form of a transfer of the generally long-termist, cooperative and consensual German ER ethos and management style (Dickmann, 2003; Ferner, Quintanilla and Varul, 2001). Furthermore, the evidence from the few qualitative studies on spill-back effects from UK-based subsidiaries to workplaces in Germany suggests some reverse diffusion amongst a certain subset of German MNCs; however, the magnitude of these effects is sometimes more modest

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than the theoretical literature might suggest (Edwards and Ferner, 2004). It should also be noted that further qualitative and quantitative studies have yet to emerge to substantiate and verify these results. This book reports on the data gathering, methodology and results of a largescale study on foreign-owned subsidiaries in the United Kingdom that seeks to rectify some of the shortcomings of the existing literature in this area.

Possible outcomes in the ER systems of subsidiaries The majority of German investors in the United Kingdom, and elsewhere, are large corporations and/or belong to the main German export industries (German-British Chamber, 2004; IAB, 2003). It is these firms, in particular, that are thought to benefit from the specific conditions of the German model. Indeed, a large amount of German FDI, as is the case for most FDI from developed countries, is geared towards exploiting ownership advantages (Barrel and Pain, 1999; HWWA, 2002). The German IR system has been ascribed an important contributory role in developing and sustaining such advantages (Hall and Soskice, 2001). Therefore, German investors in the United Kingdom might be willing to transfer aspects of their home-country ER if such companies see it as a source of competitiveness. With regard to transferability, it is frequently assumed that the benefits of the German model cannot be easily replicated to many other countries because these benefits depend, for their generation, on the specific German institutional framework (Hall and Soskice, 2001; Streeck, 1997b). Indeed, there is little evidence that German MNCs attempt to transfer the actual structures of their homecountry ER model (Dickmann, 2003; Ferner, Quintanilla and Varul, 2001) to their subsidiaries abroad. For instance, the identical replication of the German co-determination system has not been transferred abroad as it is difficult to establish in other settings that lack the necessary supporting laws and regulations. Moreover, the deregulated UK IR context lacks the necessary ability to absorb such innovations. However, the general principles of the German model, in terms of the pluralist perspective and collective ER philosophy amongst managers, are more easily exportable. German MNCs may, thus, display a desire or willingness to operate with independent collective voice structures in their subsidiaries abroad. In the United Kingdom, this may take the form of trade union recognition. By contrast, many US MNCs evidently display a corporate-driven policy of avoiding collective arrangements in their subsidiaries abroad. Therefore, a country-of-origin

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effect can be anticipated in the form of a comparably higher incidence of trade-union recognition in German-owned rather than US-owned subsidiaries in the United Kingdom. Conversely, if German parent companies were to attribute negative effects to their own ER model or if they did not perceive collective ER as a suitable template for their foreign subsidiaries, it could be expected that UK-based subsidiaries of German MNCs will be as likely as US ones to operate with direct ER policies without trade union recognition. In relation to the direct employee involvement dimension, it seems plausible to conclude that the dominance effect has had an impact on German MNCs. This seems to be reflected in German MNCs’ increasing interest in US-style ER policy innovations (Kurdelbusch, 2002; Muller, 1999). Although this has, so far, rarely led to the development of comprehensive HISs in the home base, the UK’s IR context provides space for experimentation with the best practice elements of the US model. Such subsidiaries may provide a focal point for developing US-style ER innovations. They may also act as a source of corporate learning. Indeed, several studies indicate that direct practices are widely used among the UK-based subsidiaries of German MNCs (Dickmann, 2003; Ferner, Quintanilla and Varul, 2001; Tüselmann, McDonald and Heise, 2003). This leads to the expectation that German firms in the United Kingdom may have gone some way in emulating the best practice elements of the high-road variant of the Anglo-American approach connected with the overseas subsidiaries of US MNCs. However, because US MNCs have been at the forefront of moves to introduce comprehensive direct employee involvement systems, these should be more prevalent among their UK subsidiaries than in German-owned ones. In light of these considerations, the ER policies adopted in UK-based subsidiaries of German MNCs may fall into one of four broad categories: 1. MNCs may, if they deem their home-country models to have a detrimental effect on their performance, take advantage of the relatively deregulated employment setting of the United Kingdom to adopt a minimalist approach to ER. In other words, if German MNCs were not willing to transfer those aspects of their home-country model that they view negatively, it could be expected that a significant percentage of German MNCs in the United Kingdom would adopt a minimalist approach to ER. A minimalist approach might rely on a few, if any, direct voice mechanisms. Such an approach may enable them to exploit the perceived cost and flexibility advantages connected with operating in the United Kingdom.

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2. If German MNCs do not want to export many aspects of their homecountry model to their subsidiaries in the United Kingdom, they may adopt HISs that rely on ER polices that focus on employees as individuals rather than as a group. Thus, they could be expected to display similar ER patterns to their US counterparts. Such an outcome would also buttress claims that increased competition is leading to a convergence of ER policies in different countries. 3. If German MNCs tend to view many aspects of their home country’s ER model favourably, they might be expected to replicate, as far as is possible, these in their subsidiaries abroad. Such an approach would emphasize the collective aspects of ER. Therefore, German MNCs can be expected to be willing to recognize trade unions in their workplaces in the United Kingdom. Furthermore, this approach is likely to be characterized by a more cooperative attitude amongst managers towards employees. Therefore, the UK-based subsidiaries of German MNCs can be expected to display a positive attitude towards unions. 4. Finally, direct involvement practices can be combined with trade union recognition. This can be done in one of two ways: i. If German MNCs tend to view many aspects of their home country’s ER model favourably, they could also combine direct involvement practices with trade union recognition. In other words, some of the best practice elements of the US model could be developed within a pluralistic framework that provides room for union representation. The integration of collective and direct voice channels can be described as a partnership or mutual-gains model. It would entail the involvement of union representatives in the introduction and operation of HISs. Thus, if ER in the UK-based subsidiaries of German MNCs were to display a distinctive, collective ER orientation, it is possible that they would be more likely – compared to those of US MNCs – to develop HISs within a partnership framework. The UK-based subsidiaries of US MNCs, on the other hand, would be expected to make use of an HIS only. In other words, UK-based subsidiaries of US MNCs could be expected, compared to those of German MNCs, to use HIS or direct ER approaches only; they would not be inclined to recognize unions. The combined use of direct and collective voice mechanisms in their subsidiaries abroad may lead to an increasing interest among German parent companies in introducing US-style ER policy innovations into their existing ER patterns. It would also reflect their experience of introducing direct practices into their workplaces in Germany.

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ii. Although it might be conjectured that the direct involvement mechanisms are introduced in a way that is consistent with the generally cooperative ER ethos, the evidence so far on the introduction of direct participation practices is somewhat mixed. Situations where such direct practices coexist alongside works councils have been documented (Muller, 1999; Frick, 2002a). These direct practices could, potentially, be used to circumvent or marginalize works councils.

Conclusion This chapter has set out the debates on the factors that influence the ER policies adopted in MNCs’ subsidiaries abroad. One strand of the literature stresses the role of best practice in MNCs’ decisions on the ER policies to pursue in their subsidiaries abroad. In this view, MNCs, regardless of their nationality of ownership will adopt those practices that are viewed as the global best practice. Another strand of the literature, however, emphasizes the influence of the MNCs’ home country on the ER measures adopted in their overseas subsidiaries. In this view, such polices will reflect – but not replicate – home-country practices. A further framework was also discussed. This third framework brings together these ideas on home-country and dominance effects as well as others on the importance of host-country effects and on the pressures on MNCs to integrate their activities across national borders. This latter framework, therefore, highlights the importance of the following areas: country-of-origin effects (both in terms of ‘willingness’ to transfer certain policies and the ‘transferability’ of those policies), host-country effects, dominance effects, and pressures for the international integration of MNCs’ activities. In this latter framework, therefore, both the home- and host-country effects are important. Therefore, this chapter has also discussed the ER policies than can be expected to be implemented in the UK-based subsidiaries of German and US MNCs. These expectations, of course, vary depending upon the assumptions that are made about the effects on firm performance of various ER policies that are associated with the German and UK economic models. In short, if German MNCs wish to distance themselves from some of the ER policies associated with the German economic model, such as relatively strong channels of collective representation, they are unlikely to adopt similar policies in their subsidiaries in the United Kingdom. If such companies do decide not to rely on collective channels of ER, they can either pursue a high-road or

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a low-road approach. The former would rely on the extensive use of direct involvement measures; the latter would be characterized by the complete, or near complete, absence of these measures. Of course, German MNCs may decide to replicate, as far as is possible, their home-country ER policies in their UK-based subsidiaries. This may lead to the trade unions being recognized within workplaces. Finally, German MNCs may decide to recognize trade unions and to rely extensively on direct involvement measures. This may complement one another or direct involvement practices could be used to undermine trade unions. There are, therefore, a number of approaches that could be adopted in the UK-based subsidiaries of foreign-owned MNCs. Before looking in greater detail at the types of approaches that are adopted in the subsidiaries of German and US MNCs in the United Kingdom, the relevant empirical findings from related studies will be presented and reviewed. This is done in the next chapter.

4 Firm Performance and Employee Relations

Introduction As outlined in the introductory chapter, the link between employee relations (ER) and performance in overseas subsidiaries of MNCs is more complex than that for indigenous firms. The preceding chapter has shown that ER patterns in MNCs’ international operations will be the outcome of a complex interaction between home-country, host-country and dominance effects. In turn, the results of this interplay – that is, the actual ER approaches adopted in subsidiaries – will influence subsidiary performance. Therefore, it is necessary to examine the theoretical aspects and the empirical evidence on the associations between measures of firm performance and different ER approaches. This entails a discussion of the effects on performance of the main voice structures in Germany and the United Kingdom. It also requires consideration of the effects of USstyle direct voice approaches (which have been dubbed best practice) on firm performance. More specifically, it is necessary to examine the literature relating to trade unions, JCCs, works councils, high-involvement systems (HISs) and partnership models. This examination will be located within the framework set out in Chapter 5. In this framework, ‘voice’ provides an overarching concept to integrate these discrete literatures. Accordingly, the performance implications of the various voice structures will be examined with reference to the information-sharing, power/ influence and governance components of voice. The main arguments in this area revolve around issues of trust, time horizons and the distribution of the firm’s surplus. Furthermore, the discussion of the theoretical arguments and empirical evidence relates to a range of performance indicators that include labour productivity and profits, as well as measures that could lead to an increase in productivity. 37

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This chapter begins with a review of the theoretical and empirical work on unions and firm performance; it then examines non-union management-initiated representative structures, which include joint consultative committees. The relevant literature on works councils is then examined. The theoretical and empirical work on direct involvement systems, referred to here as HISs, is, subsequently, discussed. Partnership approaches, which combine both direct and indirect voice mechanisms, are then examined theoretically and empirically. The chapter ends with a review of the limitations of previous empirical studies.

Trade unions There are two broad schools of thought on the economic effects of trade unions on firm performance. Neo-liberal writers argue that unions have an adverse effect on performance (for example, Addison and Belfield, 2003, 2004; Connolly, Hirsch and Hirschey, 1986). Others, drawing on a range of arguments from participation theory (Freeman and Lazear, 1995) to aspects of new institutional economics (Williamson, 1985), argue that unions can, potentially, improve firm performance (Freeman and Medoff, 1984; Terry, 1999). To a certain extent, these two schools of thought reflect the dual role of unions in their collective voice and collective bargaining functions, even though these may partly ‘offset’ one another. Supporters of unions refer to their productivity- and efficiencyenhancing effects. These are associated with a potential to increase the firm’s surplus. Neo-liberal critics of unions, on the other hand, have traditionally focused on the monopoly role of unions, and stress their negative effects on the firm’s profits. Furthermore, the negative effects of unions are also said to redistribute the firm’s surpluses towards employees. These negative effects arise from the rent-seeking behaviour of unions and their efficiency-retarding effects. This places a constraint on management’s prerogative and its decision-making abilities. In turn, these, arguably, have a detrimental impact on the firm’s surplus (for a detailed treatment, see Addison and Schnabel, 2003; Freeman, 1976; Metcalf, 2003a). There are three main theoretical reasons that support the presence of unions in workplaces. These are: information asymmetries between managers and employees, the public-goods character of many working conditions, and the incompleteness of labour contracts associated with the principal-agent problem (Freeman and Medoff, 1984; Levine and Tyson, 1990; Williamson, 1985; Wolf and Zwick, 2002a). Unions can help to overcome information asymmetries by facilitating information

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sharing between workers and management (Benson, 2000; Prosser, 2001). They can aggregate workers’ preferences and communicate these to managers, which may lead to better HR policies. They provide a mechanism for individual workers to air their grievances and to express their discontent. For these reasons, employees may be more willing to share information, via unions, with employers about their working conditions. This feature also helps to overcome one of the main problems associated with public goods; that is, the failure of individuals to provide information if they think that they can free ride on the efforts of others. Overall, if unions facilitate increased communication and consultation between workers and management, and if there is a role for employees (via union representatives) in the decision-making process, better and more creative solutions in work organization and production can, arguably, be expected. As part of the governance function of collective voice, unions can mitigate against principal-agent problems that can arise from incomplete contracts and the information advantages of the agent. On the one hand, monitoring and enforcing (incomplete) contracts and agreements on behalf of employees are likely to make workers less suspicious of workplace changes as it may forestall opportunistic behaviour by management, thereby easing the acceptance and implementation of innovations (Pencavel, 1977). For employers, unions may help to ensure that workers maintain their effort levels. This reduces the need for direct control, and, hence, lowers monitoring costs. Such a role for unions may lead to joint regulation. Relatedly, unions may act as a ‘buffer’ between management and individual workers, protecting workers who express dissatisfaction. Unions may also protect workers against potential job losses connected with productivity-enhancing suggestions made by employees. These union attributes should, in turn, facilitate the sharing of such information (Benson, 2000; Terry, 1999). The governance and information-sharing functions of unions can lead to benefits that can, in turn, improve productivity. These benefits include, inter alia, decreased dissatisfaction amongst employees, an improved working climate, increased morale and motivation, and improved cooperation amongst workers and between workers and management. These may, amongst other things, reduce absenteeism (and quiet sabotage) and lower job leaving and the associated recruitment and training costs. A reduction in the leaving rate may lead to an increase in workers’ investments in firm-specific skills as they may take a longer-term view of their prospects with their employer. An increase in trust between workers and management may aid such investment as it helps to

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reduce opportunism by management. Such a reduction is important, as employees with firm-specific skills have fewer outside options. Therefore, they may be easily exploited by managers. Overall, better cooperation between workers and management, facilitated by union voice, may help in the accumulation and safeguarding of human capital. All these advantages may translate into improved efficiency and better labour productivity, which in turn may improve the firm’s surplus; that is to say, the size of the ‘pie’ that can be distributed between employers, customers and workers will be bigger. Indeed, productivity advantages and the size of the surplus may potentially increase cumulatively as the involvement of unions moves from information exchange to consultation through to joint regulation (Freeman and Lazear, 1995). However, the extent to which the potential productivity benefits of unions are felt by companies depends on the power or influence that unions have. If they are to perform their information-sharing and governance functions effectively, they require an appropriate level of influence for voice to be seen as legitimate and credible. This is needed if unions are to be a source of trustworthy information for employees and are to be an authoritative agent for employers (Bryson and Wilkinson, 2002). In turn, this requires a partial surrender of the managerial prerogative and the ceding of a degree of control on the employer’s side. Weak unions will be ineffectual in their information-sharing function and in their grievance, monitoring and buffer functions for employees. They will also be ineffectual for employers in alleviating principal-agent problems if they are weak. Unions that are weak can be expected to have a negligible effect on firm performance. In contrast, strong unions can potentially be beneficial for a firm by improving its productivity performance and by increasing its surplus. Yet, unions are also engaged in collective bargaining over wages, which are paid out of the firm’s surplus. As long as wage increases reflect union-induced productivity gains, unions will not have a profit-retarding effect. Strong unions – that is, ones that can force through high wage demands – in a decentralized bargaining system can potentially be harmful: because of their bargaining power, strong unions might redistribute the firm’s surplus at the expense of profits and firm investments. However, this constellation resembles a prisoners’ dilemma. For instance, employers may endeavour to restrict the influence of strong unions. In such circumstances, they will be reluctant to share information or consult with unions, as they will be keen to protect their prerogative; they will not grant unions a governance role. However, this reduces substantially the positive effects that a powerful union voice can have

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on productivity and the factors that lead to improved productivity. If employers seek to restrict the influence of unions, they may lower productivity and reduce the firm’s surplus. Indeed, the active restriction of union influence may lead to a low-trust/high-conflict situation dominated by opportunistic behaviour, where both sides rely on their workplace strength to achieve as many gains as they can. The common good is likely to fall victim to short-term considerations, as each side fights, in a zero-sum game, for a greater share of the firm’s surplus. The size of the firm’s surplus will, however, be smaller compared to a situation where the positive effects of unions on factors that can increase productivity, such as lower absenteeism and leaving/quit rates, are fully captured. In a low-trust/high-conflict situation, therefore, company profits may be negatively affected in three ways. First, productivity may be lower. Second, wage increases may outstrip productivity gains. Finally, quasi rents in relation to investment may be appropriated by employees. Union influence, union power and their collective bargaining function form the main elements in neo-liberals’ critique of unions. Unions are conventionally viewed as having a detrimental effect on profits and productivity. If union power extends to negotiations over pay, critics argue that the firm’s profits are likely to be unjustly distributed towards labour with rent-seeking unions aiming to capture the maximum rent that they can for employees (the so-called wage premium) (Addison and Belfield, 2001; Hirsch, 2005). Furthermore, unions are viewed as a source of inefficiency as their power leads to a redistribution of control within the firm. This, subsequently, is argued to retard productivity and profits as, inter alia, constraints are placed on management decisions. Under such constraints profit-maximizing decisions may be delayed or altered. Furthermore, inefficient compromises may be brokered between managers and unions. In neo-liberal critiques of unions, arguments are frequently made about the appropriation of quasi rents by unions of investments in capital equipment and R&D. This, in turn, is argued to reduce investment rates. Two of the possible consequences of this are lower productivity rates and profits. Moreover, neo-liberals have also called into question one of the fundamental theoretical benefits of trade unions; that is, a lower quit rate. Union detractors argue that independent collective voice representation may actually lower the quit rate too much: if unproductive workers do not leave voluntarily, firm performance could suffer (Addison and Belfield, 2002). However, it is increasingly recognized that the benefits and disadvantages of unions do not accrue ‘automatically’. First, the effect of unions

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on firm performance will depend upon the degree of market competition (Metcalf, 2003b). In competitive product markets, economic rents will be small, and, with heightened international competition, rents are decreasing across OECD countries (Blanchard, 2001). This leaves unions little room for manoeuvre in terms of rent seeking. Second, the extent of any union (dis)advantage depends largely on workplace interactions between management and unions, which Freeman and Medoff (1984) termed ‘institutional response’. In other words, trade union behaviour is influenced by the actions of management and other parties in the context of the institutional setting of the ER system. The impact of unions on performance is largely contingent upon the extent to which ER are cooperative in nature. Trade union effects on productivity, the size of the surplus and profits may be different in cooperative IR environments that foster trust and long-term perspectives amongst both unions and management, compared to adversarial IR environments that are characterized by arm’s length, low-trust opportunistic relationships and shortterm perspectives. Yet, as highlighted in Chapter 1, the nature of the relationship between unions and management in the workplace is also shaped by the wider IR system and by the other components of the national business system, such as the financial system (Hall and Soskice, 2001; Whitley, 1999). The empirical evidence on the link between trade unions and firm performance in the United Kingdom needs, therefore, to be interpreted within this context.

Empirical evidence The United Kingdom Many of the recent UK studies are based on the Workplace Employee Relations Survey dataset (WERS98), with a number of the earlier studies drawing on its previous versions, the Workplace Industrial Relations Surveys (WIRS). WERS98 is the largest representative survey on ER in the United Kingdom. Unless stated otherwise, the evidence below relates to WERS/WIRS. Both recent and earlier studies have shown that unions are associated with reduced quit rates. The evidence for absenteeism is somewhat more mixed (Addison and Belfield, 2001; Addison et al., 2000; Cully et al., 1999; Fernie and Metcalf, 1995). This picture is also confirmed by nonWERS98 studies (Guest and Peccei, 2001). This would suggest that the voice provided by British unions for employees is, and was, relatively effective in generating important benefits that could improve productivity. However, the evidence on labour productivity does not corroborate this impression; it shows that lower quit rates in unionized firms did not

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translate into comparatively better productivity levels. The weight of evidence from studies relating to the 1970s and early 1980s pointed to lower productivity levels and lower productivity growth rates in unionized firms compared to non-unionized ones. Virtually all studies found a negative association between unions and firm profitability (Gregg, Machin and Metcalf, 1993; Machin, 1991; Metcalf, 1990a, 1990b). The IR landscape in this period was marked by relatively strong unions and powerful union workplace representatives. However, the arm’s length, low-trust adversarial nature of British ER, dominated by behaviour that maximized short-term gains where both sides relied on their workplace strength, meant that neither union channels nor employers had an interest in a positive-sum sharing of power. As discussed in Chapter 2, a number of factors have prevented the emergence of more cooperative ERs and sufficient levels of trust between both parties to afford them the opportunity to take a long-term view and to refrain from the pursuit of short-term opportunistic gains. These factors include: the voluntaristic nature of the British IR system, the lack of statutory employee participation rights, and the stock market-dominated financial system with its emphasis on short-term financial results. A further important factor is the decentralized pay-bargaining system. This, coupled with the lack of a formal distinction between collective bargaining and representative employee participation, meant that there was no separation between issues relating to the organization of work and those connected to pay. This, in turn, led to a situation in which firm-level union-employer relations were enmeshed in wider issues of income distribution. These wider issues tended, at the outset, to dominate those connected to the organization of work and production within workplaces. This problem was exacerbated by the lack of coordination and control capacities of peak-level IR actors, such as national-level union and employers’ associations. This ‘cooperation trap’ – that is, the inability of employers and employee representatives to collaborate at the workplace level – may explain the unfavourable performance outcomes in unionized firms during this period of union strength. Moreover, union representatives focused on job control by pursuing restrictive practices and distributive bargaining; management focused on guarding its prerogative and trying to contain union influence. As discussed in detail in the previous section, the prisoners’ dilemma arising from this low-trust environment meant that the potential productivity benefits connected with the informationsharing and governance properties of a strong union voice were forfeited. This led to lower productivity levels and smaller surpluses than would

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otherwise have been the case. Productivity levels and the size of the surplus were further reduced by restrictive practices and by industrial conflicts in which unions used their strength to pursue maximum shortterm wage gains. Indeed, the negative association with firm profits in this era highlights unions’ ability to redistribute the firm’s surplus in workers’ favour. Lower profits mean that there is less money to invest. Indeed, lower investment rates in unionized firms were seen. This further suppressed profits. Lower investment levels can, in part, be attributed to the threat by strong unions to gain completely the quasi rents associated with investments. This, it should be remembered is more likely to happen within the context of low-trust and short-term opportunistic ER in British firms. Lower investment rates, together with the increasing incidence of restrictive practices and strikes in this period, may explain the lower productivity growth rates witnessed in unionized companies.

The changing effects of unions since the mid-1980s in the United Kingdom The majority of the evidence suggests that the disadvantages linked to unions all but disappeared over the course of the mid-1980s and 1990s. The bulk of recent studies show that there are no longer significant differences in productivity levels and profits between the unionized and the non-unionized sector in the United Kingdom (Addison and Belfield, 2002; Addison and Siebert, 2003; Bryson and Wilkinson, 2002; Conyon and Freeman, 2001; Machin and Stewart, 1996; McNabb and Whitfield, 2000; Pencavel, 2003). These results are confirmed by non-WERS-based studies (Guest et al., 2003; Guest and Peccei, 2001). Unionized firms seem, in general, to have closed the productivity gap with their nonunionized counterparts and the profit-retarding effect that unions may once have had seems to have dissipated. These developments became apparent over the course of the mid/late 1980s with the productivity and profit performance differentials between unionized and non-unionized firms narrowing (Gregg, Machin and Metcalf, 1993; see Denny and Nickel, 1992 for information on unions and investments) and, by the early 1990s, the impact of trade unions on these measures became only weakly significant (Fernie and Metcalf, 1995; Machin and Stewart, 1996; Wilkinson, 2000). Indeed, some studies showed no significant associations between unions and firm performance (Booth and McCulloch, 1999; Menezes-Filho, 1997). The picture on unions and productivity growth is similar and mirrors the improvement in comparative productivity levels as the unionized sector caught up with the non-union sector. Studies generally indicate

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higher productivity growth rates in unionized firms since the mid-1980s (Addison and Belfield, 2001, 2002). Several reasons have been advanced to explain these developments. Together they may account for the disappearance of the overall union effect on productivity and profits. One reason put forward is that increased international competition since the mid-1980s and, subsequently, the exposure of British business to more competition have meant that economic rents have been reduced. This has left very little surplus rent that could be captured by unions (Blanchard, 2001). Another reason is that union recognition and collective bargaining structures, traditionally characterized by multi-unionism, have become more efficient through simplification and rationalization (Cully et al., 1999). Indeed, a negative link between unions and productivity, and between unions and financial performance seems to be confined to firms that operate in non-competitive markets and to those that still have fragmented bargaining structures (Metcalf, 2003b; Pencavel, 2003). Yet another reason is that the neo-liberal labour-market policies and IR reforms of the Thatcher governments, which formed part of a wider deregulation agenda, drastically reduced the power of unions by, inter alia, severely curtailing the scope for strike action and restrictive practices. These reforms also encouraged a more aggressive assertion of management’s prerogative that tilted the balance of power in employers’ favour (see Chapter 2). Indeed, weakened union pay-bargaining power and the removal of inefficiencies linked to union constraints on management decision making and control are the main factors put forward by neoliberals to account for the, by now, negligible average union effect on performance. Indeed, this result is viewed in these circles as a vindication of neo-liberal reform prescriptions. However, these celebrations may focus on the wrong target: nonunionized British firms may be too low a benchmark for comparing the effects of unions. Although, in general, there may no longer be significant differences – in terms of productivity and financial performance – in the United Kingdom between unionized and non-unionized companies in the private sector, there still exists a large labour-productivity gap between the UK’s private sector (in particular its manufacturing sector) and that of its main competitors, such as Germany and France. This gap has even widened since the late 1980s (OECD, 2004). In other words, labour productivity in unionized firms has only converged to the low productivity levels in non-unionized firms. Indeed, the higher labour productivity growth rates in the unionized sector since the mid-1980s have mainly been achieved by rationalization and by removing

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impediments to higher productivity, such as restrictive practices, rather than by implementing more proactive measures. Such proactive measures include the accelerated investment in new capital equipment, new technology or R&D, and a strengthening of collective voice to enhance the effects (lower quit rates and absenteeism) that can improve productivity (Nolan and Slater, 2003). These results of recent studies have been interpreted in a ‘revisionist’ way (Bryson, 2004; Bryson and Wilkinson, 2002). Such interpretations suggest that trade unions are now too weak. Therefore, they are too ineffectual to perform the information-sharing and governance functions of collective voice adequately; this weakness extends to the alleviation of principal-agent problems for employers. It may help to explain their negligible effects on measures of performance. Furthermore, as highlighted in Chapter 2, despite the altered power balance in favour of employers, there have been few efforts by management to foster more cooperative relations with unions. Instead, many employers seem to have exploited the weakened position of unions to marginalize representative channels yet further. The legislative reforms of the 1980s curtailed unions’ room for manoeuvre. This has helped to make ER appear on the surface less adversarial. Despite this, ER, in many workplaces, have remained stuck in a ‘low-trust equilibrium’. This implies that many unionized firms in Britain may be foregoing higher productivity and a larger surplus. The reasons for this are twofold. First, there has been a failure to engage with unions in a more constructive and cooperative manner. Second, employers in many unionized firms have been reluctant to cede any influence to unions. Without this influence, union channels will not be able to perform the information-sharing and governance functions of collective voice adequately. As a result, the potential productivity-enhancing benefits of unions may be lost. Viewed in this light, and set within the context of the international productivity disadvantage of British business, the findings of non-significant performance differences between unionized and non-unionized firms could be read as a failure of unionized companies to record higher productivity levels compared to their counterparts without union voice. Alternatively, these findings could be read as a failure to narrow the productivity gap in relation to their major international competitors. However, the deregulated, and still largely voluntaristic, nature of British IR may not provide the right incentive structure to underpin ER based on high-trust and long-term perspectives (see Chapter 2). In short, the decentralized collective bargaining system in combination with a stock market-dominated financial system may create incentives for

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companies to adopt an adversarial stance vis-à-vis independent employee representatives.

Non-union management-initiated representative structures As noted in Chapter 2, voluntaristic representative structures, such as joint consultative committees (JCCs) in the United Kingdom, are at best a weak form of collective involvement. They are more consistent with a unitarist rather than a pluralist view of ER. This perspective is consistent with neo-liberal theory that emphasizes that management should be free to initiate what, if any, form of collective voice to adopt. In this perspective, management should be free to select the optimal level of involvement of such bodies (Furubotn and Richter, 1998; Pejovich, 1998). Indeed, the very characteristics of voluntaristic management-initiated representative structures, such as JCCs in the United Kingdom, seem to conform to such neo-liberal prescriptions (see Chapter 5). These management-dominated structures, which can be unilaterally dissolved by management, are mainly concerned with consultation rather than joint regulations. Management determines the level of input of workers’ representatives as well as the range of issues to be consulted upon. Management also sets out the appointment procedures to, and the composition of, such bodies. Furthermore, evidence from the United Kingdom shows that JCCs are frequently connected with managementappointed employee representatives, the lack of a clear remit, the absence of any negotiations, and a limited range of issues (if any) that are subject to joint consultation (see Chapter 5). Advocates of such committees associate them with performance advantages. These are a result of the information-sharing function of collective voice in terms of information exchange, communication and consultation. This function, in turn, leads to benefits that can increase productivity, such as reduced absenteeism and quit rates (see, for instance, Coupar and Stevens, 1998; Heery and Noon, 2001). Unlike unions, however, JCCs’ lack of power and influence ensures, so their advocates would argue, that there is no redistribution of control and that no constraints are placed on management’s prerogative. Thus, management decisionmaking processes should not be distorted. Similarly, there should be no delay in making profit-maximizing decisions, no inefficient compromises, and no blocking of productivity-enhancing workplace innovations and so on. Furthermore, since these bodies lack a collective bargaining

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function, there is no potential redistribution of the firm’s surplus. In sum, proponents of voluntaristic forms of representative systems ascribe to them a positive impact on both productivity and profits. Implicitly, such expectations need to assume that voluntaristic structures are sufficient to surmount the problems connected with the public-goods nature of workplace characteristics/conditions, information asymmetries and incomplete labour contracts. Such outcomes and assumptions have been contested (Hall and Soskice, 2001; Freeman and Medoff, 1984; Millward, Bryson and Forth, 2000; Terry, 2003b). Whereas neo-liberal supporters of JCCs point to the low levels of power that they have vis-à-vis independent forms of collective voice, such as unions, critics contend that it is precisely this relative impotence that renders JCCs ineffectual. The lack of important collective voice attributes, such as influence, governance and information sharing, may be insufficient to overcome information asymmetries and the problems associated with public goods, and those linked to principal and agent problems. Viewed from a pluralist perspective, the potential benefits that can increase productivity and that are ascribed to effective collective voice (see section on unions) may not materialize, as JCCs and similar bodies are not a functional equivalent to unions (or works councils). Voluntaristic management-initiated structures may be insufficient to overcome workers’ distrust, to reduce transaction costs, and to foster cooperation among employees and among workers and managers. They may also be insufficient to promote longer-term perspectives among workers. Such perspectives are needed if employees are to invest in firm-specific skills. Indeed, the ability of such bodies to represent employees’ interests is deficient. Employee representatives in JCCs lack voice legitimacy and credibility. Indeed, they may not be perceived as a source of trustworthy information by employees. The grievance, buffer and protective aspects of independent collective voice are missing. So, too, is the ability to monitor, and, hence, the possibility to enforce incomplete agreements and contracts on behalf of employees. A restricted agenda for joint consultation may lead to a sub-optimal utilization of the beneficial information-sharing aspects of voice. In short, JCCs may not improve information flows. Furthermore, as no power is ceded by employers to employee representatives, and as management’s prerogative is left intact, JCCs lack any real influence and cannot perform a governance role. As a result, JCCs may be rendered ineffective in addressing principalagent problems. The shortfall of collective voice inherent in these management-initiated channels of representation may lead to negligible

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benefits in terms of reduced absenteeism and quits. This, in turn, will mean that productivity levels are unlikely to improve. As a result, JCCs may have little impact on productivity performance, and, hence, the firm’s surplus and profits.

Empirical evidence On balance, the empirical evidence on JCCs in the United Kingdom seems to confirm such views. For instance, there is a non-significant association between JCCs and quits, labour productivity (both level and growth), and financial performance. However, there is evidence of JCCs being associated with higher absenteeism, lower productivity levels and lower productivity growth rates (Addison and Belfield, 2001; Addison et al., 2000; Guest et al., 2003; McNabb and Whitfield, 2000). In light of the findings of a generally non-significant union effect on productivity and profits (see previous section), the neutral or, indeed, negative performance associations of JCCs provide no evidence for the neo-liberal view that management-established representative structures are preferable to independent structures. Indeed, the UK evidence suggests the contrary.

Non-union, independent collective voice: works councils The contentions both for and against works councils resemble in many, though not all, aspects those on unions. Issues of information sharing, power and governance are important in these debates (for an overview of the development of the discourse surrounding works councils, see Jackson, 2005). As are the links between, on the one hand, information sharing, power and governance, and, on the other, trust, long-termism and the locus of pay negotiations. All of these play an important role in the performance the implications of voice mechanism of works councils. Much of the theoretical literature on works councils is based on participation models, such as that by Freeman and Lazear (1995). This, in turn, draws on a broader collective voice paradigm put forward by Freeman and Medoff (1984). Other important contributions to the debate on the effects of works councils on firm performance are Levine and Tyson (1990), Rogers and Streeck (1995), and Hall and Soskice (2001). In these frameworks, the legally supported and formalized German works council system – equipped with statutory information, consultation, veto/assent and co-determination rights – is generally considered to have a positive impact on productivity, firms’ surpluses and profits.

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Conversely, neo-liberal critiques of works councils centre on their potentially surplus- and profit-reducing effects. These are said to be caused by the redistribution of control within the firm, and the direct and indirect costs associated with this. The rent-seeking behaviour of works councils also plays a prominent part in such critiques. This behaviour, it is argued, leads to the redistribution of the firm surplus at the expense of profits (Addison, Schnabel and Wagner, 2004; Franz, 2001). The main reason put forward in support of works councils’ legally enshrined participation rights is the need to overcome market failures. Markets on their own are unlikely to provide the right incentives for efficient, voluntary arrangements to emerge. In other words, markets do not provide the right incentive structure for firms to overcome the prisoners’ dilemma of the short-term, opportunistic gain-maximizing behaviour which is characterized by low trust. Markets, arguably, therefore, produce sub-optimal levels of employee participation and economic gains (Kittel, 2000; Levine and Tyson, 1990; Rogers and Streeck, 1995). The trust-building legal framework underpinning the German works council system holds out the prospect of overcoming the ‘cooperation trap’ (outlined above) and of fostering long-term perspectives and high-trust ER. The unique features of the German works council model should, theoretically, lead to superior performance outcomes when compared to firm-level employee representation via unions in decentralized collective bargaining contexts and when compared to managementinitiated voluntary bodies. Theoretically, firms with works councils should reap all the potential advantages connected with the information-sharing and governance roles of independent collective voice via union representation. These advantages include improvements to efficiency, and increases in productivity and the firm’s surplus. The theoretical arguments linking works councils to these benefits strongly resemble those put forward on unions (see above). However, these advantages should become more pronounced in the German co-determination system because its particular features should foster comparatively higher degrees of cooperation, trust and longer-term perspectives (for a more detailed discussion, see Bertelsmann Stiftung/Hans Böckler Stiftung, 1998; Frege, 2002; French, 2001; Müller-Jentsch, 1995). The mandatory (though not automatic) nature of works councils reinforces the credibility of employers’ commitments to take into account employees’ interests. The legally enshrined participation rights should lead to a surplus-maximizing level of participation.

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The legally defined rights of works councils should ensure that they have sufficient power and influence so that the potential productivityand surplus-enhancing effects of the information-sharing and governance aspects of effective collective voice can be fully reaped (see section on unions). The law ensures that works councils do not have too much power. This helps to ensure that management retains sufficient control. First, works councils’ peace obligation means that they cannot resort to industrial action during disagreements with management, but have to resort to the system of labour courts. Second, although the Works Constitution Act imposes a relatively uniform template on firms with works councils, the step-wise relationship between the powers of works councils – both in depth and breadth – and firm size reflects the different bargaining strengths of smaller and larger employers. This should mean that works councils are not disproportionately strong compared to employers. Furthermore, because unions are legally assigned sole collective bargaining rights, issues relating to the organization of production and those linked to pay should be decoupled. This should mean that works council-management relations are detached from the conflict over wider issues of income distribution. These distinctive features of the German model of employee representation help to ensure co-operation. They facilitate levels of trust that afford both sides the opportunity to take a long-term perspective on ER, and, thereby, help to overcome the prisoners’ dilemma that bedevils union-management relations in Anglo-American contexts. This prisoners’ dilemma arises from the low-trust, short-term opportunistic gainmaximizing behaviour of both sides. In such a situation, both sides exploit their workplace strength. Indeed, many of the benefits that can potentially lead to improved productivity, and that are associated with the information-sharing and governance aspects of the collective voice machinery are foregone. In the Anglo-American contexts, one of the main reasons for this is the fact there is no formal separation between the representative and the pay-bargaining roles in the decentralized wage-bargaining system. By contrast, in Germany, pay bargaining is largely divorced from negotiations over the organization of work within establishments. This, coupled with a sufficient level of influence for works councils within a cooperative ER environment, ensures that the potential productivity-increasing advantages of the information-sharing and governance function of collective voice can be reaped. An increase in a firm’s productivity may enhance the size of the firm’s surplus. Moreover, with works councils the profit-retarding effects associated, in

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principle, with the rent-seeking behaviour of unions should not arise. The reform of the Works Constitution Act (2001), which, inter alia, extends the rights of works councils; facilitates the creation of works councils, especially in smaller firms; and reduces the size thresholds used for determining the number of (full-time) works councillors. It also holds out the theoretical prospect of higher productivity and, hence, a larger surplus. This is because the potential advantages of the informationsharing and governance aspects of collective voice are more fully utilized. In cases where the new law leads to the introduction of works councils, there is the possibility that the firm’s performance will improve as a result. However, the performance advantages connected with the works council system not only depend upon its embeddedness within the wider IR system (as illustrated above), but also on the other institutions of the German business system. These other institutions include the mainly bank-based finance system and the innovation system. These have helped to underwrite high levels of trust, cooperation and longtermism within firms between capital and labour. In turn, the works councils system contributes to these high levels of trust and so on (Hall and Soskice, 2001; Streeck, 1995; Whitley, 1999). Indeed, the German institution of co-determination, as an important part of the German business system, has contributed to the delivery of a competitive advantage to firms. The business system has enabled a large part of German industry to compete successfully in international product markets. This success has been based largely on a strategy of diversified quality production strategy (Hall and Soskice, 2001; Sorge and Streeck, 1988; Streeck, 1997a). Notwithstanding the potentially positive effects of the works council system on productivity and the firm’s surplus, works councils may not only have an impact on the size of the surplus, but also on the distribution of the surplus. Despite the law prohibiting works councils from involvement in matters relating to pay, they may, nonetheless, engage in rent-seeking behaviour by enhancing labour’s share in any given surplus. As discussed in Chapter 2, by combining various issues in a ‘package deal’, works councils may be able to negotiate voluntary works agreements beyond the scope of the closely defined de jure codetermination rights. Here, possible ways to redistribute the surplus may include agreements on job-grading systems, enhanced bonuses and fringe benefits. Furthermore, the need to gain works councillors’ consent on certain issues may be one of the factors that compel employers to pay basic wage levels above the collectively agreed minimum. Other

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reasons for the wage gap can be related to efficiency-wage arguments. Yet, the extent to which works councils can engage in rent-seeking behaviour depends, in part, on whether the establishment is subject to a sectoral collective agreement (Hübler and Jirjahn, 2001). Because of the interdependencies between unions and works councillors, trade unions can act as a constraint on the rent-seeking activities of works councils. This is because union interest extends beyond a single firm to preserve the collective bargaining system. Hence, the rent-seeking behaviour of works councils, which can contribute to wage dispersion, might undermine the power and status of unions. Nonetheless, the profit-retarding effects of works councils’ rent-seeking behaviour and the associated redistribution of the firm’s surplus form central planks in the neo-liberal critique of the legally supported works council system (Addison and Belfield, 2003; Addison et al., 1998; Henkel, 1999; Schedlitzki, 2002). The conventional neo-liberal analysis of the link between works council and performance draws heavily on the union monopoly model. Furthermore, the power conveyed by works councils’ participation rights, and, in particular, their legally supported governance role via co-determination rights have been criticized as an inappropriate redistribution of control within the firm. This redistribution is said to constrain management’s prerogative. This, in turn, has adverse effects on efficiency, the size of the surplus and the firm’s profits (Addison et al., 2000). A specific point in the critique is that the level of participation rights is higher than the profit-maximizing level of employee involvement (Addison et al., 2000). Many of these arguments similar to those outlined above against unions. They are the opposite of those outlined above in favour of voluntaristic management-initiated representative bodies. In other words, like unions, but unlike JCCS, works councils are said to lengthen the decision-making process, to delay or alter profit-maximizing decisions, to lead to inefficient compromises and sub-optimal agreements, to lack flexibility in responding to the requirements of a rapidly changing business environment, to create bureaucracy costs, and to impose high direct costs on employers, as it is the employer who has to bear all the expenses of the works council apparatus, and so on (Addison, Kraft and Wagner, 1993; Addison, Schnabel and Wagner, 2001; Franz, 2001; Oechsler, 1999; Pejovich, 1998). Small firms with a works council are thought to be put at a particular performance disadvantage. The costs for small firms of works councils are often singled out (Addison, Schnabel and Wagner, 2001). Based on all these arguments, neo-liberals would expect the strengthening of the works system, which was brought about by the reform of

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the Works Constitution Act (2001), to have a negative effect on firms’ performance. A further focus in the debate about works councils is the legal support for them. This helps to explain one important criticism of them: if works councils were beneficial to firms, there should be no need for legislation, as companies themselves would set them up. Such sentiments are echoed in an argument put forward by Fitzroy and Kraft (1987). They contended that efficient managers will know which policies to implement in their firms, the so-called efficient management hypothesis. In short, they argue that independent and legally supported firm-level representative structures constrain and reduce the efficiency of good mangers. Indeed, they contend that such managers will set up efficient communication channels with employees themselves and equip these with an optimal, profit-maximizing level of employee involvement. These arguments are, obviously, influenced by neo-liberal assertions that the state should not create legislation that requires companies to adopt particular schemes. Such arguments underlie the ‘modernization’ proposal of the BDA and BDI (BDA/BDI, 2004) to move from a codified system of co-determination to a voluntary one. The academic arguments for and against a voluntary works council system are identical to those outlined in the above section on management-initiated bodies, such as JCCs in the United Kingdom. Indeed, the BDA and BDI’s call for a voluntaristic system as well as other suggestions from employers’ organizations and the CDU and FDP, ranging from a rollback of the legal participation rights for works councils through to the individualization of ER (Deutscher Bundestag, 2001; IW, 2000), are based on the standard neo-liberal critique of the German works council system in the academic literature. The recommendations put forward by employers’ organizations and political parties conform to neo-liberal reform prescriptions.

Empirical evidence Most studies on the effects of works council performance have relied either on the Hanover Firm Panel (Hannoveraner Firmenpanel) or the NIFA Panel. Examples of studies that rely on the former include: Addison and colleagues (1997, 1998, 2000, 2001, 2004), Heywood and Jirjahn (2004), Hübler and Jirjahn (2001, 2003), Jirjahn (1998, 2002), and Schedlitzki (2002). Studies that draw on the latter include: Frick (2001a), Dilger (1997, 1999, 2002). The Institute for Employment Research’s dataset (IAB-Betriebspanel) has also been used. Studies that have relied on this dataset include: Addison and Belfield (2002), Frick (2001b), (2002b); Schank and colleagues (2002) and Wolf and Zwick (2002a).

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Important earlier studies draw on surveys from the mid-1980s (BackesGellner, Frick and Sadowski, 1997; Frick and Sadowski, 1995). With regard to the average works council effect, most studies seem to confirm the productivity-enhancing qualities of the German works council system. The presence of a works council is generally associated with lower quit rates (Addison, Schnabel and Wagner, 2001; Dilger, 2002; Frick, 2001b; Frick and Sadowski, 1995; Backes-Gellner, Frick and Sadowski, 1997). Lower quit rates can be seen as an important prerequisite for increasing productivity. This may be one of the reasons underlying the findings of the majority of studies of a positive association between works councils and labour productivity levels (Addison, Schnabel and Wagner, 1998, 2001; Frick, 2002b; Jirjahn, 2002; Schank et al., 2002; Wolf and Zwick, 2002a). In other words, most studies have found that works councils are associated with higher productivity levels. Yet, a few studies have discerned a non-significant association (Schank et al., 2002). There are few studies that have examined the link between works councils and productivity growth. Some evidence suggests that the works council do not have any effect on productivity (Schank et al., 2002). Most studies show a negative association between works council presence and profitability (Addison, Schnabel and Wagner, 1997, 1998, 2000, 2001; Dilger, 1997, 1999, 2002; Jirjahn, 1998). In other words, works councils are generally associated with lower profits. This might lend support to neo-liberal critics of the works council system that, despite the division of negotiations on production and distribution issues in the German IR system, works councils may be able to redistribute some of the firm’s surplus to employees. If this does occur, it will be at the expense of profits. A further explanation might be that the productivity gains associated with works councils are outweighed by their direct and indirect costs. With regard to the former explanation, the evidence is inconclusive. Some studies point to higher wage levels in firms with works councils (Addison, Schnabel and Wagner, 2001); this might suggest that wages outstrip the higher productivity in firms with works councils. Yet, others have found no differences in wage levels between firms with and without works councils (Schedlitzki, 2002). Of course, other ways of redistributing company profits – in the form, for instance, of job classifications – are possible. However, no meaningful studies exist in this area. With regard to the latter explanation that the association between works councils and lower profits that focuses on the direct and indirect costs of works councils, studies have yet to emerge that can either verify or reject this line of argument. However, the impression of a negative works council effect on firm profits is far from clear.

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Some studies have found only a weakly significant effect (Schedlitzki, 2002), and others show a non-significant association (Hübler and Jirjahn, 2001). However, the average works council effect may obscure some systematic differences. Evidence suggests that unions and the sectoral collective bargaining system may indeed reduce the rent-seeking behaviour of works councils. Firms with a works council that are subject to sectoral collective agreements not only experience better productivity performance compared to works council firms that are not covered by sectoral agreements, but they also have a better record on profit. This latter result is also confirmed by the finding that the association between works council and wages, though positive, is less pronounced when the firm is covered by a sectoral agreement (Hübler and Jirjahn, 2003). These findings highlight that critiques of unions and sectoral collective agreements that focus on a supposed lack of flexibility to respond to local conditions (Freeman and Gibbons, 1995; Streeck and Hassel, 2003) overlook the fact that the interaction between collective agreements and works councils may make a positive contribution to firms’ performance. It also shows that the effect of works councils on firm performance cannot be adequately assessed in isolation from the other features of the wider IR system. Moreover, some studies that have discerned a negative impact of works councils on performance show that this average works council effect disappears and becomes insignificant when employers cooperate with works councils beyond the legally prescribed remit in technological and work organizational change (Dilger, 2002). This might suggest that the enhancement of works councils’ rights, in terms of depth and scope brought about by the reform of the Works Constitution Act (2001), may, in contrast to the negative performance implications of neo-liberal critiques, actually help to improve performance across firms with works councils. Alternatively, Dilger’s (2002) evidence could suggest that a voluntaristic approach; in other words, those that will benefit from extending the duties of works councils will do so, those that do not will not. One of the main points in the neo-liberal critique of the German codetermination system is that works councils have a particularly negative impact on the performance of small firms. It is argued that the works councils system sets too high a mandate and is too onerous for such firms. However, the empirical evidence as to a size effect is inconclusive. A range of studies suggests that there is a no link between works councils and labour productivity in small firms, but that there is a negative association with profits; in larger firms, however, works councils are

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positively associated with productivity and have either no or only a weakly significant negative effect on profits (Addison, Schnabel and Wagner, 2000, 2001, 2004). Conversely, a number of studies have found that the positive productivity effect holds across all size specifications (Frick, 2002a; Jirjahn, 2002; Schank et al., 2002). Relatedly, a number of studies have discerned a negative (Dilger, 2002) or insignificant (Hübler and Jirjahn, 2003) profit effect that persists across sub-samples of establishments of different sizes (Dilger, 2002; Hübler and Jirjahn, 2003). Thus, the evidence on the links between works councils and firm performance in small and large firms is ambiguous. This uncertainty is further accentuated by statistical shortcomings (see below). Moreover, the results seem to depend on the dataset that is used. Whereas studies relying on the Hannoveraner Firmenpanel, which is a regional survey based on the manufacturing sector only, seem more likely to ascertain a differential performance effect among the size sub-samples, those that draw on the IAB Betriebspanel, which is a nationally representative survey of the private sector as a whole, seem less likely to find such an effect. In short, a central claim by Addison, Schnabel, Wagner and their co-authors, which features heavily in the current German debate, that the works council system is particularly disadvantageous for small firms seems somewhat doubtful. One of the reasons why some analysts oppose works councils in small enterprises might be because workers in such firms are less dependent on one another than their counterparts in larger establishments. In other words, the performance of employees in larger workplaces – especially those in the manufacturing sector – may be highly dependent on the activities of others within the same workplace. In such situations, works councils may facilitate cooperation between different groups of employees. In smaller establishments or in those in which job boundaries are more flexible, works councils might be less effective.

Direct voice (high-involvement systems) Within the mainstream, and mostly US, HRM literature, so-called ‘high performance workplace systems’ are ascribed considerable performance advantages compared to traditional approaches to the management of labour and the organization of work (Lawler, 1996; Pfeffer, 1998). In the HRM literature, the central focus tends to be on the level of the individual employee (or small groups). A core element within this wider literature is direct HISs. A fundamental assumption underlying the idea that such packages of innovative direct information, consultation and participation

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practices can lead to superior economic performance is that the benefits do not arise from such practices in isolation, but from complementarities between individual practices. Such practices have, therefore, a mutually reinforcing impact. In other words, the combination of, for instance, teamworking and information-sharing schemes allows synergistic benefits to be reaped (Milgrom and Roberts, 1995). The HIS approach, often postulated as ‘enlightened management’, is thought to reflect a shift from a traditional authoritarian labour management strategy towards a participatory one; this shift is partly the result of, and/or a prerequisite for, new post-Taylorist forms of work organization in connection with more flexible post-Fordist production systems and strategies. The latter include diversified quality production (Kochan and Osterman, 1994; Pil and McDuffie, 1996; Sorge and Streeck, 1988) In this connection, HISs are seen as a cornerstone for a productivity- and quality-oriented competitive strategy (Geary and Dobbins, 2001). Indeed, most accounts of the potential performance advantages of HISs represent a version of unitarist arguments. These accounts identify the capacity of such systems to transform management-employee relations and to create a ‘new’ ER environment, based on trust and cooperation. Such an environment is conducive to a managerial approach aimed at maximizing labour’s contribution by tapping into employees’ discretionary effort, tacit skills and knowledge (for an overview, see Delaney and Godard, 2001; Guest, 1997; see also Fernie and Metcalfe, 2004). Although there is disagreement in the HRM literature on the theoretical linkages and causal path between the introduction of HISs and improved firm performance, and the exact means by which these benefits are delivered, a common theme revolves around their positive impact on employee attitudes and behaviour. This positive effect on employee attitudes and behaviour arises from greater intrinsic rewards for employees and a stronger psychological contract between the employer and the employee compared to that associated with traditional management approaches and working arrangements. Moreover, the positive psychological contract linked to HISs is assumed to be stronger than that associated with more conventional collective voice structures, such as unions or works councils (for an overview, see Nolan and O’Donnell, 2003). With HISs being the vehicle of effective direct employee voice and capturing management’s emphasis on the direct ER dimension, their impact on performance can be linked to the three key aspects of voice: information sharing, power/influence and governance. Direct information exchange and consultation between managers and employees may

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create the ability to alleviate information asymmetries. Employees have greater knowledge and tacit skills than their managers in certain areas. For instance, employees will know more about the tasks, work methods and processes related to their specific job. Employees, thus, can be a major source of improvement and innovation in work organization and production process/service delivery. The knowledge and skills of employees can be tapped into through direct information exchange and consultation. Here, greater access by employees to management information may also help to facilitate mutual trust. This, in turn, may ensure that such cooperation is forthcoming. The governance function of direct voice, which is inherent in the direct participation schemes of the HISs package, arises in connection with the decentralization and devolution of decision-making powers. This decentralization of decisionmaking authority relates to job- and work-related issues, and can be devolved to individuals or small groups under the overall control of management (for example, teamwork and quality circles). This provides employees with greater autonomy, discretion and responsibility for the organization and performance aspects of their own jobs (Applebaum et al., 2000; Black and Lynch, 1997, 2001). In short, management transfers a degree of power and influence over certain tasks to individuals or small groups, whilst maintaining overall control. In combination with the information-sharing aspects of direct voice, HISs may help to resolve principal-agent problems inherent in ER by generating an environment of trust and long-termism. This, in turn, will foster a more positive psychological contract between employees and management (McNabb and Whitfield, 1998). A stronger psychological contract and the greater intrinsic rewards ascribed to HISs may generate higher levels of job satisfaction and motivation. These may lead to increased commitment, cooperation and employee loyalty, and, in turn, to higher effort levels. Subsequently, this is likely to result either directly or indirectly in higher labour productivity, a larger surplus and, ultimately, in a stronger financial performance (Guest et al., 2003). Notwithstanding the different emphases within the various strands in the HRM literature on the range of elements within the HIS-performance chain, the importance of mutual trust and longterm perspectives of both management and employees are recognized either explicitly or implicitly as critical in reaping the potential performance advantages of HISs. Indeed, the cultivation of trust and a commitment to a long-term employment relationship with the employee is an essential prerequisite for the generation and maintenance of a positive psychological contract. Thus, for HISs to be fully

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effective and to buttress the psychological contract, they need to be underpinned by credible undertakings on job security and by systems that provide financial gains for increased responsibility and effort. Research has shown that employment security is the most important condition for HISs to prosper in the long run (Collinson, Edwards and Rees, 1998; Geary and Dobbins, 2001). In much of the HRM literature and among practitioners, however, a positive link between HISs and profits is often taken for granted. Yet, this link is far from clear. Although HISs may potentially raise labour productivity, they may also increase labour costs. The latter may happen if employees gain higher compensation as a result of their additional responsibility and effort levels. It may also occur if employees become more productive. Such workers may be able to command higher wages. If employees’ wages increase by a total amount that is greater than the enhanced firm surplus, which was caused by the gains in productivity that followed the establishment of a HIS, the effects on profits will be negative (or, at best, negligible). If the effects are negative, this implies that the HIS is poorly managed. Similarly, increases in non-wage costs that stem from increases in direct wages may help to offset the gains created by a HIS. Once again, the association between HISs and profits may be negative or negligible. Furthermore, profits are likely to be affected by the substantial implementation, maintenance and coordination costs of HISs. Indeed, with productivity gains of HISs occurring only over the longer run, profits may well be negative in the short-run. This is because a stronger psychological contract requires high levels of trust; this, however, takes time to develop. The costs of introducing and maintaining a HIS, on the other hand, arise immediately. The outcome, therefore, depends crucially on the prior extent of trust between management and employees. Similar to the broader mainstream HRM literature, most of the literature on HISs generally adopts a unitaristic conception of ER. HISs are seen as being the defining element of the individualistic high-road ER approach. Unitaristic proponents of HISs, often implicitly, argue that the direct voice function inherent in HISs is not only a functional equivalent to independent collective voice via unions (and works councils), but that such systems are better mechanisms for employee voice. They also implicitly argue that HISs lead to better firm performance compared to unions (Blyton and Turnbull, 2004; Marchington, 2001). In light of the heterogeneity of preferences within a diverse workforce, and with interest representation via collective voice being akin to a median voter model, individual interests are thought to be better addressed by direct

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voice practices. Furthermore, communication barriers between employees and management are assumed to be lower than those in workplaces with union representation. Indeed, the main argument, with regards to the superior performance of firms with an individualistic high-road approach to ER compared to those with collective ER approaches, is that all of the performance advantages of HISs, discussed above, can be reaped, whilst, at the same time, all of the potential labour productivity-impeding and negative profit effects of unions can be avoided. In regard to the potentially negative effects of unions, the argument in favour of HISs follows a neo-liberal path. It is, in many respects, identical to the neo-liberal analysis, discussed above, of the theoretical performance advantages of voluntaristic management-initiated representative structures as compared to independent collective voice structures (see above). In short, the expectation is that without the power and influence aspects of union voice and without collective bargaining, there will be no sub-optimal level of information flows and communication between management and employees. Similarly, there will be no loss of management control, no inefficient compromises, no delay of profit-maximizing management decisions, and no blocking of productivity-enhancing workplace innovations. It is not just the decision-making process that will benefit from the absence of unions: firms’ profits should also benefit. This is because there will be no redistribution of the firm’s surplus to employees at the expense of profits. Similarly, there will be no capturing of quasi-rents, and fewer industrial conflicts. As with management-initiated representative structures, the unitaristic perspective seems to assume that HISs by themselves are sufficient to overcome information asymmetries, problems connected with the provision of workplace-related public goods and the principal-agent problems in employment relations. However, within the pluralistic strand of the literature, such assumptions and the superior performance advantages ascribed to an individualistic HIS-based ER approach have been challenged (Clegg et al., 1978; Kessler and Purcell, 2003). HISs by themselves are not viewed as functional equivalents of, or substitutes for, independent collective voice structures, such as unions or works councils. HISs as a vehicle for direct voice are one-sided managerial strategies and can be withdrawn unilaterally by management. The benefits that can enhance productivity, such as lower quit rates and absenteeism, may be absent if independent collective voice structures are not present. This might be because the information-sharing and governance aspects of HISs are weaker than those of independent collective voice structures. Moreover, HISs deployed

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within an individualistic ER approach may be insufficient to generate high-trust relations if the wider IR system and broader national business system do not create an environment that can facilitate greater trust. HISs may also be less effective in a national business system that does not offer incentives to management to adopt a long-term approach to ER. For instance, certain varieties of capitalism may offer incentives to management to behave opportunistically to maximize short-term gains. This may be particularly acute in an ER landscape, such as the United Kingdom’s, which is characterized by low trust and short-termism. In such a situation, there may be low levels of trust prior to the introduction of HISs. In other words, HISs may not generate a sufficient level of trust for a more positive psychological contract. A stronger psychological contract is, however, a cornerstone in much of the HRM literature on the HIS-performance link. In fact, many of the arguments advanced by pluralists against the optimistic view of unitarists on the relative performance advantages of an individualistic HIS-based ER approach compared to a collective ER approach mirror their critique of neo-liberal arguments on the performance advantages of management-initiated representative bodies, such as joint consultative committees (see above). In the absence of the important information-sharing and governance properties of unions (or works councils), such as their grievance, protective, buffer, monitoring and governance roles, HISs are not robust enough to increase employees’ trust and long-term views on their employment relationship with the company. Indeed, on the issues of governance and influence, the devolution of power is restricted to narrow job-related aspects rather than wider employment issues or higher level decision making within the firm. Thus, the performance advantages of HISs within the context of an individualistic approach to ER may be more modest than predicted by the predominantly unitaristic mainstream HRM literature.

Empirical evidence A large number of studies have been carried out on the impact of HISs on various measures of firm performance. The bulk of these have been conducted in the United States. However, these studies are not directly comparable. Due to the lack of a consensus over the composition of HISs, studies have tended to work with different definitions, practices and measurement approaches. A considerable number of US studies are based on small sample sizes. They are also frequently industry specific. (For an overview, see Wolf and Zwick, 2002a; Wood, 1999a.) Although these shortcomings do not allow for a conclusive assessment of the

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empirical evidence, a considerable number of studies in the United States (Applebaum and Berg, 2000; Batt, 2002; Black and Lynch, 2001) and more limited research in the United Kingdom (West, 2002; Peccei, Guest and Dewe, 2002; Ramsey, Scholarios and Harley, 2000) seem to suggest a positive performance association with HISs across a range of measures. However, several US studies (Freeman, Kleiner and Ostroff, 2000; Kleiner, Leonard and Pilarski, 1999) point to a small, but insignificant, effect of HISs on productivity. A sizeable number of studies show a similar pattern with regard to financial performance (Becker and Huselid, 1998; Cappelli and Neumark, 1999; Huselid, 1995). Indeed, a large-scale and representative study by Cappelli and Neumark (1999) showed that such systems may raise labour productivity while also raising labour costs with no subsequent overall effect on firms’ profits. Similarly, a considerable number of UK studies have discerned either a non-significant or only a weakly significant positive association between HISs and various measures of performance (Guest et al., 2003; Guest and Peccei, 2001; Wood and de Menezes, 1998). In sum, although the tenor of the empirical evidence in the United States and United Kingdom leans towards a positive performance effect, this is far from unambiguous, especially in relation to profits. The UK evidence of a positive HIS-performance link is somewhat less convincing than that from the United States. Furthermore, these findings have to be set against the backdrop of a generally low adoption rate of these systems and their relatively short life-spans in both the United States and, in particular, the United Kingdom (see Chapter 2). HISs are a more common, though not universal, feature among leading US MNCs (see Chapter 3). Reaping the potential performance advantages of HISs via their productivity-enhancing qualities requires a cooperative and longtermist management approach to ER. However, as a result of deregulated and flexible IR contexts and the wider business system, such as the stock market-dominated financial systems, a large sector of firms may be predisposed towards a short-term orientated cost-minimizing route to competition (see Chapter 2). Because of the deregulated IR environments in the United States and the United Kingdom, there may be a bias against the development, first, of long-term ER perspectives by management, and, second, of high-trust employee–management relations, and, thus, against the introduction and long-term viability of HISs.

Partnership approaches In contrast to the unitaristic presuppositions underlying the development of the best practice element of the Anglo-American model within

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an individualistic ER approach, a partnership approach is based on pluralistic assumptions. Such an approach combines direct and indirect forms of participation in a complementary way. The integration of direct voice structures (in the form of HISs) and the collective voice machinery of trade unions (or works councils) within a dual approach to ER requires a high degree of internal consistency to be effective. A partnership approach – in comparison both to a single channel collective voice mechanism and to individualistic ER approaches – offers the prospect of improving outcomes for firms and employees. Indeed, this is the main premise of the mutual-gains models in the US IR literature (Kochan and Osterman, 1994) and of partnership models in the United Kingdom (Guest and Peccei, 2001; IPA, 1997). In these models, labour, both individually and via their representatives, work together with management to provide shared benefits. An implicit or explicit assumption in such models is that, for HISs to thrive in the long run and for innovations in management practices and workplace organization to be fully effective, they need to be supported by a formal joint governance system. In such a system, independent representative structures are necessary, first, to sustain partnerships, second, to reap their potential economic benefits, and, finally, to prevent possible exploitation by management (Bryson, 2004; Wood and FentonO’Creevy, 2005). This involves a partial surrender of management control and prerogative. As a corollary, it entails enhanced power and influence for collective actors. Partnership approaches are based on an integrative bargaining philosophy. This implies that distributive and integrative bargaining must be combined in those IR landscapes, such as the United States and the United Kingdom, that are dominated by decentralized collective bargaining and in which unions are the main channel of collective voice at the firm level. In such settings, a partnership model offers the theoretical possibility of escaping the prisoners’ dilemma and the zero-sum game inherent in management–union relations. Within a partnership model, the performance benefits ascribed to HISs can be secured and augmented. Indeed, cooperation, trust (building), long-term perspectives and mutuality are at the very core of the partnership-performance links (Dundon et al., 2004; Guest and Peccei, 1998, 2001, Hollingshead, Nichols and Tailby, 2003). Moreover, the inherent qualities, such as the exchange of information and a degree of influence for workers’ representatives, of a partnership approach may lead to productivity gains (both directly and indirectly via lower quit rates and absenteeism) and higher surpluses. Hence, profits in firms with a partnership approach

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may be higher than those that could be obtained if the firm had either just union voice or HISs alone. As direct and collective voice mechanisms are used as complements, their combination may prove more effective in meeting the needs of employees than if these two voice channels were used separately (Bryson, 2004; Bryson, Forth and Kirby, 2005; Dundon et al., 2004; see also Hyman, 1997; Kelly, 2000; Kessler, Undy and Heron, 2004). In such a partnership, total employee voice is increased, and each channel may address different employment-related issues. The two channels may, therefore, cover a wider spectrum of issues than one alone. In other words, each channel covers aspects that are not, or not adequately, covered by the other; this should lead to better information sharing, enhanced information flows, communication and consultation. Trade union voice, which is aimed at wider employment relations issues, is more effective in tackling grievances, resolving disputes, ensuring fair treatment, monitoring, and enforcing (incomplete) contracts and agreements. It may also be more effective in protecting workers who express dissatisfaction and in protecting them from any potential job losses that could result from productivity-enhancing suggestions made by employees. On the other hand, direct voice is better suited for information and consultation on job-related issues. It can help to overcome the principal-agent problem inherent in union agency. In other words, collective voice represents the median voter (worker). However, individual preferences and interests are likely to be heterogeneous within a diverse workforce. Direct voice helps to ensure that these, too, are raised. The greatest impetus arises, however, from the governance role of unions in a partnership model, where HISs are introduced and operated within a joint governance system. This safeguards the extra productivity gains and the potential improvement in the joint surplus that arise from an increase in total voice. In terms of total voice, a partnership approach can help to ensure that, in addition to the benefits of union voice that can increase productivity, the productivity-enhancing properties of HISs can also be reaped (Bryson, 2004; Dundon et al., 2004). A partnership model may also lead to further productivity- and, potentially, surplus-enhancing gains. These may arise as a result of synergistic effects at several levels between the two different forms of voice in a partnership model. Importantly, the governance role of unions can underpin a greater degree of trust between employees and management. It may facilitate a longer-term perspective among employees. The latter is an important prerequisite for workers’ perceptions of a positive psychological contract; it forms the core in the literature on the HIS-performance

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link, and it is associated with higher commitment and increased work effort. It is higher in partnership models than it is in HISs in a nonunion environment (Cappelli and Neumark, 2001). This is because of the legitimacy of independent representative bodies, such as unions, as a source of credible and trustworthy information for employees. This can help to reduce suspicions that employees may have about work intensification, exploitation and job insecurity as a result of the introduction of HISs. Indeed, studies show that union endorsement of such workplace innovations is a key factor in their successful implementation (see Edwards and Wright, 2001). Unions, via their governance role in HISs, can, therefore, help to ensure that joint regulations address employees’ concerns, such as employment security. In other words, the surrender of a degree of management control to give unions more influence is crucial if the productivity advantage ascribed to HISs is to be more fully attained than it is in situations where HISs are deployed within an individualistic approach to ER. However, such cooperative solutions require a high degree of trust between union representatives and management. This is because union power and influence in a partnership model are increased over and above the levels that existed prior to the partnership arrangement (Waddington, 2003). Additionally, the information-sharing and governance role of unions in a partnership model may ease the implementation of more far-reaching innovative direct employee involvement and work practices than otherwise might be the case. All the above partnership-specific advantages may translate into productivity gains over and above those that might be achieved with either a single channel collective ER approach alone or with an individualistic high-road ER approach based on HISs only or a dual approach in which collective channels and HISs merely coexist alongside each other. Since these extra productivity gains are unique to a partnership model, they represent a kind of ‘partnership rent’. This rent enlarges the size of the firm’s surplus over and above that which might be attainable by the productivity-enhancing effects either of collective and direct voice in isolation or in situations in which collective and direct voice coexist rather than being integrated with one another. However, unlike monopoly rents, ‘partnership rents’ can be maintained in competitive markets. Indeed, the partnership model offers the possibility of a positive-sum game or a ‘win-win’ situation, as long as employees gain some part of the partnership rent in the form of higher wages and as long as employers retain some part of the partnership rent in the form of profits. Thus, even if workers share some (but not all) of this rent, firms with a partnership

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approach will, ceteris paribus, be better off compared to those without a partnership approach since this rent is unique to partnerships. As long as the whole partnership rent is not redistributed to labour, the firm may enjoy a better financial performance compared to its competitors that do not have partnership arrangements. However, such a mutual-gains outcome presupposes a high level of trust and cooperation between management and unions. It also assumes a long-term outlook on both sides. If both employees and employers exhibit such attitudes, they will be unlikely to engage in short-term gainmaximizing opportunistic behaviour. Trade union power is increased in a partnership model as a result of the enhanced level of influence that is necessary for the partnership rent and the subsequent larger surplus to materialize in the first place. Therefore, employers need to create the space for mutual trust by adopting a long-term view of labour relations. Employers also need to engage constructively with unions so that unions can lengthen their time horizons and refrain from using their increased power to maximize wage claims (Hefeker, 1998). Such wage claims could result in the capture of all of the partnership rent. This, in turn, would undermine the long-term viability of the partnership model and with it the enhanced role of unions. If a partnership model is sustained, both labour and capital can benefit in the form of higher wages, profits, dividends and investments in the future (Pugh and Tyrrall, 2001). Thus, preventing the erosion of a partnership model in the long run and sustaining (and even enhancing) its potential performance advantages vis-à-vis alternative ER approaches necessitate a trust-based tacit contract. In such a contract, capital aims to maximize stakeholder value and/or to maximize shareholder value in the long run rather than pursue short-term profit maximization. Such a contract also means that unions not only adopt a long-term bargaining stance, but also make the necessary trade-offs between issues related to pay and the organization of work. Unions will also have to refrain from renegotiating deals after investments have been made (Hutton, 1995). In light of the above considerations, a fundamental question is whether partnerships work and whether the potential positive effects can be sustained in an IR setting such as the United Kingdom’s (and the United States’) where there seems to be a systematic bias against the generation of high levels of trust, cooperation and long-term perspectives. Such perspectives are necessary if the mutual gains of a partnership approach are to be reaped. As discussed in Chapter 2, the weakened union position since the 1980s has not led to a sea change in British ER, which remain dominated by short-termism and low trust. There have

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been few efforts on the part of management to foster more cooperative relations with unions. Instead, there has been a firmer assertion of the managerial prerogative. In the United Kingdom, the IR framework is mainly voluntaristic, and the collective bargaining system is predominantly decentralized. Management–union relations are embedded within this context in the United Kingdom. This, combined with the absence of a supporting institutional infrastructure elsewhere in the national business system, such as the financial system, that may help to foster long-termism and high-trust relations, may hinder the adoption and survival of voluntary partnerships. Serious doubts must, therefore, remain over the long-term commitment to, and long-term survival of, UK-type voluntary partnerships. A broadly analogous assessment also applies to management-union partnerships in the United States.

Empirical evidence In the absence of a widely agreed meaning on what constitutes a partnership model, studies have operated with different definitions; this makes the interpretation of the empirical evidence somewhat difficult (see, for example, Cooke, 1994; Guest and Peccei, 2001; Sako, 1998). Nevertheless, evidence in the United Kingdom and United States suggests that partnerships are positively linked to above-average labour productivity. Several studies have shown that they have a greater impact than other ER approaches (Batt and Applebaum, 1995; Black and Lynch, 1997; EIRO, 2005; Green and McIntosh, 1998; Metcalf 2003a; Pencavel, 2003). The extent of the productivity advantages that can be ascribed to partnerships does, however, vary considerably in these studies. A recent US study suggests that partnerships are associated with better financial performance (Batt and Welbourne, 2002). Relatedly, some evidence in the United Kingdom suggests a positive, but only weakly significant, association between a partnership approach and firm profits. The evidence also suggests that the balance of advantages is skewed in favour of employers (Guest and Peccei, 2001). This seems to confirm concerns among British IR observers that a partnership approach may have more to do with employers co-opting weakened unions rather than it does with employers sharing power with unions in a positive-sum way. In other words, employers may be using the mantle of partnerships to keep down wages (Dundon et al., 2004; Waddington, 2003). The results of these studies have to be set against the backdrop of the low incidence of voluntary partnerships among unionized firms in both the United States and the United Kingdom (see Chapter 2). Thus, despite the apparent performance advantages for firms, there seems, in general,

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to be a bias among Anglo-American firms against the pursuit of this performance-enhancing route, as outlined above. Furthermore, the results of the studies have also to be viewed against the backdrop of signs that partnerships are being eroded and of indications of a fading commitment among British employers to partnerships (CBI, 1999; EIRO, 2005). Similar evidence is emerging from the United States (Kleiner, Leonard and Pilarski, 1999). Thus, even among the fraction of unionized firms that have partnerships, there are serious question marks about the survival of this ER approach. This, again, points to a systematic bias against their long-term viability in Anglo-American business systems, regardless of their performance advantages.

Limitations of previous studies Shortcomings and limitations in the existing empirical evidence mean that reservations must be exercised in the interpretation and generalization of their findings (for detailed overviews, see Addison, Schnabel and Wagner, 1998; Cappelli and Neumark, 1999; Edwards and Wright, 2001; Fernie and Metcalf, 1995; Frege, 2002; Huselid and Becker, 1996; Wood, 1999a). The bulk of the studies rely on cross-sectional data. They are, thus, subject to the conventional limitations, including, inter alia, uncertainty over, first, the direction of causation, and, second, the effect of unobserved factors. Many studies provide only a partial picture by looking at individual ER practices. In other words the different elements of firms’ ER are often considered in isolation. Studies do not attempt to develop a systematic and comprehensive typology to capture the whole variety of ER patterns within companies and countries. This is partly due to the fact that there have, in general, been few attempts to integrate the HRM and the IR strands of the performance literature. Notwithstanding notable exceptions (Black and Lynch, 2001; Metcalf, 2003a), US and UK studies that investigate the HIS-performance link tend to ignore unions altogether (Becker and Gerhart, 1996; Ichionowski and Shaw, 1999; Wright, Gardner and Moynihan, 2003). Studies that examine the association between unions and firm performance often exclude the possible effects of HIS and the interaction between unions and HISs (Blanchflower and Bryson, 2004; Hirsch, Wachter and Gillula, 1999; Huselid and Becker, 1996). Relatedly, the dichotomy in most of the German studies between firms with and without works councils fails, on the whole, to capture important variations within firms that have a works council and those that do not; German studies also tend to overlook emerging ER trends.

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Studies on HISs exhibit a range of problems (for details, see Delaney and Godard, 2001; Wolf and Zwick, 2002b; and Wood, 1999b). Many of the US studies are sector specific and are based on small sample sizes. As yet, only a few large, representative surveys have emerged. This is also a problem in UK studies; however, for the United Kingdom, there have been more large-scale representative studies based on WERS98. These studies are not comparable as they lack a common definition of a HIS, employ different methodologies and measurement approaches, and vary as to the type of practices included. Therefore, these studies are not directly comparable. All studies neglect the qualitative dimension of HISs. In other words, the varying strength of the different direct involvement practices are overlooked. Models in the mould of the collective voice arguments of Freeman and Medoff (1984) suggest cumulative performance effects as one moves from information exchange through to consultation to participation/co-determination (Freeman and Lazear, 1995). In the absence of a widely agreed definition of the elements of partnership or mutual gains models (for details, see Guest and Peccei, 2001; Wood and Fenton-O’Creevy, 2005), studies of such models use different categorizations and are, thus, not directly comparable. In general, much of the German evidence on the effects of works council is somewhat skewed towards the manufacturing sector, despite the increasing importance of the service sector. Only those studies based on the IAB-Betriebspanel are representative of the private sector as a whole. However, a substantial body of evidence relates to the Hannoveraner Firmenpanel and the NIFA dataset, and, thus, respectively, to the manufacturing sector in Lower Saxony or certain branches of the manufacturing sector. As discussed in the empirical section on works councils, the different results in studies on the link between works councils and performance seem, at least in part, to depend on the particular data set used. The UK studies of unions are mainly based on WERS/WIRS. They are, thus, nationally representative for the private sector as a whole. Furthermore, in assessing the impact of works councils on labour productivity, studies that rely on the Hannoveraner Firmenpanel use objective labour productivity measures. This, however, runs the risk of conflating price and quantity effects as the dataset does not contain information on capital stock. Subjective measurement scales can avoid such problems. Studies in both Germany and the United Kingdom tend to exhibit a number of statistical problems. Little attention has been paid to the sufficiency requirements of multivariate regression analysis – such as, a sufficient number of cases in a given category and sufficient degrees of freedom (for details, see Long, 1997). As a result, these requirements are

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often not met. In other words, the number of observations in a given category should not be too small and the number of independent variables should not be too large relative to the sample size. Numerous highly influential studies on the performance association of works councils in Germany and unions in the United Kingdom (see, for example, Addison and Belfield, 2001; Addison, Schnabel and Wagner, 2000, 2004; Fernie and Metcalf, 1995) have heavily skewed categories that result in the number of observations in certain cells being too small to make robust statistical inferences. This lack of observations introduces bias into the regression analysis; this makes the results of the regressions unreliable. For example, several studies carried out by Addison and his co-authors on works councils in Germany have used a sub-sample of establishments with between five and 20 employees (see, for instance, Addison, Schnabel and Wagner, 2004). However, only 9 per cent of such establishments have a works council. This makes the results heavily biased. This is unfortunate in light of the claims made by these authors that the German system of codetermination puts small firms at a particular performance disadvantage. Similarly, several UK studies, which set out to prove that establishments with stronger unions are likely to have a worse performance record than those establishments with weaker unions, exhibit the same type of problems (see, for example, Addison and Belfield, 2001). It is not just the independent variables that are affected by this problem, the dependent variables – that is, the variables measuring performance outcomes – can be too (for example, Addison and Belfield, 2003). Relatedly, studies that looked at the average works council effect and conventionally include establishment size as a control variable (see, for instance, Addison, Schnabel and Wagner, 2001; Schedlitzki, 2002), can be assumed to suffer from collinearity problems, since presence of a works council is strongly related with establishment size. Furthermore, other studies include too large a number of independent variables relative to the sample size (see, for instance, Guest and Peccei, 2001). Almost all the existing studies do not transform variables in order to achieve consistency between the dependent and independent variables; this might lead to inaccuracies in the estimation of the results (for details, see Jiskoot et al., 1998). With HISs and systems of direct employee involvement in general being composite indices, studies often do not report whether tests for internal consistency have been conducted (for instance, Addison and Belfield, 2001). Indeed, sometimes studies use such a composite index despite the results of the reliability tests falling below acceptable values (see, for example, Guest and Peccei, 2001).

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Leaving aside the general limitations of cross-sectional analysis (Huselid and Becker, 1996), the current study has been designed to redress the above shortcomings in previous studies of the association between ER and performance, as well as the limitations in the studies on ER in international operations of MNCs (see Chapter 3). Before looking in greater detail at the data that underpin this study and the method used to collect them, the next chapter discusses the concept of voice. As already noted, this concept plays an important role – either implicitly or explicitly – in much of the relevant literature. The following chapter systematically set outs the different facets of the concept.

Conclusion This chapter has reviewed the different theoretical perspectives on, and the empirical studies of, the links between various measures of firm performance, on the one hand, and, on the other, trade unions, joint consultative committees, works councils, direct-voice mechanisms (HIS) and partnership approaches. The literature on the empirical links between unions and firm performance shows that the average union effect has changed over the years. Whilst unions were once linked, in a statistically significant way, to lower productivity levels, this association is now insignificant. In other words, unionized firms do not appear to be at a disadvantage compared to their unionized counterparts in terms of productivity. Whilst, as noted above, some may expect management-initiated representative organizations to avoid the potential disadvantages associated with trade unions, the empirical evidence for joint consultative committees generally found either neutral or, indeed, negative associations between them and various measures of firm performance. In short, the evidence on JCCs does not support the neo-liberal view that management-established representative structures are preferable to independent structures. Indeed, the UK evidence suggests the contrary. The theoretical literature reviewed in this chapter was shown to have many affinities to that on works councils. The evidence is, perhaps, similarly ambiguous. The equivocal nature of the evidence is not helped by statistical shortcomings (outlined above). Moreover, the results seem to depend on the dataset that is used. Whereas studies relying on the Hannoveraner Firmenpanel, which is a regional survey based on the manufacturing sector only, seem more likely to discern that the linkages, if any, between works councils and firm performance differ according to the size of the establishments under review, those that draw on the

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IAB Betriebspanel, which is a nationally representative survey of the private sector as a whole, seem less likely to find such an effect. In short, a central claim by Addison, Schnabel, Wagner and their co-authors, which features heavily in the current German debate, is that the works council system is particularly disadvantageous for small firms; this seems somewhat doubtful. As will be discussed in more detail in the next chapter, the theoretical literature on the benefits to firms of having direct voice mechanisms in place draws on ideas and arguments that are related to those found in debates on the potential advantages and disadvantages of trade unions, joint consultative committees and works councils. The empirical evidence on the links between HIS and firm performance is, on the whole, supportive of the notion that they can benefit companies. The evidence is, however, far from unambiguous, especially in relation to profits. Moreover, the UK evidence of a positive HIS-performance link is somewhat less convincing than that from the United States. These findings should also be set within the context of a, on the whole, low adoption rate of these systems and their relatively short life-spans in both the United States and, in particular, the United Kingdom (see Chapter 2). HISs are a more common, though not universal, feature among leading US MNCs (see Chapter 3). Reaping the potential performance advantages of HISs via their productivity-enhancing qualities requires a cooperative and long-termist management approach to ER. However, the UK’s broader business system may militate against a large number of firms having such an outlook (see Chapter 2). Because of the deregulated IR environments in the United States and the United Kingdom, there may be a bias against the development, first, of long-term ER perspectives by management, and, second, of high-trust employee-management relations, and, hence, against the introduction and long-term viability of HISs. Thus, it may require companies, such as German MNCs, that can draw on resources from other business systems to reap fully the advantages that HIS can, potentially, bring. This chapter has noted that the evidence from the United Kingdom and the United States suggests that partnerships are positively linked to above-average labour productivity. Several studies have shown that they have a greater impact than other ER approaches. The extent of the productivity advantages that can be ascribed to partnerships does, however, vary considerably in these studies. A recent US study suggests that partnerships are associated with better financial performance (Batt and Welbourne, 2002). Relatedly, some evidence in the United Kingdom suggests a positive, but only weakly significant, association between a

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partnership approach and firm profits. When considering these results, it should not be forgotten that the numbers of voluntary partnerships among unionized firms in both the United States and the United Kingdom is low (see Chapter 2). Thus, despite the apparent performance advantages for firms, there seems, in general, to be a bias among AngloAmerican firms against the pursuit of this performance-enhancing route. It should also be noted that there are indications that British employers’ commitment to partnerships is waning. Similar evidence is emerging in the United States (Kleiner, Leonard and Pilarski, 1999). Thus, even among the fraction of unionized firms that have partnerships, there are serious question marks about the survival of this ER approach. This, again, points to a systematic bias against their long-term viability in Anglo-American business systems, regardless of their performance advantages. The next chapter examines how these different aspects of ER, which have been examined in this chapter at a theoretical and empirical level, can be brought together under the concept of voice. It also puts forward propositions on the expected relationships between various voice mechanisms and the various measures of firm performance examined in this research.

5 Voice in Employee Relations Systems

Introduction A systematic and comprehensive assessment of the performance impact of alternative ER patterns requires an integrated framework that draws together the discrete strands of the relevant literatures. There has been little attempt to integrate systematically the HRM strand of the performance literature, which is centred predominantly on the level of the individual employee, and the IR strand, which is mainly concerned with the effect of collective structures and institutions. The concept of voice can, however, provide an overarching framework within which to locate both literatures so as to capture a wide variety of ER patterns. This chapter outlines the concept of voice mechanisms and the resultant ER approaches. The links between the attributes of particular types of voice mechanisms and firm performance have been explored in detail in Chapter 4. The voice concept has been widely used in the HRM and IR literature in recent years (Benson, 2000; Dundon et al., 2004; Roche, 2000). There is a broad consensus on the forms and functions of voice (McCabe and Lewin, 1992; Millward, Bryson and Forth, 2000; cf. Gollan, 2001). Building on this consensus, which can be traced back to Hirschman (1970), voice is defined here as: ●

●

information sharing to provide means to air workers’ grievances, suggestions about ways to improve the firm’s products/services or production processes, as well as information from management to employees or their representatives and consultation; power and influence ranging from veto rights for employees or their representatives, and devolved decision-making powers to improve the effectiveness of team work and control over methods of work; 75

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governance systems to alleviate information asymmetries, problems associated with incomplete labour contracts and principal-agent problems.

The use of voice mechanisms in ER systems is likely to be subject to country-of-origin effects if, as suggested in Chapter 3, MNCs may not adopt the dominant ER systems in host locations. Moreover, in a permissive industrial relations system such as the United Kingdom, MNCs may experiment with a variety of voice mechanisms in their ER systems in attempts to improve performance. This chapter considers a variety of voice mechanisms in ER approaches in the context of ER systems. Firms that develop effective voice mechanisms in their ER systems should have better performance than those that that have less effective systems. On the basis of this line of reasoning, a set of propositions on relationships between voice mechanisms in different ER systems and performance are determined as a means of investigating the effectiveness of voice mechanisms. Country-of-origin effects for German-owned subsidiaries in the United Kingdom are also considered.

Unitary and holistic voice mechanisms Workers can express voice directly or by workers’ representatives collectively. This issue has been the most contentious (Dundon et al., 2004; Benson, 2000). There are major differences between researchers on the subject of who should have voice if it is to be effective (Delaney and Godard, 2001; Freeman and Medoff, 1984; Hirsch and Addison, 1986; Wood and Fenton-O’Creevy, 2005). The two main divisions are between collective and direct voice, and, within collective voice, between independent channels (trade unions or non-union structures, such as works councils) or management-initiated structures (for example, joint consultative committees (JCCs) in the United Kingdom). This issue highlights a more fundamental ‘dividing line’ between analysts: whilst there is a consensus on the benefits of information sharing, there is much discordance on how power should be distributed between managers, workers and/or their representatives (Delaney and Godard, 2001; Wood and FentonO’Creevy, 2005). These views, in turn, strongly colour assessments of the potential benefits of unions and works councils and government legislation (see Chapter 4). Some scholars have argued in favour of one form of voice (Freeman and Medoff, 1984; Ichniowski et al., 1996), but different forms of voice

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are not necessarily mutually exclusive: a combination of different forms of voice could be the most effective (Kochan and Osterman, 1994). This may well be the case if different forms of voice create diverse advantages for firms that help to alleviate asymmetric problems and that enhance the performance of employees. However, this requires consideration of both collective and individualistic voice mechanisms and the interconnections between these two approaches. This is important because it, first, makes clear that many previous studies have focused too narrowly on just one form of voice (Addison and Belfield, 2003; Ichniowski and Shaw, 1999), and, second, shows that if a more holistic approach is used in empirical studies a better understanding of the importance of the impact of ER systems for performance can be obtained (Guest and Peccei, 2001; Wood and Frenton-O’Creevy, 2005). It is, therefore, likely that ER systems will display multifaceted voice mechanisms to tackle asymmetric information problems and to enhance the performance of workers. This reasoning leads to our first proposition: P1 A wide variety of different voice mechanisms are likely to be used to help to limit asymmetric information problems and to boost the performance of workers. If the arguments of neo-liberal academics are correct, the use of collectivist and direct involvement practices will undermine management prerogatives. This will induce rent-seeking behaviour by employees that will lead to poor performance compared to that which can be obtained in the absence of these voice mechanisms (Addison and Belfield, 2004; Addison et al., 2000; Siebert, 1997). In permissive industrial relations systems where foreign-owned subsidiaries can choose not to have voice mechanisms, MNCs can avoid rent-seeking behaviour associated with voice mechanisms. These types of ER systems have been termed ‘Bleak Houses’ (Sissons, 1993). If no support can be found for P1, this would suggest that German MNCs are not attracted to the United Kingdom to take advantage of the permissive industrial relations system in order to escape the more legally constrained industrial relations system in their home base.

Collective and direct involvement employee relations systems There are two distinct types of ER systems, collective and direct involvement. These ER systems can be associated with a variety of

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voice mechanisms. Hybrid systems, partnership models that embody components from both collective and direct involvement systems, can also have a variety of voice mechanisms. All of the different forms of voice mechanism can be used to form a typology of approaches that can capture the variety of ER patterns regardless of the particular country in which they are expressed. A useful starting point to conceptualize ER on management’s relative emphasis on either collective or direct voice is to use a framework that relates to the collective and direct employee involvement dimensions (Guest and Conway, 1999; Tüselmann et al., 2003). Three ER systems are outlined below in the relevant sections below; these are entitled Trade Unions and Joint Consultative Committees (JCCs), High Involvement Systems, and Partnerships.

Trade unions and JCCs Collective voice mechanisms include trade union and/or non-union channels of interest representation, and the latter involves a type of collective direct involvement practice that stems from the HRM policies of firms, such as JCCs and works councils. In such bodies trade unions may not be involved so these types of collective voice mechanisms are effectively a direct relationship voice mechanism. However, in contrast to traditional collective voice mechanisms, such as trade unions or works councils, management-initiated voluntaristic structures, such as JCCs in the United Kingdom, are at best considered as a weak form of collective involvement and as management-dominated bodies (Delaney and Godard, 2001; Heery and Noon, 2001). The powers of JCCs, appointment procedures, issues to be discussed and the level of input of workers’ representatives are defined by management who can also unilaterally dissolve them (Bartram and Creegan, 2003). They are frequently connected with the lack of an independent mandate, with management-appointed employee representatives, the absence of any negotiating powers and restricted agendas for consultation (Cully et al., 1999; Terry, 2003a). Compared to independent representative structures, these bodies are relatively powerless voice mechanisms in terms of information sharing, monitoring and governance. In terms of collective voice, JCCs should be viewed as pseudo collective voice, rather than collective voice sensu stricto. Therefore, JCCs cannot be considered as functional equivalents to unions or works councils. JCCs cannot, therefore, be regarded as an effective form of collective voice (Benson, 2000) and should not be seen as embodying management’s emphasis on the collective ER policy dimension. In JCCs with no trade union involvement it is likely that they will not provide effective voice mechanisms.

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This leads to our second proposition: P2 JCCs will not lead to as good performance as other collective voice mechanisms. Given the entrenched use of effective voice mechanisms, based on works councils and trade union recognition, German MNCs may have a tendency to use collective ER systems in their subsidiaries in those countries that have permissive industrial relations systems. Therefore, German subsidiaries are likely to make significant use of collective voice mechanisms, such as trade unions and JCCs.

High-Involvement Systems Direct involvement dimension relate to the extent to which ER priorities are focused at the level of the individual employee. Direct employee voice is facilitated through a variety of direct information-sharing, consultation and participation schemes. An emphasis on the direct ER dimension and effective direct voice is connected with the development of HRM-style high-involvement systems (HISs), which entail the integration of these practices into an extensive and coherent bundle (Edwards and Wright, 2001). The main thrust underlying the development of HISs as well as effective direct voice mechanisms is that individual practices must be part of a comprehensive system of measures (Black and Lynch, 2001; Huselid, 1995), as there is the potential for synergies to be reaped because of complementarities between workplace practices (Milgrom and Roberts, 1995). Such systems normally regard employees as key assets (Becker and Huselid, 1998; Cappelli and Neumark, 2001; Wood, 1999a). HISs are a core component of the wider, more elaborate ‘highperformance workplace systems’ strand in the US HRM literature (Applebaum and Berg, 2000; Bailey, Berg and Sandy, 2001). Our third proposition reflects these views on HISs: P3 ER systems that have HIS-based voice mechanisms will have better performance than ER systems with no effective voice mechanisms. It is not clear from the existing literature if collective voice mechanisms are likely to be superior to individualistic HISs in tackling asymmetric problems and enhancing the performance of workers. The existing literature makes claims and provides conflicting evidence on the effectiveness of these voice mechanisms. In the context of foreign-owned

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subsidiaries, it is possible that there are country-of-origin effects on ER approaches and there may also be effects associated with global pressures on MNCs. Therefore, German-owned subsidiaries may be influenced by home-country ER approaches that make it more likely for them to adopt collective voice mechanisms in host locations. However, global competitive pressures may induce German MNCs to embrace global best practice ER systems based on HISs. Therefore, German-owned subsidiaries in the United Kingdom may be just as likely as US MNCs to use global best practice HIS-influenced voice mechanisms.

Partnership Within the dual approach, which is in effect a hybrid model, direct and collective voice mechanisms may either coexist side by side or be integrated in a complementary manner in the form of a partnership model. Implicitly, such a commitment to pluralism in a partnership model entails that direct employee involvement is supported by a joint governance system where the representative channels of labour are involved and play an active role in the introduction and operation of direct involvement schemes (Wood and Fenton-O’Creevy, 2005). The focus of partnership models is on information sharing, a sufficient level of influence and a governance function for the representative structures of labour; these are at the heart of the mutual-gains and partnership models in the US and UK literature (Kochan and Osterman, 1994; Oxenbridge and Brown, 2002; Taylor and Ramsay, 1998) and are common to both the Involvement and Participation Association (IPA) (1997) and the Trades Union Congress (TUC) (1999) definition of partnerships. Most of this literature claims that partnership models provide more effective voice mechanisms compared to both collective and direct involvement systems. This claim leads to our final proposition: P4 Partnership approaches are likely to lead to better performance than the exclusive use of either collective voice or direct involvement mechanisms. German-owned subsidiaries may be attracted to partnership-type approaches in their ER systems because it allows for elements of a country-of-origin effect from the collectivist home-country model while also allowing for elements of the HIS influenced by global best practice approaches. In permissive industrial relations systems such as the United Kingdom, German MNCs may be able to combine the best aspects of the collectivist approaches from their host locations with HISs approaches

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that are informed by global best practices approaches. This outcome could provide ER approaches that fit in with the UK industrial relations system, and permit the export of good ER approaches from the home country, and also allow German MNCs to compete effectively with global best practice systems that are influenced by US MNCs.

Typologies of employee relations systems Combining the relative emphasis on the two ER voice dimensions results in four broad ER approaches, which relate to the general management ER philosophy (collectivistic or individualistic) and outlook (pluralistic or unitaristic). Collective approaches can take two routes: either in the form of a traditional collective approach (collective arrangements but no HIS) or a dual approach (collective arrangements and HIS). Individualistic approaches may proceed along two avenues: either a ‘high road’ individualized direct involvement approach (HIS but no collective arrangements) or a ‘low road’ minimalist approach (no HIS and no collective arrangements). The former is usually associated with large US MNCs and is frequently seen as global best practice. It is sometimes viewed as the functional equivalent and alternative to collective voice (Heller et al., 1998). The latter constitutes a low-cost labour flexibility approach and can, in its radical form, be described as a Dickensian ‘Bleak House’ approach (Sisson, 1993) and an extreme case of freemarket economics, where ER are based on the firm assertion of management’s prerogative without any meaningful employee voice practices. A stylized summary of the major types of voice mechanisms and their predicted outcomes and country-of-origin effects is summarized in Table 5.1.

Conclusion German-owned subsidiaries in the United Kingdom are likely to fall into all four categories of ER systems outlined in this chapter. It is also probable that there will be country-of-origin effects in German-owned subsidiaries in the United Kingdom. The emphasis on collective voice mechanisms in Germany is likely to lead to a tendency towards the use of collectivist voice mechanisms in German subsidiaries in the United Kingdom. However, global competitive pressures may also exert pressures on German subsidiaries to adopt global best practices based on HISs. Given the emphasis on collective voice mechanisms in Germany, there may be a tendency towards using these types of voice mechanisms

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Table 5.1

Collective and direct involvement ER systems

Type of ER system

Voice mechanisms systems

Type of voice mechanisms

Predicted performance outcomes

Predicted country-of-origin effects

Traditional Collective

1. Trade unions 2. JCCs No HISs with either voice mechanisms

1. Only trade unions 2. Only JCCs 3. JCCs with tradeunion involvement

Only trade unions or JCCs with trade-union involvement better than only JCCs

German subsidiaries likely to use trade-union voice and if JCCs to have trade-union involvement

HighInvolvement Systems (HISs)

HISs packages with no collective voice mechanisms

Global best-practice packages of HISs

Good performance in globally competitive markets

Most likely in German subsidiaries that operate in globally competitive markets

Dual Systems (including partnership model)

Trade unions and /or JCCs with HISs

1. Trade unions with HISs 2. JCCs with HISs 3. Trade unions/JCCs with HISs

Best system to solve problems with asymmetric information and to boost performance of workers

Most likely for German subsidiaries as it includes a collectivist approach (which is entrenched in home location) and also includes elements of global best practice

Bleak House

No collective approach and no HISs

Management prerogative

Poor system to deal with asymmetric information problems and finding solutions to boost employee performance

Unlikely to be common in German subsidiaries unless they seek to avoid constraints of the German collectivist approach in home location

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in German subsidiaries, but the permissive industrial relations system in the United Kingdom may create incentives to combine collective approaches with a HIS. This will lead to a hybrid system based on partnership between collective voice mechanisms and HIS. It is possible that some German subsidiaries will take the opportunity, made available by the UK industrial relations systems, to adopt management prerogative ER systems. Arguments have been made in this chapter that different voice mechanisms are likely to lead to different performance outcomes. Chapters 6, 7 and 8 investigate these issues and provide evidence on both the types of ER systems and the performance outcomes that are associated with different ER systems.

6 Data and Methodology

The study is based on a postal survey of managing directors of Germanowned subsidiaries in the United Kingdom. The survey was conducted in 2004, and the unit of analysis is the establishment. The study design ensured that many of the limitations and shortcomings in the existing stock of empirical work, as identified in the literature review (see Chapters 3 and 4), were redressed. Additionally, a survey of a sample of US subsidiaries was conducted to allow for a comparative analysis of ER systems. The particularities of this background study are discussed in the final section of this chapter.

Questionnaire design and data collection The data were collected using a structured questionnaire (see Appendix). The questionnaire was structured around three areas in which data were sought. A series of questions related to the incidence of representative arrangements and practices and direct employee involvement mechanisms. A wide range of control variables was included on the basis of the findings of previous, related studies in Germany and the United Kingdom (see, for example, Addison and Belfield, 2001; Addison et al., 2003; McNabb and Whitfield, 2000; Schedlitzki, 2002). The selection of the performance-related variables was informed by the most frequently used indicators in related large-scale studies in Germany and the United Kingdom (for instance, Addison et al., 2000; Addison, Schnabel and Wagner, 2001; Conyon and Freeman, 2001; Dilger, 2002). Retrospective data on longer-term developments were not collected for two reasons. First, a recent large-scale representative study has shown that over onethird of German subsidiaries in the United Kingdom were established/ acquired within the last ten years (Hoppe et al., 2003). Second, previous 84

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studies (for example, Harzing, 1999) indicated that a high percentage of the addressees would probably be German expatriate managers, and the average duration of foreign assignments in German MNCs has been shown to be approximately five years (Kienbaum Studie, 2000). The questionnaire was piloted with a selection of subsidiaries of different sizes and from different industries. This entailed a site visit to test the design of the self-completion questionnaire and a face-to-face feedback session. Based on the feedback, several items in the questionnaire were modified. The survey consisted of a census of all German firms in the United Kingdom with at least 25 employees, based on the List of Companies of the German-British Chamber of Industry and Commerce. The employment threshold is in line with several WIRS/WERS surveys. The rationale for excluding establishments below this limit lies in the combination of the substantial percentage of German subsidiaries being small and the high degree of informality of employment relations in these types of firms in the United Kingdom (Scase, 2003). Furthermore, it allows the results of this survey to be discussed within the context of the findings of major UK studies. The database of the German-British Chamber is the most comprehensive list of German firms in the United Kingdom. Of the more than 1300 subsidiaries contained in the database, over onethird fell below the employment threshold; this left 852 establishments as the target population. The pre-tested questionnaire was sent to the managing directors of the sampled firms. A reminder was posted to those firms from which no reply was received after the return date. A total of 209 subsidiaries replied, which represents a response rate of rate of 24.6 per cent. The response rate compares favourably with other questionnaire research into ER of foreign-owned subsidiaries (Child, Faulkner and Pitkethly, 2001; Schmitt, 2003). The data in Table 6.1 indicate reasonable representativeness. Similarly, following Osterman (1994), possible non-response bias was checked by estimating a logistic model for each sample, with the probability of response being the dependent variable, while establishment size, sector and region were the independent variables. The results confirmed that there were no significant differences between respondents and nonrespondents. Further checks for non-response bias were conducted, using the same estimation technique. Following Schmitt (2003), these other checks for non-response bias utilized early and late respondents and a number of establishment characteristics, such as entry mode, presence of expatriate managers and establishment age. Late responses were defined as a proxy for non-response and these were classified as those

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Table 6.1

Profile of survey respondents (in per cent) Respondents

Total population

58.9 20.3 20.8

54.3 22.9 22.8

9.1 8.1 10.5 18.7 18.7

8.6 6.5 12.4 19.1 16.1

14.4 9.1 10.5

12.1 12.5 13.4

Size 25–99 employees 100–250 employees
250 employees Industry Chemicals and pharmaceuticals Rubber, plastics, glass and ceramics Metalworking Mechanical engineering Electrical engineering, electronics, communication, precision instruments Vehicles Other manufacturing Service sector

Notes: Total population  852; number of survey respondents  209. Rounding errors may prevent the relevant column totals equalling 100 per cent.

who returned the questionnaire only after a reminder was sent out. Results confirmed that there were no significant differences between respondents and non-respondents.

Measures, classifications and operationalization Performance outcomes In line with increasing calls for researchers to concentrate not only on bottom-line financial performance to assess firm performance, but also on a comprehensive range of measures (Huselid, 1995; Richard and Johnson, 2001), a set of indicators was used. This set included quits (voluntary resignations), absenteeism, comparative labour productivity, labour productivity change and comparative financial performance. The reason for including the first two measures is that they are important indicators of factors that can increase productivity, so-called pro-productivity measures. All questions on the performance variables were phrased in an identical way to those in WERS98. The underlying rationale was that these were already tried and tested in the largest survey of its kind in the United Kingdom. However, this implied that the questions on the level of labour productivity, on the change in labour productivity, and on financial performance were based on subjective measurement scales.

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The labour productivity level and financial performance variables relate to the assessment compared to other companies in the same industry as the respondents. Yet, subjective measurement scales are also used for several performance variables in the large German datasets, such as the Hannoveraner Firmenpanels and the IAB Betriebspanel. Furthermore, this procedure has several advantages compared to the collection of hard data (for a detailed discussion see Machin and Stewart, 1996; Robinson and Pearce, 1988). For instance, the addressees may not have direct access to such data and/or may not be willing to provide these; this, in turn, may have negative effects on the response rate and/or results if a substantial number of returned questionnaires contain missing information on performance. The concept of labour productivity has meaning in all establishments, but there are no standardized measures in many sectors. Importantly, management is likely to act on the basis of subjective perceptions of company performance relative to the firm’s competitors, rather than solely relying on objective performance data (Guest et al., 2003). Additionally, there is evidence to suggest an association between subjective performance evaluation and actual performance (for an overview, see Machin and Stewart, 1996). Furthermore, it avoids the risk of confounding price and quantity effects that might arise from the collection of hard data on labour productivity. However, data on wages and labour costs have not been collected. The pilot study revealed that most participants were not willing to provide information on these (neither in the form of hard data nor in the form of subjective data). It was viewed as being too sensitive on grounds of competition. To avoid a potentially low response rate and/or large number of returns with missing cases, these questions were omitted from the final version of the questionnaire.

Employee relations–dimensions and approaches In line with the discussion in Chapter 5, and in accordance with Guest and Conway (1999), Benson (2000) and Gunnigle and colleagues (1998), the relative emphasis on the collective ER voice dimension was defined by trade union recognition for collective bargaining purposes. For reasons discussed in Chapter 5, establishments that had only a JCC in place fell outside this definition, as such a relatively weak and voluntary channel in a non-union setting seems to reflect a more unitarist, rather than pluralist, frame of reference. Indeed, inspection of the survey data confirmed the validity of the definition of the collective voice dimension. JCCs in non-union workplaces were frequently connected with the lack of explicit terms of reference, with management-appointed employee representatives and with the absence of any negotiations.

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The direct ER voice dimension was defined by the presence of a highinvolvement system (HIS), consisting of an integrated bundle of comprehensive direct employee involvement mechanisms, which are a core element in the wider and more elaborate high-performance workplace literature (for a detailed overview, see Ramsay, Scholarios and Harley, 2000; Wood and Fenton-O’Creevy, 2005). Since no commonly agreed definition or list of practices or measurement approach exists, a broad working definition of a HIS was adopted. It builds on the work by Edwards and Wright (2001). This entails the combination of direct participation, consultation and information-sharing schemes. The list of such practices was constructed on the basis of direct involvement practices that are regularly included in the relevant studies (Cappelli and Neumark, 2001; Gill and Krieger, 2000). The list of practices includes partly autonomous teamwork and quality circles/ problem-solving groups (direct participation); attitude surveys, suggestion schemes and regular meetings with the workforce (direct consultation); team briefings, regular newsletters and systematic use of the management chain (information sharing). However, the HIS literature has been criticized for neglecting the differential strength of the various practices as potential voice mechanisms (Delaney and Godard, 2001). Some models in the mould of the collective-voice arguments of Freeman and Medoff (1984) highlight cumulative performance effects as one moves from information exchange through consultation to participation/ co-determination (Freeman and Lazear, 1995). In order to capture this qualitative dimension, a composite index was constructed with a participation practice attracting a score of 3, a consultation practice a score of 2 and an information practice a score of 1. This yields a score of 15 if all the above practices were in place. This is the first study of its kind to incorporate such a qualitative dimension. Using the average score as the dividing line, respondents above the average score were defined as having a HIS in place. Sensitivity analysis, using alternative scoring systems, produced similar results. Crohnbach’s alpha reliability coefficient, which assesses the internal consistency of this construct, is 0.72; it, thus, falls within the acceptable value range. On the basis of this operationalization, establishments were divided into four ER approaches along the lines outlined in Chapter 5. This allows for a more detailed analysis, which, in turn, enables a more differentiated picture to be gained compared to many existing studies (see Chapters 3 and 4). Two collective approaches are discerned: either union recognition that forms part of a partnership model or union recognition that does not form part of a partnership model. Due to the absence of a commonly agreed

Data and Methodology 89

definition of the concept of ‘partnership’ (see Chapter 5), the working definition adopted here denotes the systematic involvement of the representatives of labour via negotiations in the introduction and operation of direct employee involvement schemes. Two individualistic approaches emerge: either no union recognition, but a HIS or no union recognition and no HIS. The former denotes the so-called individualistic high-road approach, and the latter embodies the low-road cost-minimizing variant. However, there is one caveat with regard to the division of the sample into these four approaches; namely, that the group ‘union recognition that does not form part of a partnership model’ contains establishments with trade union recognition only as well as those in which union recognition and a HIS coexist, but where these are not integrated within a partnership. Ideally, these two types of establishments would have been treated separately. However, the number of observations for each of these was too small in relation to the sample size to allow for separate treatment. This would have compromised the conditions for the minimum number of observations to ensure a sufficient number of cases in each category in relation to the sample size. The details are outlined in the next section. A sufficient number of cases are needed in each category to avoid bias in the regression results. As discussed in the literature review (Chapter 4), these sufficiency requirements have not been adhered to in a large number of existing studies. However, adhering to these sufficiency conditions implies that some information and detail have inevitably been lost by subsuming these types of establishment into one ER approach. Yet, this trade-off is justified on the grounds of maintaining rigour in the statistical analysis. Moreover, this also allows for the conduct of stronger tests throughout the analysis by utilizing the whole sample, rather than having to resort to weaker (and less informative) tests on the basis of an analysis of ER-performance associations within sub-samples. (For details see Addison and Belfield, 2002.)

Control variables Firm performance depends on a wide range of factors. An extensive array of control variables was collected to allow for factors expected to influence performance other than the existence of ER practices, dimensions and approaches (see Table 6.2). The selection of the control variables was based on factors regularly included in previous studies (for instance, Addison and Belfield, 2001; Addison et al., 2003; Guest et al., 2003; McNabb and Whitfield, 2000), as well as additional MNC-specific factors, such as the receipt of knowledge and technology transfer from the parent country, and the presence of expatriate managers. A number of

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Employee Relations in Foreign-Owned Subsidiaries

control variables also act as proxies for other factors. For example, the proportion of skilled employees can be viewed as a proxy for the level of technology used. The importance of international markets acts as an indicator for the extent of market competition; size and multi-establishment sites may be viewed as proxies for market power in the host country. The industry variable also picks up factors such as capital intensity and the degree of globalization pressures. The inclusion of a variable to indicate the establishment’s region controls for potential location-specific effects. Where appropriate, the construction of variables has been based on official classification systems. The employee skills variable was based on the Standard Occupational Classification System. The industry variable was constructed on the basis of the NACE classification system at the two-digit level and collapsed to eight categories. The region variable was constructed on the basis of the Government Official Region classification and collapsed into four categories. The definitions for all control variables are shown in Table 6.2.

Table 6.2

Definition of the variables

Dependent variables

Values and labels

Quits

1 – above the sample average 0 – below the sample average 1 – below 1% 2 – 2% 3 – above 3% 1 – better than average in the industry 0 – about or below the average in the industry 1 – stayed the same or decreased 2 – gone up a little 3 – gone up a lot during the last 5 years 1 – better than average in the industry 0 – about or below the average in the industry

Absenteeism

Comparative labour productivity

Labour productivity change

Comparative financial performance

Explanatory variables

Values and labels

I. Employee Relations Individual Practices Trade union recognition Joint consultative committee Team work Quality circles

1 – yes; 0 – no 1 – yes; 0 – no 1 – yes; 0 – no 1 – yes; 0 – no Continued

91 Table 6.2

Continued

Explanatory variables

Values and labels

Regular meetings Attitude surveys Suggestion schemes Team briefings Management chain Newsletters

1 – yes; 0 – no 1 – yes; 0 – no 1 – yes; 0 – no 1 – yes; 0 – no 1 – yes; 0 – no 1 – yes; 0 – no

II. Employee Relations Voice Dimensions Collective ER dimension (trade union recognition) Direct ER dimension (high involvement system)

1 – yes; 0 – no 1 – above average score of weighted composite index for direct involvement practices 0 – below average score of weighted composite index for direct involvement practices

III. Employee Relations Approaches Trade union recognition with a partnership model Trade union recognition without a partnership model No trade union recognition and high involvement system No trade union recognition and no high involvement system

1– yes; 0 – no 1– yes; 0 – no 1– yes; 0 – no 1– yes; 0 – no

Control variables

Values and labels

Size

1 – smaller than sample average 2 – average 3 – larger than sample average 1 – 1–10 years 2 – 11–20 years 3 – more than 20 years 1 – greenfield site 0 – brownfield site 1 – yes; 0 – no 1 – smaller than sample average 2 – average 3 – larger than sample average 1 – smaller than sample average 2 – average 3 – larger than sample average

Age

Entry mode Multi-establishment site % skilled employees

% part-time employees

Continued

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Employee Relations in Foreign-Owned Subsidiaries

Table 6.2

Continued

Control variables

Values and labels

Expatriate managers Transfer of know-how and technology Importance of foreign markets

1 – yes; 0 – no 1 – yes; 0 – no

Industry

Region

1 – if main market or at least two secondary markets are outside the UK; 0 – otherwise 1 – Other manufacturing 2 – Chemicals 3 – Rubber, plastic, glass and ceramics 4 – Metal works and production 5 – Mechanical engineering 6 – Electrics, electronics, communication, precision instruments 7 – Vehicles 8 – Services 1 – East 2 – North 3 – South 4 – West

Variable transformation and categorization Prior to the regression analysis to test for potential associations between ER and firm performance being conducted, issues of variable categorization and transformation were addressed. Due to the particular purposes of the research, the variables derived from the survey and used in the quantitative analysis are of several types. According to Sokal and Rohlf’s (1969) classification, they include measurement variables, ranked variables and attributes. Measurement variables are those whose differing states may be expressed in a numerically ordered fashion. The measurement variables can be disaggregated further into continuous variables, which may take any value between any two fixed points (for example, the fraction of skilled employees) and discontinuous variables, also known as discrete variables, which only take fixed numerical values and no intermediate values are possible (for example, number of subsidiaries of the MNC). Ranked variables, also called ordinal variables, cannot be measured, but they can be ranked by their magnitude when either a variable of interest cannot be measured or when a variable that may be measured is categorized to serve the specific purposes of the analysis. For

Data and Methodology 93

example, comparative labour productivity, which in principle may be measured on an interval scale, may require categorization and may be measured as ‘above average’, ‘around average’ and ‘below average’ in the sample. Finally, attributes that describe properties of the sample entities that cannot be measured can be expressed numerically (for example, subsidiary being a greenfield or a brownfield establishment). Variables of all these types are found in our sample and, in the review below, the appropriate statistical techniques for analyses incorporating these variables are considered. In order to carry out the regression analysis, some of the continuous variables, such as size of the subsidiary, fraction of part-time employees and fraction of skilled employees, were transformed into categorical variables. This was done to achieve consistency between the dependent and independent variables. Assigning values of the continuous variable, ycont, into categories was performed using the following procedure. First, the sample mean of the variable,
, and its standard deviation, , were calculated accounting for the presence of outliers. Then the values of the continuous variable were assigned to categories using the following formula (6.1):




1, if ycat  2, if 3, if

ycont 
 k
 k  ycont 
 k, ycont

 k

(6.1)

where k  1 or k  0.5. The value of parameter k was allowed to take values of 1 or 0.5 in order to ensure, first, a sufficient number of cases in a given category and, second, sufficient degrees of freedom (Long, 1997). Sufficiency implies that the number of observations in a given category should not be too small relative, first, to the sample size (not smaller than 15 per cent of the sample size or 30 observations) and, second, to the number of observations in other categories to avoid bias in the regression results due to over-representation of a given category in the sample. Some of the dependent variables (comparative labour productivity, comparative financial performance and labour productivity change), which were obtained from the survey, were initially designed as categorical variables with five categories. However, having examined their frequency distributions and histograms, the number of observations in the extreme categories was lower than the adopted threshold mentioned above. To achieve a sufficient number of observations in the categories and to avoid bias caused by the over-representation of the middle

94

Employee Relations in Foreign-Owned Subsidiaries

categories, these variables were collapsed into those with a smaller number of categories (three categories in the case of labour productivity change, and two in the case of comparative labour productivity and comparative financial performance). The remaining dependent variables (quit rate and absenteeism), which were initially envisaged in the survey as continuous variables, were transformed into categorical ones with five categories using a method similar to procedure (6.1) and, upon examination of the histograms and frequency distributions, further collapsed into three categories in the case of absenteeism and two categories in the case of quits. Table 6.2 presents the variables and their categorizations used in the regression analysis.

Regression analysis The type of regression analysis used for the particular research problem is stipulated by the nature of the data used in this study. As mentioned above, all of the dependent variables used in the analysis are discontinuous, that is, they take a limited range of fixed values. In the econometric literature, such variables are called limited dependent variables (Long and Freese, 2003) or discreet choice variables (Greene, 2003). Using a conventional linear regression model is not appropriate in this case due to violations of some of its assumptions caused by the nature of the dependent variable (Greene, 2003; Long, 1997; Long and Freese, 2003). A special class of the regression model has been developed for the analysis of such variables. Regression models for limited dependent variables may be derived in three ways that result in an identical mathematical specification: (1) using the measurement relation between latent variable and observed outcome; (2) constructing a random utility model; (3) constructing a probability model (Greene, 2003; Long and Freese, 2003). Since the final model formulation of any of the derivation methods is identical, the latent variable approach is presented here. This conceptualization, which assumes a measurement relation between the latent variable and the observed outcome, is described below.

Modelling binary dependent variables Binary regression model (BRM) Assume that there is a latent variable ranging from   to  , related to the observed independent variables via a linear relationship: y*i  xi   i

(6.2)

Data and Methodology 95

The continuum of the latent variable y* values is mapped on to the limited set of the outcomes of the observed variable y via the following measurement relation: yi 


10 ifif yy
 00 * i * i

(6.3)

The probability that the dependent variable y has an outcome 1 is modelled as a nonlinear function of the linear combination of the set of independent variables x: Pr(y  1 | x)  F (
[  x] | x)

(6.4)

From (6.4) it becomes clear that the probability depends on the distribution of the error term F(). It should be noted that since the underlying variable y* is unobserved, its distribution is unknown and, therefore, the distribution of  is not known either. This requires an assumption to be made about the distribution of the error term. The two most commonly assumed distributions are standard normal (denoted ) and logit (denoted ) distributions, resulting in probit (6.5) and logit model (6.6), respectively: t 1 exp  dt  2 2

(6.5)

exp (  x) 1  exp (  x)

(6.6)

x 

Pr(y  1| x) 

2



Pr(y  1 | x) 

Using a probability function ensures that the estimated values of y are within the {0,1} interval. Since the distribution of the latent dependent variable underlying observable outcomes is not known, the variance of the error term of this non-linear regression model is assumed; otherwise the model cannot be identified. The variance of the error terms is set to 1 (2/3) in the case of the probit (logit) model. The joint distribution and likelihood function for the model (6.3)–(6.4) is given by: Pr(Y1  y1,Y2  y2, …, Yn  yn | X ) 





[1  F(x )]

yi0



F(x )

yi 1

(6.7)

n

L() 

[F(x )yi ][1 F(x )]1yi,

i1

(6.8)

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Employee Relations in Foreign-Owned Subsidiaries

where F is the respective distribution function (standard normal or logistic). The log-likelihood function is given by: LnL 

n

 {y ln F(x )  (1  y ) ln[1  F(x )]}

i1

i

i

i

i

(6.9)

In the case of a probit model, the maximum likelihood estimator (6.9) is sometimes called quasi-maximum likelihood estimator (QMLE), since the assumption of normality may not hold. Asymptotic covariance matrix for the QMLE is calculated using White’s (1982) robust ‘sandwich’ estimator: Var (ˆ )  [H 1][Bˆ ][ H 1],

(6.10)

where H is the Hessian matrix of the second derivatives of the loglikelihood function. As noted in Greene (2003), the QMLE is not consistent in the presence of omitted variables and non-linearity of the functional relation. Consistent means here that the probability limit of the parameter estimates does not equal the true value of the parameter as the sample size approaches infinity. Since QMLE is also not consistent in the presence of heteroscedasticity, the heteroscedastic binary probit model that accounts for this problem is considered below. The goodness-of-fit of the model is estimated using McFadden’s R2 from a broad family of pseudo R2s (Long and Freese, 2003), defined as: Pseudo R2  1 

ln L1 , ln L0

(6.11)

where L1 and L0 are the values of likelihood functions for the unrestricted (full) and restricted (constant only) models. Available studies (for example, Amemiya, 1981) have shown that there is a linear dependency between the coefficients of the logit and the probit model. Namely, L  1.6 P, where L and P are parameter estimates from logit and probit models respectively. Therefore, the choice of model depends mostly on the priorities of the researcher regarding the distribution of the variables or on considerations related to the post-estimation stage of the analysis. In the current study, the preference was to estimate the probit model. The main reason for this was that such a model handles the problem of heteroscedasticity, which is discussed in more detail below, in a less computationally burdensome way than a logit model does.

Data and Methodology 97

Heteroscedasticity problem in the context of binary dependent variable models As pointed out by Greene (2003), cross-sectional data often give rise to deviation from the important assumption of homoscedasticity adopted in conventional limited dependent variables models. The resulting heteroscedasticity means that the maximum likelihood estimators are inconsistent and the covariance matrix is inappropriate (Yatchew and Griliches, 1985). Therefore, in the analysis, where appropriate, the model that accounts for possible heteroscedasticity in the data was used. The heteroscedastic binary probit (HBP) model assumes multiple heteroscedasticity specification in the spirit of Harvey (1976): y*  x   ,

(6.12)

Var ( x, z)  [exp (z )]

2

(6.13)

It follows from (6.13), then, that the variance of the error term is not constant. It is a function of the set of x and z variables and varies from observation to observation. The fact that the same set of variables x is included in both equations (6.12) and (6.13) does not cause the problem of perfect multicollinearity, since, in the first case, it affects the conditional mean of y, and, in the second, the conditional variance (Campbell, Lo and MacKinlay, 1997). The maximum likelihood function for the process modelled by equations (6.12)–(6.13), assuming normal density function, takes the following form: ln L 


y ln Fexp (z )  (1  y ) ln1  Fexp (z ) . x i 

n

i1

i

x i 

i

i

i

(6.14)

In order to determine whether a heteroscedastic ordered probit model should be used, a conventional likelihood ratio test was used to test for the presence of heteroscedasticity, as suggested by Greene (2003). Assuming that the set of variables z that cause heteroscedasticity of form (6.13) is known, we may apply a conventional likelihood ratio test and test whether the coefficients of z are different from zero in a statistically significant way. In this case the hypotheses may be formulated in the following way: H0 :   0 (homoscedasticity) against H1 :   0 (heteroscedasticity). The likelihood ratio test is formulated as follows: LR  2[ln LR  ln LU]˜2(k)

(6.15)

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Employee Relations in Foreign-Owned Subsidiaries

where LR is the value of the likelihood function for the restricted model (where coefficients  in heteroscedasticity equation (6.13) are assumed to be zeroes, that is, a homoscedastic model), LU is the value of the likelihood function for the unrestricted, total (heteroscedastic) model (6.12)–(6.13), and k is the number of restrictions, that is, the number of coefficients that are assumed to be equal to zero. For those specifications for which the null hypothesis of homoscedasticity was not rejected by the likelihood ratio tests, the results of the conventional binary probit model are reported. For those specifications for which the null hypothesis of homoscedasticity was rejected, the heteroscedastic ordered model was fitted.

Interpreting the coefficients of the binary probit model Due the non-linearity of the models considered above and because of its implications for the interpretation of the model, the following applies to the reading of the estimated coefficients with regard to the direction of the relationship between the dependent and independent variables. Since, in the case of binary dependent variables, there are only two values that y can take (zero and one, assuming no missing values), inferring the direction of the functional relation is straightforward. A positive (negative) sign of the coefficient estimate would suggest that the probability that outcome y equals one increases (decreases) with the increase (decrease) in the value of the independent variable x.

Modelling ordinal variables Ordinal regression model (ORM) Ordinal variables are coded as consecutive integers from 1 to the number of categories. (Ordinal variables are sometimes also called categorical.) To stress that there is an inherent ranking in the categories of ordinal variable, following Long and Freese (2003), the word ‘ordinal’ is used here rather than ‘categorical’ in order to avoid confusion with the categorical variables whose categories do not have this inherent ranking (for example, a categorical variable that indicates which industry a subsidiary belongs to). See Siegel and Castellan (1988), for a detailed review of the measurement issues and formal properties of such variables. The categories of the ordinal variable are ranked. An ordinal variable may be created either when a variable of interest cannot be measured on a real scale or when a variable that may be measured on an interval scale is categorized to serve the specific purposes of the analysis. As BRM, ORM may be derived in several ways. For the sake of consistency, the latent-variable

Data and Methodology 99

concept is, once again, relied upon. Assuming that y* is a latent variable, it is presupposed that it is linearly related to the set of independent variables x: y*i  xi   i

(6.16)

In the case of an ordinal observed variable, the continuum of the latent variable y* is divided in the set of J outcomes of the observed variable y:




1 if 0    y*i  1 2 if 1  y*i  2 yi  … … … , J if J1 y*i  J  

(6.17)

where 1 through J are the so-called ‘cut-off’ or ‘threshold’ parameters. The probability of observing value m of y is given by: Pr(y  m | x)  Pr( m1  y* m |x),

(6.18)

Pr(y  m |x)  F( m  x )  F( m1 x ),

(6.19)

Pr(y  1 | x)  F(x )

(6.20)

or:

Using a normal probability function for F, the following probit model arises: t 1 exp  dt  2 2

x 

Pr(y  1|x) 

2

(6.21)



The variance of the error term of this non-linear regression model is assumed to be 1 in the case of a probit model, as the distribution of the latent dependent variable underlying observable outcomes is not known. Derivations of the log-likelihood function and marginal effects are not presented. (For details, see Greene, 2003.)

The problem of heteroscedasticity in the context of an ordered probit model As noted by Greene (2003), cross-sectional data, which are often used in this type of study, give rise to deviation from the important assumption of homoscedasticity adopted in conventional limited dependent variable

100

Employee Relations in Foreign-Owned Subsidiaries

models. The resulting heteroscedasticity leads to maximum likelihood estimators that are inconsistent and to a covariance matrix that is inappropriate (Yatchew and Griliches, 1985). Therefore, in the present analysis, use is made of models that take into account the possibility that heteroscedasticity exists within the data. The heteroscedastic ordered probit (HOP) model put forward by Alvarez and Brehm (1998) follows the multiple heteroscedasticity specification initially proposed by Harvey (1976): y*  x   ,

(6.22)

Var( x, z)  [exp(z )]2

(6.23)

The maximum likelihood function for the process modelled by equations (6.22)–(6.23) – assuming a normal density function – takes the following form:

ln L 


n

i1

exp(z )

yi ln F

x i 

i



exp(z ) .

 (1 yi) ln 1  F

x i 

i

(6.24)

Equation (6.24) represents the maximum likelihood for the heteroscedastic probit model. Where the logit density is substituted in equation (6.24), the heteroscedastic logit model is obtained. In order to determine whether a heteroscedastic ordered probit model should be used, a conventional likelihood ratio test was used to test for the presence of heteroscedasticity, as suggested by Greene (2003): LR  2[ln LR  ln LU]˜ 2(k),

(6.25)

where LR is the value of the likelihood function for the restricted model (where coefficients for heteroscedasticity equation (6.23) are assumed to be zeroes, i.e., homoscedastic model), LU is the value of the likelihood function for the unrestricted, total model (6.22)–(6.23), and k is the number of restrictions, that is, the coefficients that are assumed to be equal to zero. For those specifications for which the null hypothesis of homoscedasticity was not rejected by the likelihood ratio tests, the results of the conventional ordered probit model are reported. For those specifications for which the null hypothesis of homoscedasticity was rejected, the heteroscedastic ordered model was fitted.

Data and Methodology 101

Interpreting the coefficients of the ordered probit model In the case of the ordered probit models, the dependent variable has more than two categories. Therefore, caution must be exercised when interpreting coefficient estimates for the various categories of the dependent variable. A positive sign of the coefficient indicates a higher (lower) probability of receiving the highest (lowest) outcome of the dependent variable. However, the coefficient estimate does not reveal either the direction or the effects of the independent variables on the probability of receiving an outcome from the ‘middle’ categories.

Estimation issues The estimation of the conventional as well as heteroscedastic binary and ordered probit models was performed using the statistical package STATA 8.0. (STATA is statistical software developed by the STATA Corporation.) One of the advantages of the STATA statistical package is that it automatically checks for collinearity between the independent variables before the estimation process takes place and it reports which variable caused the multi-collinearity problem. Parameter estimation via maximum likelihood in STATA 8.0 is performed using Newton-Raphson optimization algorithm. For these models, convergence is achieved within several iterations. Estimation of heteroscedastic ordered probit models was performed using the STATA 8.0 statistical package in combination with a modified GAUSS code for estimation of HOP kindly provided by Michael Alvarez. (GAUSS is statistical software developed by Aptech Corp. that uses a matrix programming language.) Since the form of the likelihood function (6.24) for the heteroscedastic model is quite complex, its maximization requires a significant number of iterations until convergence is reached. As noted in Long (1997), numerical methods for maximum likelihood estimation tend to work well when the model is well specified. In such cases, convergence may be achieved within five iterations. Therefore, if convergence does not occur within 100 iterations, a condition that the estimation process is stopped was imposed. This outcome is interpreted as evidence against the possibility of fitting a heteroscedastic probit model to the data. In such instances, a conventional probit model was fitted.

Particularities of the comparative German-US study The data and methodology for this study are identical to those in the ERperformance study for German subsidiaries described above. Therefore,

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Employee Relations in Foreign-Owned Subsidiaries

this section contains only the additional information for this background study. The questionnaire for the US subsidiaries excluded the performance questions. The US sample was obtained by a stratified random sampling method. Because of the large number of US subsidiaries in the UK (over 12,000 establishments) a stratified random sample was used to obtain a representative sample of US subsidiaries. The sampling frame was based on lists obtained from the Regional Development Agencies and the Duns and Bradstreet List. A representative sample of 900 establishments was drawn to reflect the size of the German sample. This was done to ensure sufficiently large responses from both nationality groups to avoid potential bias in the subsequent regression analysis due to heavily skewed nationality groups. The sampling frame was first stratified by employment size (three categories) and industry (based on the NACE classification system at the two-digit level and collapsed to eight categories). Subsequently, establishments were randomly selected within each size band and industry. A total of 186 subsidiaries replied; this represented a response rate of 20.7 per cent. The corresponding response rate for the combined German-US samples equals 22.8 per cent. Standard checks confirmed reasonable representativeness. Similarly, tests for non-response bias confirmed that there were no significant differences between respondents and non-respondents. (The tests performed were identical to those for the German sample described above). Following Bae and colleagues (1998) and the 1997 Employee Participation and Organizational Change (EPOC) survey (Gill and Krieger, 2000), the data from the German and US surveys were pooled for subsequent statistical analysis. The classifications and operationalization of the ER dimensions and approaches were identical to those portrayed above. The reliability coefficient computed for the internal consistency of the ‘HIS’ construct was 0.72 for the combined sample. The average score for the composite index, which was constructed to define establishments with a HIS, was identical for both the German and the US samples. With regards to the ER approaches, a further distinction was drawn within the minimalist ER approach (see Chapters 3 and 5). The minimalist approach does not necessarily imply a deliberate policy choice. It may operate by default where firms have some direct practices in places, yet falling short of the threshold for the definition of a HIS, that is, an above-average score on the weighted index for direct involvement practices. These can be distinguished from so-called ‘Bleak Houses’, in which no meaningful employee involvement exists. The ‘Bleak House’ subcategory was defined as a minimalist approach, lacking any form of

Data and Methodology 103

representative channels and falling within the lower quartile of the weighted direct involvement index. This sub-category was not used in the main study on the association between ER and performance in German subsidiaries, because the number of cases for the German sample lies below the minimum number necessary to satisfy the sufficiency requirements stipulated above. This was the case for both the total sample and the minimalist approach sub-sample. However, for the pooled German and US data, the sufficiency requirements were met for the minimalist sub-sample. ER dimensions and approaches were treated as dependent variables. Regression models are binary probit and their heteroscedastic counterparts in cases where heteroscedasticity was detected.

7 The Characteristics of Voice Mechanisms in German Subsidiaries

Preliminary remarks The results of the regression estimates for the pooled sample of German and US subsidiaries are shown in Table 7.1. The results are presented in summative form. For ease of presentation, this summary table of the regression analyses reports only the signs of the coefficients and the significance level of the nationality variable. The value of the coefficients and the z-statistics are reported in Appendix Table A.3. The control variables used in the full regression models are identical to those in the performance study. With the main focus of the study being on the ER-performance aspects, the full regression models and the descriptive statistics have not been included in the Appendix, but are available from the authors on request. The descriptive statistics for the German subsidiaries are contained in Appendix Table A.1. Those descriptive statistics confirm proposition one (P1) that was put forward in Chapter 5. That proposition made explicit the expectation that a wide variety of voice mechanisms would be used to overcome such problems as asymmetric information in order to increase subsidiary performance. The ER dimensions and approaches have been treated as the dependent variables. Table 7.1 compares the incidence of ER dimensions and approaches among the two nationality groups. Since these are dichotomous variables, the mean scores can be interpreted as the percentage of establishments that emphasize a certain ER dimension or operate with a certain ER approach. The asterisks denote the extent to which significant nationality differences remain after allowing for the influence of the control variables. A positive coefficient denotes that German subsidiaries are more likely to emphasize a certain ER dimension or have a certain ER approach; a negative coefficient indicates that US subsidiaries are more 104

Voice Mechanisms in German Subsidiaries

105

likely to do so. As a general observation, the R2s are not high. This is common in cross-sectional data analysis and is partly due to the nature of the type of variables in the regression models. Nonetheless, the R2s are in line with other studies on IR/HRM in MNCs’ overseas affiliates (see, for example, Guest and Hoque, 1996; Walsh, 2001).

The dimensions of employee relations With regard to the dimensions of ER, there is strong evidence that ER in German subsidiaries, compared to their US counterparts, reflect the collective ER philosophy associated with the German model, with German subsidiaries being more likely to recognize trade unions. Indeed, the nationality difference is even highly significant. Whereas the results seem to confirm the findings of previous studies of a distinct, corporatedriven anti-union policy among US MNCs (see Chapter 3), they do not confirm the findings of previous studies on German subsidiaries in the Table 7.1

Country-of-origin differences Mean

Coefficient

Pseudo R2

Germany

US

0.38

0.26


***

0.06

0.64

0.68




0.07

0.22

0.09


***

0.09

0.16

0.16




0.03

0.36

0.52

–**

0.08

0.26

0.24

–

0.09

0.14 [0.03]

0.42 [0.12]

–**

0.15

Employee Relations Dimensions Collective dimension (trade union recognition) Direct dimension (highinvolvement system (HIS)) Employee Relations Approaches Trade union recognition with partnership Trade union recognition without partnership No trade union recognition, but HIS No trade union recognition and no HIS Bleak Houses

Notes: ***, **, * denote statistical significance at the 1, 5 and 10 per cent levels, respectively. The number of observations for the ‘Bleak House’ approach is based on the number of subsidiaries with no trade union recognition and no HIS. Figures in brackets are based on all subsidiaries. For the control variables used in the full regression models, please refer to Appendix Table A.4.

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United Kingdom; such studies failed to detect a country-of-origin effect (see Chapter 3). There is, thus, little evidence for the notion that ER in German subsidiaries in the permissive UK host-country IR context have, in general, converged towards individualistic Anglo-American ER patterns. With respect to the direct involvement dimension, the strength of the dominance effect appears far stronger than anticipated. ER in German subsidiaries are characterized by the widespread take-up of comprehensive direct employee involvement systems. Although US MNCs tend to be at the forefront of deploying HISs in their subsidiaries abroad (see Chapter 3), German MNCs’ operations in the United Kingdom have made more progress in emulating this innovative element of the AngloAmerican high-road approach than has often been assumed. There are no significant differences between German- and US-owned sites, indicating that German subsidiaries seem to have caught up with their US counterparts. This may reflect the working of the dominance effect in German parent companies in the form of an increasing interest among German MNCs in US-style HRM innovations (see Chapter 3). In line with expectations that a dominance effect would be most visible in MNCs’ establishments in permissive IR contexts, the findings also indicate that the extent of interest in German MNCs in US-type innovations may be even more pronounced than the reading of the current evidence would suggest. Taken together, the findings, so far, suggest that the direction of the dominance effects work via the direct ER dimension, rather than the collective ER route. However, a more detailed investigation of ER approaches may shed more light on these findings.

Employee relations approaches With regards to ER approaches, there are no significant differences between German and US subsidiaries with regard to non-partnership unionized workplaces (see Table 7.1). A similar picture emerges for the individualistic low-road minimalist approach (no trade union recognition and no HIS) with there being no significant differences between German and US sites (see Table 7.1). Indeed, with over one-quarter of German subsidiaries neither having trade union recognition nor having developed comprehensive direct voice systems in the form of a HIS, a sizeable minority of German MNCs may indeed seek to escape the perceived constraints of the German model to exploit the putative labour-cost and flexibility advantages of the United Kingdom. This could also indicate that the underlying philosophy of the German stakeholder model, where

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employee participation and involvement are accepted as legitimate, does not translate into an Anglo-American context. However, this finding contrasts with the tenor of studies on German FDI in the United Kingdom (and elsewhere), which show that the search either for lower costs or for labour flexibility are relatively unimportant in explaining the location decisions of German MNCs (Hoppe et al., 2003; HWWA, 2002). Similarly, the finding would not seem to tally with recent case study evidence on IR/HRM in German MNCs in the United Kingdom (and elsewhere); such evidence points to the relatively widespread home-country imprint on German subsidiaries in the form of a country-of-origin effect at a more intangible level; that is, in terms of ER style, ethos and mindset (see Chapter 3). However, with the minimalist approach being a default category and partly the function of the choice of the cut-off point for the definition of a HIS (see Chapter 4), the incidence of such an approach may be an accidental rather than a deliberate policy choice. Indeed, German-owned firms with a minimalist approach are significantly less likely to fall into the ‘Bleak House’ category than US firms are (see Table 7.1). In other words, apparent similarities at the level of the ER approach mask deeper nationality differences at the more intangible ER level. German firms are less likely to exhibit the ‘ugly face’ of the Anglo-American approach in the form of a tough management style based on the free rein of management’s prerogative. The findings also raise some doubts with regard to the popular stereotype of US MNCs being at the vanguard of moves to disseminate innovative ER patterns. Only 12 per cent of German subsidiaries that have a minimalist approach, or 3 per cent of all German sites, are ‘Bleak Houses’. In these subsidiaries, home-country traits seem absent even at the more intangible level. In this light, the findings confirm the evidence of recent qualitative studies (see Chapter 3). These reveal a pervasive home-country imprint in the form of a consensual and cooperative ER style and ethos in German MNCs operating in the United Kingdom. This style and ethos can be expressed either through collective or through direct channels. Relatedly, the findings confirm the results of most FDI studies. These show that only a fraction of German MNCs have a strategic desire, when operating in permissive IR contexts, to escape the German model by pursuing low-cost labour flexibility strategies (see above). Furthermore, a strong country-of-origin effect emerges with regard to the partnership approach (trade union recognition with a partnership model) and the individualistic high-road approach (no union recognition, but a HIS). HISs in German subsidiaries are more likely to be

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embedded in a pluralistic framework, with a partnership approach being far more pronounced compared to US-owned sites (see Table 7.1). The nationality difference is even highly significant. A corollary of this is that German MNCs’ operations in the United Kingdom are significantly less likely to deploy HIS within a unitarist framework and within an individualistic ER approach (see Table 7.1). Taken together, the findings confirm that the interaction between country-of-origin and dominance effects in the deregulated UK host-country context leads to the emergence a nationally distinct hybrid model in a considerable number of German-owned establishments. This takes the form of a selective appropriation of the best-practice element of the Anglo-American approach. Since this is done predominantly within a partnership framework that integrates comprehensive direct employee involvement with the presence of a trade union, such a hybrid has a high degree of internal coherence. This is because it entails accommodation and integration, rather than tensions and contradictions between home-country and dominance effects. The findings for the German subsidiaries seem to mirror the consensual ER ethos in Germany in the relationship between management and the works council. They also reflect the generally cooperative German management style. Indeed, well over one-half of the German subsidiaries that recognize trade unions have such partnership arrangements compared to less than one-third of unionized US subsidiaries. The incidence of partnership arrangements among comparable unionized British firms is less than 20 per cent (EIRO, 2005; Gill and Krieger, 2000). These findings suggest that German-owned firms may present a better fit with the partnership agendas of the TUC and the current Labour Government and with the mutual-gains model of the US IR literature (for details, see Katz and Darbishire, 2000). Moreover, with more than one-fifth of German subsidiaries operating a partnership approach compared to less than 10 per cent of US-owned firms (and around 5 per cent of comparable British companies), ER in a considerable number of German MNCs’ sites in the United Kingdom can be viewed as the hallmark of the consensual and cooperative element of the collective German ER model. These sites may also be viewed as reflecting a new, more dualistic version of the collective approach in Germany, which is already apparent in an embryonic form in a number of cases (see Chapter 2). Although a considerable number of German MNCs in the United Kingdom operate a partnership approach (this approach is far more common in German MNCs’ subsidiaries than it is in their US-owned counterparts and British firms), it is not a universal feature of German-owned

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establishments. This raises the issue of what type of MNCs these partnership approaches are associated with. In particular, the control orientation of the parent company has been identified as an important explanatory variable for the successful transmission of ER practices from the centre to the periphery (Harzing and Sorge, 2003; Nachum, 2003). German MNCs tend to rely on social modes of subsidiary control via expatriate managers rather than direct control (Harzing, 1999). Thus, subsidiaries where the parent company exercises a degree of control over HRM and IR issues may be more likely to exhibit country-of-origin effects in terms of integrating US-style ER innovations within a partnership approach. Conversely, if German parent companies did not attribute positive outcomes to the German ER model and/or did not perceive it as being useful in their international operations, parent-company control may work in the direction predicted by the competitive convergence thesis; that is, German parent companies would be keen to adopt, in their overseas subsidiaries, an individualistic high-road approach in which HISs are developed within a unitaristic framework and within an individualistic approach. Nearly 40 per cent of German subsidiaries have expatriate managers (see Appendix Table 1). Compared to this average, expatriate managers were present in 65 per cent of subsidiaries which have a partnership approach. Cross-tabulation revealed that the differences were statistically significant. Thus, there is clear evidence that parent-company characteristics that might potentially predispose companies towards the adoption of the global best-practice template within an individualistic ER approach are in fact associated with a strong emphasis on a country-of-origin solution to the adoption of the best practice element of the Anglo-American model within a collective approach and a partnership framework.

Summary and concluding remarks This chapter has shed new light on ER in German-owned firms in AngloAmerican settings. It has shown that it is too simplistic to view labour relations in UK-based subsidiaries of German MNCs (and MNCs in general) in terms of a straightforward choice between exporting the German (or home) model and adopting the Anglo-American one. The results here point to a complex interaction between home-country, host-country and global best practice effects. The results confirm the impression of recent in-depth case studies; however, they contrast with the general tenor of the scant quantitative studies on IR/HRM in German subsidiaries in the United Kingdom (and elsewhere) (see Chapter 3).

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Indeed, this is the first quantitative study that has gone beyond that of other survey-based studies in terms of its depth and detail, and has gone some way to incorporate the richness of information provided by qualitative research. This chapter has provided strong evidence for a country-of-origin effect among German subsidiaries in the United Kingdom. This effect seems to be revealed at two levels: first, at the level of the ER approach and outlook (pluralist or unitarist), and, second, at a more intangible level in the form of ER style, ethos and mindset. Compared to US subsidiaries, a collective ER orientation is more pronounced in German subsidiaries. They are far more likely to recognize trade unions. However, German subsidiaries have made more progress in emulating the progressive variant of the Anglo-American approach in the form of HISs than the current literature suggests. Indeed, German subsidiaries in the United Kingdom seem to have caught up with their US counterparts in developing such comprehensive and integrated direct employee involvement systems, even though international operations of US MNCs are generally thought to be at the vanguard of deploying this best practice element of the US model. However, in contrast to US subsidiaries, German firms in the United Kingdom are far more likely to develop such best practice elements within a pluralistic framework and within a collective ER approach in the form of a partnership approach that integrates both collective and direct voice channels. By contrast, US subsidiaries are more likely to deploy HISs within a unitarist framework as part of an individualistic approach to ER. The findings correspond with an emerging trend in parent companies in Germany. This trend reflects an increasing interest in incorporating US-style ER innovations into existing collective ER patterns. Admittedly, the evidence so far on the introduction of direct involvement practices in German parent companies is mixed, and in a significant number of companies direct practices and works councils tend to coexist; this carries the danger that the former could potentially be used to circumvent works councils. Notwithstanding this, the findings might reflect the generally consensual and cooperative nature of ER in Germany. Indeed, such a concealed country-of-origin effect is evident more widely throughout German subsidiaries, regardless of the voice channels used. The extremely rare incidence of ‘Bleak Houses’ compared to US subsidiaries underpins this view. However, partnership arrangements can be viewed as the hallmark of the cooperative element of the German model, as well as a German-specific means by which to incorporate US-style innovations. This results in a nationally distinct hybrid

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model that embodies accommodation and integration rather than tensions and contradictions between home-country and dominance effects. Partnership approaches are positively associated with parent-company control. Taken together, the results seem, in part at least, to indicate that there is no evidence to suggest that German MNCs, in general, do not attribute positive outcomes to the German representative system and/or do not perceive the collective orientation of the home-country approach as a suitable model for their international operations. If these fundamental underlying conditions for the willingness, or motives, for the crossborder transfer of aspects of the home-country model were missing, the analysis comparing German subsidiaries in the United Kingdom to US ones would not have produced the positive and – in some instances – highly significant associations. On the contrary, it may be possible that UK sites that have developed a partnership approach may act as a source of corporate learning, and that such hybrid-style ER patterns may hold important lessons for German parent companies in terms of how to integrate US-style ER innovations into their home-country ER model in partnership with the works councils. However, the relative firm performance outcomes arising from a partnership approach in their UK-based subsidiaries, compared to alternative ER approaches, will be an important consideration in any potential moves to ‘spill-back’ such a partnership approach to Germany. The results of the study on the associations between different ER policies and approaches, on the one hand, and performance, on the other, in German subsidiaries in the United Kingdom, which are discussed in the next chapter, will shed more light on this issue.

8 Voice Mechanisms and Performance

Preliminary remarks and observations This chapter presents the performance associations connected with the observed ER patterns in German subsidiaries that were discussed in the preceding chapter. It was noted that these patterns emerge from the interplay between home-country, host-country and dominance effects. The ER-subsidiary performance links are analysed in a three-stage process. In the first step, the performance associations of individual ER practices and institutional arrangements are investigated. This is followed by an evaluation of the relationship between the ER policy dimensions and performance. Finally, a more detailed analysis between subsidiary performance and the various ER approaches is conducted. The results of the regression estimates are presented in Tables 8.1 to 8.5. The results, presented in summary form, show the associations between ER practices, dimensions and approaches and the range of performance outcomes after allowing for the influence of the control variables. The full regression models are shown in Appendix Tables A.4 to A.8. For ease of presentation, the summary tables report only the signs of the coefficients and the significance levels. The value of the coefficients and the z-statistics are reported in Appendix Tables A.4 to A.8. As a general observation, the R2 values are not high (see Tables 8.1 to 8.5). As outlined in Chapter 7, this is common in cross-sectional data analysis and is partly due to the nature of the type of variables in the regression models. However, the R2 values are partly higher compared to similar regression models in various major studies in Germany and the United Kingdom (Addison and Belfield, 2001; Addison et al., 2000; Addison, Schnabel and Wagner, 2001; Fernie and Metcalf, 1995). Relatively few of the control variables have a significant relationship with the performance measures (see Appendix Tables A.4 to A.8). This is 112

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not, however, out of line with related studies of establishments in Germany and the United Kingdom. It compares even more favourably to a number of important studies of establishments in Germany and the United Kingdom (Addison et al., 2000; Addison and Belfield, 2001; Guest and Peccei, 2001; Guest et al., 2003; Schedlitzki, 2002). With regard to the main performance indicators, several control variables show a relatively consistent pattern, as was partly to be expected, across the regression models (see Appendix Tables A.4 to A.8). The transfer of know-how and technology from the German home base is generally connected – albeit only weakly significantly – with aboveaverage labour productivity levels. The presence of German expatriate managers and a more highly skilled labour force are associated with higher productivity growth. Workforce characteristics seem to have a substantial impact on firms’ profits. A more highly skilled labour force is associated with above-average financial performance, whereas a flexible employment pattern, in terms of a high share of part-time employees, is more likely to be related to below-average financial performance. Thus, a skilled labour approach, with presumably a commitment to training and skills development, and an emphasis on ‘traditional’ full-time employment patterns, which may be connected with a greater emphasis on employment security, yield better firm performance. In other words, subsidiaries that reflect elements of the stereotypical German employment approach seem to outperform their counterparts that compete with lower skills and/or employment approaches based on numerical flexibility. These latter subsidiaries have employment patterns that seem to have affinities with elements of the stereotypical UK approach. Moreover, subsidiaries whose market-supply mandate includes foreign markets are associated with above-average financial performance. Hence, subsidiaries that compete in the international market place and that are subject to stronger international competitive pressures exhibit better profits compared to those that compete mainly in the UK’s domestic market. Perhaps somewhat surprisingly, neither the branch of industry nor subsidiary size is associated with the main performance measures. However, this is mirrored in the mixed results that are associated with these variables in related UK studies (Addison and Belfield, 2001, 2002; Addison et al., 2000; Guest et al., 2003; Guest and Peccei, 2001).

Representative channels and individual direct practices Table 8.1 shows the results for the regression models that assess the links between, on the one hand, representative channels and the various

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Table 8.1

Performance outcomes and employee relations – individual practices Quits Absenteeism Comparative Labour Comparative labour productivity financial productivity growth performance

Trade union recognition Joint consultative committee Team work Quality circles Regular meetings Attitude surveys Suggestion schemes Team briefings Management chain Newsletters Pseudo R2


***



***









**








 



**
* 

 




 * 



*
 


 

 


** 

* 





0.15

 0.07


0.14


0.10

 0.12

Notes: ***, **, * denote significance at the 1, 5, and 10 per cent levels, respectively. For the full regression models, please see Appendix Table A.4.

direct involvement practices and, on the other, the various measures of firm performance included in the study. Leaving aside the performance outcomes associated with trade unions, which will be discussed in the next section, the disaggregated level of the data does not allow for strong inferences. Contrary to expectations, and in contrast to the bulk of the UK evidence, which finds, at best, a neutral effect of voluntary managementinitiated representative structures on the range of performance outcome measures (see Chapter 4), JCCs in German subsidiaries, which are at best a weak pseudo collective voice channel, exhibit a significant positive association with comparative labour productivity. However, a closer inspection of the data reveals that about one-half of JCCs are in unionized subsidiaries. This, therefore, suggests that the positive relationship with productivity may be largely explained by union recognition, which is also positively associated with comparative labour productivity. Thus, it remains to be seen whether the positive productivity link holds in non-unionized subsidiaries where JCCs may have been set-up as an alternative or substitute for collective voice channels via trade unions. In other words, further evidence is required before a more definitive assessment of proposition two (P2) from Chapter 5 can be given.

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Few of the direct employee involvement practices are significantly related to the performance indicators; there is little consistency either in the signs of the coefficients across individual practices or in the associations of individual practices across the range of performance variables. These findings are in line with various related studies in Germany, the United Kingdom and the United States that have examined the performance link of direct practices on a stand-alone basis (Addison and Belfield, 2001; Addison, Schnabel and Wagner, 2001; Cappelli and Neumark, 1999; Schedlitzki, 2002). The findings of this study are perhaps not surprising since the positive effects of these practices are thought to arise when they are integrated into a comprehensive direct involvement package (HIS) to form an effective direct voice system, which, inter alia, allows synergy benefits to be reaped because of complementarities between individual practices (see Chapter 4).

Voice mechanisms and employee relations dimensions This section analyses the link between ER dimensions and firm performance in a more comprehensive manner by relating the performance outcomes to ER policy dimensions; that is, the extent to which management’s ER priorities are directed toward the level of collective representation and/or the level of the individual employee (see Chapter 5). Table 8.2 exhibits the findings for the collective ER dimension Table 8.2

Performance outcomes and voice mechanisms Quits Absenteeism Comparative Labour Comparative labour productivity financial productivity growth performance

Trade union
*** recognition (collective ER dimension) Joint consultative
committees without trade union recognition High-involvement
system (direct ER dimension) Pseudo R2 0.14



***



















**





0.06

0.09

0.06

0.10

Notes: ***, **, * denote significance at the 1, 5, and 10 per cent levels, respectively. For the full regression models, please see Appendix Table A.5.

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(trade union recognition) and the direct ER dimension (presence of a HIS), as well as for JCCs in workplaces without trade union recognition as these are viewed, from a neo-liberal perspective, as an alternative and functional equivalent to independent collective voice structures (i.e., as an alternative to unions in the United Kingdom and works councils in Germany). This level of analysis allows for more meaningful insights compared to the preceding section.

Joint consultative committees in non-unionized subsidiaries JCCs in a non-union environment have no significant association with any of the performance measures (see Table 8.2). This corroborates the tentative suggestion in the previous section that the positive relationship with labour productivity arises only in connection with JCCs that are located in subsidiaries with union recognition. It also indicates that proposition two (P2) outlined in Chapter 5 is correct. That proposition made explicit the expectation that JCCs would not be as associated with good performance as other collective voice mechanisms. This result is more in line with the tenor of related studies on JCCs in British firms (see Chapter 4). These management-sponsored bodies in a non-union setting would appear to be ineffectual as they are too weak a voice mechanism to obtain the potential advantages that can lift productivity and that are connected to the information-sharing and governance functions associated with independent union voice structures, whilst at the same time avoiding their potential disadvantages, such as the redistribution of the firm’s surplus, the distortion and protraction of profit-maximizing decisions, and inefficient compromises, and so on. Indeed, inspection of the data confirms the impression of the strand of the literature that views JCCs in non-union workplaces as representing a unitaristic rather than a pluralistic ER outlook. The data show that JCCs in non-union subsidiaries tend to be management-dominated bodies, which are frequently connected with management-appointed employee representatives, a lack of an explicit remit, and an absence of any negotiations and joint regulation. These results are in line with the findings on JCCs in British firms (see Chapter 4). Thus, they are not functional equivalents to independent voice structures. The lack of real influence, the absence of a governance role, as well as a restricted agenda for information exchange and consultation renders these bodies relatively impotent compared to independent voice structures. This means that the potential productivity advantages connected with the latter do not arise (see Chapter 4). The resulting shortfall in collective voice in these management-initiated channels of representation in non-unionized

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German subsidiaries may explain their non-significant impact across the range of measures used to capture firm performance in this study. The findings do not lend much support to neo-liberal arguments, such as the efficient management hypothesis, which posits that management will set up representative structures themselves if they are beneficial for firm performance and these will be equipped with an optimal, profit-maximizing level of employee involvement. In other words, the efficient management hypothesis avers that voluntary rather than independent union structures (or independent works councils with statutory participation rights in Germany) will be more effective in achieving better performance. By contrast, the independent voice institution of trade unions rather than voluntary representative structures are associated with lower quit rates and, partly as a consequence, above-average productivity levels, whilst JCCs in a non-union environment do not have a positive impact on firm profits. In fact, non-unionized subsidiaries with JCCs seem no different with regard to profits compared to their unionized counterparts. These findings for German subsidiaries that operate only with voluntaristic management-initiated representative systems may hold important insights for the current debate in Germany on the ‘modernization’ proposal of the BDA and the BDI (BDA/BDI, 2004) to move from a codified system of co-determination to a voluntaristic one.

Trade union recognition (collective employee relations dimension) The results shown in Table 8.2 highlight very favourable results for unionized German subsidiaries in the United Kingdom. Trade union recognition is related in a highly significant way to below-average quit rates. This may have translated into better labour productivity levels and may, alongside the other productivity-enhancing properties of collective voice (see Chapter 4), explain the highly significant association between trade union recognition and above-average comparative labour productivity. The associations between unions and both absenteeism and labour productivity growth are non-significant. There are no significant differences between unionized and non-unionized subsidiaries in terms of comparative financial performance. Thus, trade unions do not seem to have a negative impact on firm profits. In other words, unions in German subsidiaries have no profit-retarding effect. There seems to be no redistribution of the firm’s surplus at the expense of profit where the union-induced productivity gains, which may enhance the firm’s surplus, are over-compensated by wage gains.

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The results in Table 8.2 suggest that the collective voice effect of trade unions in German subsidiaries may lead to welfare gains; these seem to accrue to labour in the form of higher wages and/or to consumers in the form of lower prices, whilst employers suffer no relative profit disadvantage. However, the absence of wage and price data (see Chapter 4) does not allow for inferences to be made, first, about the share, if any, of the productivity gains distributed to labour and, second, about the extent to which the productivity gains are passed on to consumers. In other words, the neutral profit effect may be due to the working of competitive market forces in the goods and services markets. The main finding remains, however, that collective ER patterns via trade union channels do not put these subsidiaries at a financial performance disadvantage compared to their counterparts that do not recognize trade unions; at the same time, moreover, unions provide potential benefits for both employees and consumers. Thus, the findings on the performance impact of trade unions in German subsidiaries do not support the neo-liberal critique of unions (see Chapter 4). The results compare favourably to the findings on the average union effect in UK firms (see Chapter 4). Whereas the findings for quit rates are generally in line with the results here for German subsidiaries, the lower quit rates in UK firms do not seem to translate into better productivity levels, as the association between union recognition and comparative productivity performance is insignificant in the majority of UK studies (see Chapter 4). Indeed, the significant and positive relationship between trade union recognition and labour productivity levels seems to be more in line with most of the studies on the average works council effect in Germany (see Chapter 4). The absence of a negative impact on firm profits in unionized German subsidiaries corresponds to recent evidence for unionized British firms (see Chapter 4). A probable explanation for the favourable performance outcomes in unionized German subsidiaries compared to both unionized British firms and non-unionized German subsidiaries may be the interaction between unions and management in German-owned firms. This may reflect the country-of-origin effect at a more intangible, cultural level in the form of ER style and ethos, and managerial mindset. As highlighted in Chapter 4, benefits and disadvantages of unions do not arise ‘automatically’, but are, inter alia, contingent upon the extent to which ER are cooperative in nature. Trade union effects on productivity, the size of the surplus and profits will be different in situations of a cooperative ER environment that fosters trustful relationships and long-term perspectives amongst both unions and management compared to situations of an ER

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environment characterized by arm’s length, opportunistic low-trust relationships and short-term perspectives. As discussed in Chapter 3, the tenor of recent qualitative studies into German operations in the United Kingdom (and elsewhere) points to a relatively pervasive home-country imprint of the German ER model in the form of longer-term management perspectives and a cooperative ER style, be it through collective or direct channels (Dickmann, 2003; Ferner, Quintanilla and Varul, 2001). The results of the comparative study on German and US subsidiaries in the United Kingdom presented in Chapter 7 also confirm this view. The home-country effect is not automatic, but may vary in strength according to a range of contingent factors, such as aspects of parent-company control (see Chapter 7 and the penultimate section in this chapter). Despite this, the home-country effect seems to work particularly well where the principles of the German model in the form of a collective ER orientation are adopted; this takes the form of trade union recognition in the UK context. In other words, a transfer of the cooperative and long-termist elements of the German collective ER model into a deregulated and decentralized host-country setting, where union-management interaction has generally been characterized by low-trust, short-term, gain-maximizing and arm’s length relationships seems to provide the right incentive structure to capture the potentially positive productivity-enhancing collective voice effects associated with unions. These effects may, in turn, enhance the firm’s surplus, whilst at the same time avoiding the potentially detrimental effects on the firm’s profits that, in a decentralized collective bargaining setting, may arise without such a cooperative approach. This would also extend the findings of the comparative background study in Chapter 7. The significantly higher propensity of German firms to recognize unions compared to US subsidiaries (as well as compared to UK-owned firms (see EIRO, 2005; WERS98)) may also be seen as the outcome of rational behaviour to reap the potential performance advantages of collective voice structures that are available to firms that engage in a constructive and cooperative relationship with labour representatives. This leads to the expectation that the comparatively high incidence of German MNCs operating in the United Kingdom with functional equivalents to institutions found in the German IR model may, perhaps, be best explained by a blend of both home-country institutional and cultural factors and rational firm behaviour. Indeed, a transfer of the German managerial mindset and stakeholder perspective, as well as the style and ethos of ER that emphasizes cooperation and a longer-term perspective, may enable both subsidiary

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management and unions to lengthen their time horizons and to adopt a more consensual view of the employment relationship. This may generate higher levels of trust. In a high-trust environment, trade unions may be afforded the necessary degree of power and influence to act as effective voice mechanisms in terms not only of their grievance, information-exchange, communication and monitoring functions, but also of their governance functions. The latter include effective agents for both employers and employees. In turn, the productivity-enhancing benefits associated with effective collective voice may have materialized. This, in turn, may explain the highly significant productivity advantage of unionized German subsidiaries. However, such an enhanced influence of trade unions in the decentralized UK bargaining context, in which union-management relations are often characterized by short-term opportunistic gain-maximizing behaviour and where both sides rely on their workplace strength to bolster their position, carries the potential danger of unions pushing through maximum pay claims that outstrip the collective voice-induced productivity gains; such high pay claims would have a detrimental effect on the firm’s profit. As discussed in Chapter 4, this constellation resembles a prisoners’ dilemma, where employers will respond by endeavouring to restrict union influence and will be reluctant either, first, to share information or consult with unions or, second, to grant them a governance role. In other words, they will protect their prerogative. This may lead to lower productivity and a smaller surplus than otherwise, since the potential productivity-enhancing qualities of a strong collective voice remain underutilized. Importantly, a cooperative and trustful ER relationship in German subsidiaries allows trade unions to lengthen their time horizons and to take a longer-term view. This helps to overcome the problem of rational myopia (see Chapter 4), so that the positive productivity effects of their enhanced influence do not dissipate by short-term opportunistic gains via rent seeking and a redistribution of the firm’s surplus where wage gains overcompensate higher unioninduced productivity. If productivity gains are outweighed by wage increases, the effect on the firm’s profit is likely to be a detrimental one. This line of argument might explain the highly significant positive association between unions and productivity in German subsidiaries and the absence of a union disadvantage in terms of firms’ profits. Although this study cannot provide definitive evidence for the above arguments, as this would require in-depth and extensive qualitative work at both the subsidiary and the parent-company level, a variety of sources seem to support the above interpretation of the evidence. As outlined

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above, recent case-study evidence (Ferner, Quintanilla and Varul, 2001; Dickmann, 2003), which would also appear to be corroborated by the comparative German-US background study of this project (see Chapter 7), supports the argument that German MNCs tend to transfer a long-term, cooperative and consensual management style and ER ethos to their subsidiaries in the United Kingdom (and elsewhere). This, in turn, suggests that the German stakeholder model may be applied, in some form, to the MNC’s international workforce. The interpretation of the above findings also tallies with studies on German parent companies in the United Kingdom (and elsewhere) that show, first, that they place less emphasis on short-term financial results that focus on cost-control strategies and, second, that the German headquarters tend to take a longer-term view of subsidiary profits (Carr, 1998; Child, Faulkner and Pitkethly, 2001). The importance of longer-term management perspectives and cooperative ER is also borne out by an examination of the mission and/or vision statements of German MNCs which frequently refer to ‘stakeholder value’ or ‘shareholder value over the long run’, and ‘corporate social responsibility’, and so on (Dickmann, 2003; Ferner and Varul, 2000). A number of German MNCs have explicit HRM guidelines or codes of conduct for their international operations, which stipulate ‘management by co-operation’, ‘partnership with local labour representatives’, and the like (Ferner, Quintanilla and Varul, 2001). In spite of current changes in the corporate governance and collective ER models in German MNCs (see Chapter 2), evidence suggests that this has not led to a general move away from long-term management perspectives and the stakeholder role accorded to labour and their representatives (Almond, Edwards and Clark, 2003; Max Planck Institut für Gesellschaftsforschung, 2002; Muller, 1999), so that a country-of-origin effect, in the form of longer-term management perspectives and a cooperative ER style and ethos, is still prevalent despite recent developments in Germany. Furthermore, indirect support for the line of arguments in the interpretation of the results of this study may be drawn from the nature of German FDI. Notwithstanding some shift in the motivations underlying German FDI – especially that in Central and Eastern Europe – towards cost considerations, the main motivations behind German FDI in the United Kingdom and other highly developed countries are long-term market share and growth objectives (Barrell and Pain, 1999; Döhrn et al., 2000; Raines et al., 1999; Tüselmann, 1998). These findings were recently confirmed by a census of German parent companies with investments in the United Kingdom (Hoppe et al., 2002).

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Thus, the favourable findings for unionized German firms in the United Kingdom may indicate that the transfer of the German mindset helps to create long-term perspectives and cooperative ER that generate sufficiently high levels of trust between management and unions to overcome the prisoners’ dilemma. This dilemma arises from low-trust, opportunistic, short-term, gain-maximizing behaviour inherent in management-union relations in many British companies. As discussed in Chapters 4 and 7, evidence from the United Kingdom suggests that, despite the shifting power balance in favour of employers since the Thatcher reforms of the 1980s, there has been little effort on the part of employers to create cooperative and constructive relationships with unions; instead, the reforms have been used to restrict the influence of unions and to marginalize them. Yet, this seems to have taken away the basis for reaping the productivity- and surplus-enhancing benefits of strong union voice, which in turn may, at least partly, explain the non-significant average union effect in British-owned firms (see Chapter 4), which is in contrast to the highly significant positive average union effect in German subsidiaries in the United Kingdom. In this light, the absence of a negative trade union effect on firms’ profits in both British- and German-owned firms in the United Kingdom seems to have very different causes. Whereas in unionized British firms the non-significant profit association may have more to do with weakened trade union power in the United Kingdom since the early 1980s, the non-significant association in German subsidiaries may have more to do with higher levels of trust, cooperation and lengthened time horizons on both sides. The greater levels of trust in the latter subsidiaries are likely to mean that trade unions abstain from pursuing short-term and opportunistic high pay claims that outstrip union-induced productivity gains. This may occur despite their enhanced influence and power, and without which the potential productivity-enhancing advantages of strong collective voice may not have been translated into the impressive comparative productivity performance in unionized subsidiaries. However, the links between management-union relations, on the one hand, and the observed performance outcomes, on the other, cannot be adequately explained in isolation. Attention must also be paid to the embeddedness of such relations in the wider IR system as well as in the other institutions of the national business system that influence ER at the firm level (see Chapter 4). Whereas the deregulated and still mainly voluntaristic UK IR setting in combination with the prevalence of decentralized collective bargaining and the predominantly stock marketorientated financial system with its emphasis on short-term financial

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results may constrain British employers in their ability to adopt a more long-term perspective that is necessary to generate sufficient levels of trust and cooperation to reap the positive collective voice effects on firm performance, ER in German subsidiaries enjoy a degree of ‘autonomy’ from the wider UK IR context and the other UK business-system institutions. For example, German subsidiaries will be less dependent than indigenous firms on the local UK stock market for their financing. The country-of-origin influence in terms of long-term management perspectives and a generally cooperative ER style, discussed above, would seem to imply that these are ‘underwritten’ by the cooperative element of the parent companies’ works council-based ER model, which, in turn, is largely contingent upon the embeddedness of the works council system in the wider German IR parameters, such as, on the one hand, the interdependencies between works councillors and trade unions, and, on the other, the nature of the collective bargaining system, as well as the other institutional elements of the German business system. This support is still provided in spite of the current changes to Germany’s IR and corporate governance systems (Almond, Edwards and Clark, 2003; Max-Planck-Insititut für Gesellschaftsforschung, 2002). In other words, the favourable performance outcomes in unionized German subsidiaries are indirectly supported by the German institutional setting. That institutional framework seems to underpin the conditions for the generation of trust, cooperation and long-term perspectives amongst both management and unions. These are needed in order to reap the performance advantages associated with effective collective voice in an IR host-country institutional context that otherwise exerts a systemic bias against the development of a high-trust ER relationship. This systemic bias militates against taking a longer-term view. Subsequently, the productivity- and surplus-enhancing advantages of effective voice are largely foregone. In sum, there is no evidence that German MNCs’ affiliates in an Anglo-American host-country setting suffer from a performance disadvantage when operating with German-style collective ER patterns. Indeed, the findings suggest the opposite. It should, however, be borne in mind that the findings here refer to the average union impact. They may, therefore, mask important differences among unionized subsidiaries, such as those with and without a partnership approach. Such considerations will be illuminated in the section on ER approaches. Despite this, there is no evidence to support the oft-heard critique that the German model of ER is unsuitable as a template in international operations that places German MNCs at a disadvantage in an era of

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global competition. One reason put forward to bolster such arguments is that the advantages of the German model are not transferable to the international arena because its characteristics are, supposedly, too rooted in the specific German context (Streeck, 1997a). On the contrary, the adoption of the principles of the German model combined with a transfer of a German managerial mindset and ER style and ethos, with the latter being indirectly underpinned by the German IR system, seems to provide German MNCs’ overseas subsidiaries with performance advantages.

High-involvement systems (direct employee relations dimension) I