International Trade &

Competition 3001IBA

Question 2: Given the operational models of the MNEs, discuss how has the slow recovery from the GFC influenced the effectiveness of MNE operations?

By: Jon Andre Pedersen (S2821823) Lecturer: Dr. Moazzem Hossain Tutor: Victoria Rummelhoff Date of submission: 22.05.2015 Word count: 2189 (excluding in-text references and footnotes)

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INTRODUCTION The global financial crisis (GFC) has brought unprecedented challenges to the world

economy and led to numerous demands for regulatory improvements of its financial

architecture. Moreover, the recovery has been significantly slow, as the crisis that hit in

2008 has now switched from the financial system to the ability of governments to repay

debts - wherein the ability of governments to offset the loss of investor and consumer

confidence through fiscal stimulus has been severely constrained (Stewart et al., 2011).

The crisis has, importantly, not only affected governments, but has also had significant

impact on Multinational Enterprises (MNEs). This paper will show how the GFC has

strongly impacted and changed the effectiveness and operational model of MNEs in

Ireland. First, this paper will briefly elaborate on the GFC and give a literature review of

various GFC focuses and approaches. It will then portray how MNEs have become

increasingly focused on cost reduction, changed the role of the HR function in many

regards, and weakned trade union influence while increasingly undertaking unilateral

decision making.

THE GLOBAL FINANCIAL CRISIS While boom and bust cycles have been common for decades (Ferguson, 2008), the

recent GFC has had vast global spillover effects (Bramble, 2009). The first stage of the

crisis originated in the US subprime mortgage crisis and then subsequently affected

other financial sectors. It then hit the real economy as financial institutions were forced

to go into liquidation (Avgouleas, 2009; Papademos, 2009), which led to a decline in

aggregate demand and expenditure, exports collapsed, investment slowed, production

was cut, and jobs were shed (Sherry, 2009; Kaway, 2009; Thorne, 2010; Bramble,

2011). 1 Moreover, share markets fell across the globe reducing corporate and

household wealth leading to strong contraction in trade flows (Oxfam, 2010; UNCTAD,

2009, 2010). In its latter stage, it has severely impacted the public sector in most

nations as increases in fiscal stimulation to support the financial system have imposed

heavy strains on public sector budgets (Kennedy, 2009; Freedman, 2009; Farrar &

1 According to EMCC (2015), in the end of 2014 there were four million more part-time workers, and nine million fewer full-time workers than in 2008. In the case of Ireland, within a year after the crisis unemployment increased to about 12.5 percent and job generation had ground to a halt (see Appendix B) (BBC News, 2009).

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Parson, 2012, p. 397; Garnaut, 2009; Yan & Halkyard, 2010), leading some nations to

focus on austerity budgets and large cuts in the public sectors (Bramble, 2011). 2

Few countries around the world have been left unaffected by the GFC and, today, it is

apparent that some countries remain in economic difficulties (Mercer, 2013), and jobs

are continuously being shed (EMCC, 2015), as the GFC is becoming increasingly

unresponsive to ‘management’ (Lambie, 2010). Ireland, in particular, poses as an

interesting case as it, to a great extent, was in the eye of the storm of the GFC (Whelan,

2010) as it had embraced financialization more profoundly than other nations (Roche et

al., 2011, p. 20), had a large ratio of MNEs – and in many ways acted as Europe’s tax

haven (Davis, 2013). Today, Ireland faces major financing problems with sovereign debt

(McDonnell & Burgess, 2013, p. 185; ABC, 2011), and despite direct support from

governments and a more regulated economic environment (Elder, 2014), MNEs have

faced substantial difficulties in the long economic downturn.

LITERATURE REVIEW While, many agree that the collapse of the US property market was the catalyst cause

to the GFC there is significant disparity in the focus on underlying factors and causes to

the crisis. For example, the causes of the GFC in popular discourse have ranged from:

that the GFC resulted from unbridled 'greed' and predatory lending by bankers (Corden

as cited in Conley, 2009; Yahanpath & Tintu, 2011), the incapacity of poor people to

manage their mortgages, and inappropriate government regulation of the financial

system (Elliott & Atkinson, 2008; Roubini, 2009; Simkovic, 2011; Stiglitz, 2008; Farrar &

Parson, 2013; Arestis & Sawyer, 2010), the extensive belief in self-correcting markets

and the deregulation of the financial system since the 1970s (Maino et al., 2010; Fox as

cited in Thorne, 2010; Marks, 2010; Bramble, 2011; Picciotto, 2011) 3 systemic

breaches in accountability and ethics at all levels (Financial Crisis Inquiry Commission,

2011), global trade imbalances and excessive credit (Evans, 2010; Teehankee, 2009),

investor panic (Khor & Kee 2008), and questionable surveillance by auditors and rating

agencies (Elliot, 2011).

2 See Thorne (2010) for an extensive examination of the post-GFC return to Keynesian public administration. 3 While most authors argue that a majjor underpinning problem was the extensive de-regulation, Pomfret (2012), on the other hand, regard the financial difficulties of the European countries to be caused by the contrary - excessively regulated financial sectors.

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Overall, the very existence of the national and international system of corporate

capitalism has been questioned (Farrar & Parson, 2013), and there is a view of a

systemic failure (Soros as cited in Conley, 2009, p. 91; Lambie, 2010) requiring

fundamental reform (Bellamy & Magdoff, 2009; Farrar & Parson, 2012). As the GFC

unfolds, Keynesian state interventions are on the rise after three decades of

marginalization by neoclassical economics (Bresser-Pereira, 2010), with prominent

proponents such as Stiglitz (2003), Krugman (2009a, 2009b), and Garnaut (2009). 4

Nevertheless, while most underpinning theory relies on neoclassical or Keynesian

economics, some authors use Marxian economic analysis - pursuing the connections

between capitalism’s crisis and its distinctive class structure – to understand the crisis

(Wolff & Resnick, 2010).

Authors have also focused more specifically on how economic crises affect

organizations, such as on labour markets and management behaviour (Krugman,

2009), labour use strategies (Gunnigle et al., 2013), decision making (Kranz & Steger,

2013), collective bargaining and headcount (Gennard, 2009), HRM strategies (Smith &

Abdullah, 2004), HR development (Wang et al., 2009), training and development (Fodor

& Poor, 2009), change management (Elliot et al., 2005), layoffs (Greenhalgh et al., 1986

as cited in Kranz & Steger, 2013). Lastly, whereas some take a macro approach in

understanding the effects on organisations (Le Queux & Peetz, 2013), others employ

surveys and interviews (Gunnigle et al., 2013), case studies (Zagelmeyer, 2013), and

individual sense-making approaches (Kranz & Steger, 2013). 5

MULTINATIONAL ENTERPRISES Although there is no universal agreement on the exact definition of MNEs (Carbaugh,

2013, p. 295), there are some identifiable features, and most acknowledge that it entails

4 Due to increased government interventions and regulations, Zaring (2012) point to how the global financial regulation is beginning to operate like a legal system, and Levine (2012), among others, welcome the idea of an independent, supra-regulatory. See Minsky (1992) for a post-Keynesian explanation where he theorized that financial fragility is a typical feature of any capitalist economy as financial crises are difficult to avoid because economic stability eventually encourages increased risk-taking. 5 There are many theories that attempt to elaborate and explain the essential purpose and rationale of MNEs (see Kusluvan, 1998). Notably the theories are often specifically divided into either macro-economic approaches (i.e. focusing on FDI as capital flows, location theory, government imposed distortions, the Aliber theory, and MNEs as a supplement to international trade), and micro-economic approaches (i.e. business administration approaches, Hymer-Kindleberger theory, product cycle theory, MNEs as oligopolistic reactions of firms, internalization theory of MNEs, and the eclectic paradigm as a general theory of MNEs).

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organisations that is registered and operates in more than one country at a time

(Dunning, 1973, p. 13) - usually with both stock ownership and company management

having a multinational character, and typically having over 25 percent of foreign sales to

total sales (Carbaugh, 2013, p. 296).

Overall, although MNEs generally performed, on average, better than their local

competitors (Chenz & Alfaroy, 2010), they also faced difficulties, as foreign affiliate

sales fell from 2008 onwards. Although the effectiveness and responses by MNEs

depend on a number of factors, 6 there is possible to make some general statements as

to what the majority of companies have been undertaking in response to the GFC and

the prolonged slow recovery in Ireland. Among others, overall, MNEs have especially

been compelled by circumstances to search for ways of curbing spending, re-structure

HR, and alter decision-making and weakening the role of unions.

1. Cost Reduction The prolonged economic crisis especially led MNEs in Ireland to cut costs across all

their functions (Mercer, 2013), as priorities become focused on organisational survival

(Barney & Wright, 1998; Fodor & Poor, 2009; Graham & Harvey, 2001) in an increased

uncertain environment (Ramiah et al., 2014) making working capital management

particularly important (Bedell, 2009). MNEs may use many interrelated firm-and country-

level strategies to cope with uncertain environments in their operations (Agarwal as

cited in Martinez, 2012), and particularly utilise such measures to their internal

structures to reduce risk and cost in a response to new realities (Roche et al., 2011, p.

41). This form of internalisation meant that the MNEs needed to alter their firm-specific

advantages in order to cope with the crisis and gain comparative advantage (Moazzem,

2015).

Overall, the recession has had a huge negative impact on the Irish labour market

(Roche et al., 2011; Gennard, 2009), albeit with MNE’s employment levels having held

6 Among others, it greatly depends on industry sectors as certain sectors have suffered more than others, especially in the retail and wholesale sector. Whereas the healthcare industry have been particularly recession proof in Ireland (McDonnell & Burgess, 2013), the banking sector has not (Gunnigle et al., 2013; Roche et al., 2011, p. 192). Geographic location is also important: for example, except for Ireland, the most affected region from the global recession is Southern Europe. Therefore, many MNEs in these countries faced serious financial problems, such as Aldi, who, despite being successful elsewhere, had to withdraw its big expansion to Greece (Marian, 2010).

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up better than in the broader economy (Central Statistical Agency as cited in Roche et

al., 2011). Although, the form and extent of adjustment and cost reductions depends on

a number of factors (McDonnell & Burgess, 2013), for the most part, companies seem

to have responded to the GFC by reducing factor quantities (employment), as well as to

adjust factor prices (wages) (Roche et al., 2011; Sheehan, 2009a), 7 and having done

so more severely than most other nations (Carley & Marginson, 2011, p. 10). In Ireland,

most employers and MNEs considered cost reduction as the most effective response to

the recession (2009 National Workplace Survey as cited in Roche et al., 2011, p. 54;

McDonnell & Burgess, 2013). In Ireland, these cuts have particularly manifested itself in

a majority of pay freezes (Carley & Marginson, 2011; Sheehan, 2009a), termination of

temporary contracts, decreased working hours and pay cuts (Roche et al., 2011, p. 56-

69; CSO, 2010, Mercer, 2009), 8 reduced employment (Hay Group, 2009), and

recruitment freezes (Gunnigle et al., 2013), but also reductions in use of outside

services (Mercer, 2013), reduced training and development (Russel et al., 2011, p. 2,

27; Dobbins, 2008) - across most industries (see Appendix E). Overall, there was a

general occurrences of downsizing - a common strategy for shifting the organisation

structure from what it is now to what it has to be in order to sustain competitive edge

and satisfy customers (Cameron, 1999).

AXA, a global insurance company operating in Ireland, was also affected by the GFC

and faced decline (AXA, 2010) leading it to alter its pay scales and freeze its salaries

(Sheehan, 2009c). Moreover, AXA introduced a restructuring plan that aimed to protect

jobs by reducing pay significantly and increasing the working week by one and a half

hours (Roche et al., 2011, p. 55), and today it is recovering (AXA, 2015). Similarly,

Kingspan, a global leader in fabric and insulation, also faced severe economic downturn

resulting in 70% drop in profit in 2008 compared to 2007 (Kingspan, 2009), and

responded by removing their profit sharing scheme, freezing salaries, and reducing

overtime (Farrelly, 2010), and in 2014 the company seems to have been able to

recuperate (Kingspan, 2015). Overall, although fewer firms have reduced their

7 See Appendix A1 for some specific examples on how Irish MNEs went about reducing costs. 8 In Ireland, for example, a large proportion of MNEs have implemented pay cuts; companies from aviation (i.e. Aer Lingus), manufacturing (i.e. Bulmers), finance (i.e. KPMG), to hospitality (i.e. Xtravision) have all introduced pay cuts in the region of 5-10 per cent (see Roche et al., 2011, p. 56-57).

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headcount over the last two years compared to the initial period of the GFC, there are

few firms intending to recruit and increase their size (Mercer, 2013), and salary freezes

are likely to persist.

2. Change in HRM Practices and Its Role A second prominent effect the GFC and slow recovery has had on MNEs operating in

Ireland has been to alter their HRM practices (Roche et al., 2011, p. 41) and increase

the strategic role of HR (Gunnigle et al., 2013). As Couto et al. (2009) put forward, ‘the

global economy is not just contracting; it is undergoing a structural shift that will

fundamentally and permanently alter the shape and fortunes of many, if not all,

industries.’ This has led HRM practices to significantly change and being enacted upon

(Roche et al., 2011, p. 41), and especially so as the pursuit of dynamic comparative

advantage in a continuously restructuring world economy increases the need for

flexibility in MNE operations (Moazzem, 2015).9

A majority of firms have realized that mere cost reductions would not ensure long term

survivability and competitiveness and thus have combined such strategies with

measures to improve innovation, product quality (2009 National Workplace Survey as

cited in Roche et al., 2011, p. 54), and a whole range of alternative measures in attempt

to ride-out the recession (see Appendix D) (Dobbins, 2008). The MNE sector has also,

importantly, witnessed a high level of ‘job churn’, i.e. concurrent job losses and job

creation (Gunnigle et al., 2013), as they have embarked upon complex restructuring

programs. In Ireland, consistent with eclectic theory, there seems to have been a focus

on internalising advantages; in that there is a desire to internalise firm specific

advantages rather than selling or externalizing them through licensing, franchising or

outsourcing (Dunning, 1988, 2001; Russel et al., 2011), especially as the location

advantages still remained in the country, particularly as it was to a large extent the least

cost location – important to internalisation (Buckley, 1988, p. 182) – among others due

to low corporate taxation (Davis, 2013).

9 See Appendix A2 for some specific examples of how Irish MNEs altered their HR practices, and whether they opposed or worked with trade unions.

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Significant changes in the external environment of organisations clearly impact HRM

practice (Pinnington & Edwards, 2000), but contrary to previous economic crises,

McDonnell and Burgess (2013), find that the GFC has brought upon a greater strategic

role for the HR function in Ireland. This is particularly true as most of the restructuring

activity engaged in by MNEs falls within the domain of HR, such as downsizing,

concession bargaining, drops in working time, and changes to working environments

and reward schemes (Gunnigle et al., 2013). In general, the HR function appeared to

play a key role in ‘delivering’ the results of the GFC within MNEs, and enhanced these

firm’s effectiveness. This is particularly true as firms become to realize that HR strategy

and business strategy needs to be integrated to ensure competitive advantage (Fry &

Smith, 1987). AXA, among others, responded to the GFC by undertaking various HR

measures such as voluntary layings-off, new pay rules, early retirement, and a

overhauled profit share system (Sheehan, 2009c) that aligned it with the firm’s long-

term goals (Couto et al., 2009). Kingspan similarly, partly eliminated flexi-break,

abolished an incremental scale for clerical staff, reduced overtime rate, and also

refurbished their profit share scheme.

3. Weaker Unions and Unilateral Decision Making A third major point of the changes in the operational models of MNEs in Ireland has

been that unions have become increasingly weakened, and decision-making has

become increasingly central and hierarchical (Roche et al., 2013; Kranz & Steger,

2013). An economic crisis pose major challenges for MNEs because it re‐emphasises

the clash of interests between employees and employers (Kaufman as cited in

McDonnell & Burgess, 2013). When faced by a crisis, management in MNEs will,

according to literature, seek to take advantage of the weaker bargaining position of

unions and employees to secure some combination of reductions of employment and

changes in work practices (Gunnigle et al., 2013). Firms in Ireland that may have long

wished to initiate organisational change or terminate employment are now better able to

do so under the guise of recession (Sheehan, 2009b), and the fact that trade unions are

in a weaker position renders them less able to resist such management actions (Le

Quex & Peetz, 2013), and they have been increasingly by-passed (Roche et al., 2011,

p. 152).

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This is particularly being undertaken through concession bargaining and unilateral

management decisions (Heckmann et al., 2009), which is reflected in both the

outcomes of negotiations and through the ways in which decisions are made (Kochan et

al., as cited in Gunnigle et al., 2013) which have been evident in Ireland. Particularly in

the MNE sector in Ireland, there is a general tendency for union avoidance (Gunnigle et

al., 2009) and the GFC has significantly further accelerated the decline in union

influence on MNEs. 10 Moreover, the fact that there are relatively few unions, weak

union membership (Carley & Marginson, 2011, p. 22-26), and an absence of collective

frameworks for negotiation work at the national and industry level (Dobbins, 2008)

further exacerbates the situation. 11

Even in the instances where good relationships may have existed with unions in Ireland,

instructions to MNEs on how to proceed in the recession have often come from

corporate headquarters outside Ireland. The non-Irish parent organisation, working from

a different agenda, often wanted their decisions to be applied directly and often

unilaterally, resulting in union’s commitment to staff in Ireland being over-ruled (Roche

et al., 2011). In most instances, the unions and workforce made significant concessions

to maintain employment and increase their employer's competitiveness (Zagelmeyer,

2013) with few reciprocal concessions having been gained (Roche et al., 2011, p. 165),

often due to a climate of fear with threats by the companies to close if unions did not

agree to drastic changes (Roche et al., 2011, p.55, 159). 12 For example, Kingspan and

many others opposed trade unions (Farrelly, 2010), however, whereas a few (i.e. AXA),

did agree with unions on ambitious cost reduction plans (Roche et al., 2011, p. 58;

Sheehan, 2009c).

Furthermore, whereas employee participation is often considered as a positive

necessity to overcome corporate crises and come up with novel marketable innovations

10 However, importantly to note is that in some cases the GFC has triggered greater cooperation between trade unions and management in Ireland. 11 As both Gunnigle et al. (2013) and Roche et al. (2011) stress: despite that salary reductions and changes in working conditions have increased worker interest in joining trade unions, the power of unions themselves appears diminished. 12 Zagelmeyer (2013) show that similar occurences took place in Germany, where - due to the ability by the employers to exert bargaining power - many of these bargaining negotiations were rather traditional distributive bargaining, as opposed to integrative – win-win–bargaining.

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(Kluge and Vitols, 2010) – an essential feature of the modern view of how MNEs should

operate (Moazzem, 2015) - Kranz and Steger (2013) show that the GFC massively

changed the conditions under which decisions are made. It especially led to a

prominence of a traditional hierarchical style of decision making and an authoritarian

leadership style with a strong orientation towards senior management (Kranz & Steger,

2013; Mercer, 2013). 13

CONCLUSION Organisations and countries across the globe have all felt the consequences of the

GFC, and as with all recessions the impact is very uneven across countries, regions

and sectors. Moreover, the full impact of the GFC is still emerging in many countries.

However, what we do observe is that the GFC has had profound effects on MNEs, and

particularly so in Ireland. In Ireland, the GFC has especially made MNEs focus on cost

reduction through various means, but particularly through reductions in wages and

labour headcount, and salary freezes. Secondly, the GFC and ongoing difficulties have

altered the function and importance of HR, bringing with it significant job churns and

restructing. Lastly, the GFC have resulted in more hierarchical and unilateral decision-

making wherein trade unions have often been by-passed and their role diminished.

13 Among others, this has also occurred regarding benefits, where top management teams at corporate headquarters – rather than individual strategic business units – are now making the final decisions.

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APPENDICES Appendix A Table A1. GFC Pay and Benefits Responses – Specific Examples from Ireland.

Ulster Bank Closed their benefit pension scheme to new applicants and freezed salaries.

Eircom Reduced certain bonuses and performance payments, decreased mileage rates, freezed pay, and implemented some pay cuts.

Dublin Airport Authority

Freezed pay and sat new terms for new employees, decreased sick pay, overtime and

shift premiums and moved to more performance‐related pay schemes.

Axa Lessened terms and conditions, changed pay scales, and performance, bonus and profit sharing systems.

Hollister Changed their pension system

Irish Life and Permanent

Reduced bonuses by 75 percent for all staff.

Kingspan Abolished their profit sharing system.

Retrieved from Higgins and Sheehan (as cited in Gunnigle et al., 2013).

Table A2. GFC HRM Responses – Specific Examples from Ireland

Aer Lingus Implemented a ‘Leave and return’ plan where employees returned on reduced pay and conditions, also in general changed working conditions and introduced lower new entry pay rates.

Agreed with unions.

AXA Utilised voluntary redundancies, introduced new pay systems, voluntary early retirement, and altered their profit share system.

Agreed with unions.

Bausch and Lomb

Also utilised voluntary lay-offs, and introduced short‐time working for the remainding employees.

Agreed with trade unions.

Coca‐Cola Outsourced some distribution and warehousing. Trade unions

opposed.

Independent News and Media

Implemented pay cuts and numerous new working time arrangements.

Trade unions opposed.

Dell Went through large internal restructuring and off-shored some of their business.

Non‐union company

Dublin Airport Authority

Shed jobs, implemented pay freeze, and established a scheme involving strict profit targets.

Trade unions opposed.

Element Six Both voluntary and compulsory redundancies with a renewed focus on short-term working.

Trade unions opposed.

Kingspan Eliminated 11 percent of flexibreak, abolished incremental scale for clerical staff, removed profit share system, reduced overtime and implemented a freeze on salaries.

Trade unions opposed.

Pfizer Closed one of its plants. Trade unions

opposed

Clarion Hotel

Adopted a plan that involved employees accepting pay cuts and agreeing to greater working time/shift flexibility leading to no redundancies.

Unknown

Compiled from: Dobbins (2008), Gunnigle et al., (2013) and (Roche et al., 2011).

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Appendix B

Figure B1. Employment and Unemployment Levels 2005-2009 in Ireland. Retrieved from CSO Labour Market 2010 (as cited in Roche et al., 2011, p. 14).

Appendix C

Figure C1. Average Earnings Growth by Sector in Ireland. Retrieved from CSO Labour Market 2010 (as cited in Roche et al., 2011, p. 15)

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Appendix D Table D1. HRM Practices in a Recession

The literature on the policies and practices used by HR managers to help firms adjust to hard economic times is diffuse. However, above are some of the main HR practices identified in literature. Retrieved from Roche et al. (2011, p. 41).

Appendix E Table E1. Pay and Pensions Measures Adopted in Ireland

Retrieved from (Roche et al., 2011, p. 68).

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Table E2. Headcount and Staffing Measures Adopted in Ireland.

Retrieved from Roche et al. (2011, p. 69). Table E3. Changes in Working Time Arrangements in Ireland.

Retrieved from Roche et al. (2011, p. 70).