wage negotiations in the asia pacific: does globalization increase the wage gap?

This article was downloaded by: [UNIVERSITY OF ADELAIDE LIBRARIES]On: 16 November 2014, At: 15:43Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK

Asia Pacific Business ReviewPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/fapb20

Wage Negotiations in the Asia Pacific: DoesGlobalization Increase the Wage Gap?Ron Edwards a , Daniel Evans b & Aaron Smith ba Monash University , Australiab Latrobe University , AustraliaPublished online: 10 Jan 2007.

To cite this article: Ron Edwards , Daniel Evans & Aaron Smith (2006) Wage Negotiations in the Asia Pacific: DoesGlobalization Increase the Wage Gap?, Asia Pacific Business Review, 12:1, 95-108, DOI: 10.1080/13602380500391314

To link to this article: http://dx.doi.org/10.1080/13602380500391314

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) containedin the publications on our platform. However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of theContent. Any opinions and views expressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon andshould be independently verified with primary sources of information. Taylor and Francis shall not be liable forany losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use ofthe Content.

This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

http://www.tandfonline.com/loi/fapb20

http://www.tandfonline.com/action/showCitFormats?doi=10.1080/13602380500391314

http://dx.doi.org/10.1080/13602380500391314

http://www.tandfonline.com/page/terms-and-conditions

http://www.tandfonline.com/page/terms-and-conditions

Wage Negotiations in the Asia Pacific:Does Globalization Increasethe Wage Gap?

RON EDWARDS*, DANIEL EVANS* & AARON SMITH***Monash University, Australia, **Latrobe University- Australia

ABSTRACT This article uses research from the fields of international business, economics andindustrial relations to investigate how the context of multinational corporations affects thebargaining power of shop-floor workers and senior management. It is set in the context of the AsiaPacific region. Senior executives negotiate their salaries from positions of strength, especially whentheir subsidiaries fulfil important strategic roles. In contrast, shop-floor workers can face threats to‘move the plant to Asia’ when negotiating wages. These dissimilar negotiating positions provide thecontext in which wages are negotiated in the region. It is anticipated that the study will assistmanagers of multinational corporations and their employees’ representatives as they approachwage negotiations.

KEY WORDS: multinational corporations, wage negotiation, Asia-Pacific, income inequality, wage gaps

Introduction

The relationship between globalization and income inequality has received a greatdeal of attention in the media and in academic discourse. Much of the analysisadopts a macroeconomic approach and focuses on the manner in whichinternational trade (imports and exports) impacts on relative poverty (Edwards,1997; Watkins et al., 2002; Henry & O’Brien, 2003). Only a few studies haveexamined the link between capital flows and inequality, and again, these studieshave adopted a macroeconomic and cross-country approach (Morris & Western,1999). The aim of this article is to consider the way in which the nature ofmultinational corporations (MNCs), their global context and their organizationalarrangements, affect the bargaining power of shop-floor workers and seniormanagement when determining wage and salary levels in the Asia-Pacific region.While similar forces are at work the world over, the close proximity of high wage(for example, Australia, Singapore, New Zealand), middle wage (for example,Malaysia and Thailand) and low wage countries (for example, Indonesia, China)make the issue particularly relevant.

1360-2381 Print/1743-792X Online/06/010095-14 q 2006 Taylor & FrancisDOI: 10.1080/13602380500391314

Correspondence Address: Associate Professor Ron Edwards, Faculty of Business and Economics, Monash

University, PO Box 527, Frankston 3199, Australia. E-mail: [email protected]

Asia Pacific Business Review,Vol. 12, No. 1, 95–108, January 2006

Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

The study argues that the global nature of the market for senior staff, especiallythe chief executive officer, can generate immense wage premiums. However, thereis no equivalent assistance to shop-floor workers. Indeed, in some circumstances,the MNC’s global operations can work to hold the wages of ordinary workersdown, thereby broadening the gap between high and low income earners in theMNC’s host country. By analysing the impact of the environment of MNCs on thebargaining power of labour, both high and low paid, the article provides insightsfor wage negotiators.This study reviews the international literature dealing with foreign direct

investment (FDI) and its implications for the demand for labour. This literatureassists in understanding the contexts, constraints and opportunities facing workersand management in MNC subsidiaries as they approach wage negotiationsand as they interpret and respond to each other. It will assist trade unions todetermine when threats to ‘move to Asia’ have substance and when they do not;and gauges the bargaining strength of senior executives in MNCs and theirsubsidiaries.The next section outlines the general economic literature addressing the manner

in which foreign direct investment (FDI) affects the demand for labour in bothhigh and low wage countries. Sections three and four consider the circumstancesof shop-floor labour and senior managers respectively. Section five offers someconclusions and advice for managers in multinational corporations in theAsia-Pacific, their employees and their representatives.

Foreign Direct Investment and the Demand for Labour in High and LowWage Countries

How does the free movement of capital affect the demand for labour in high wagecountries? In theory, as capital flows are liberalized, investment that mightotherwise be committed to employment generating activities in industrializedcountries will be attracted to neighbouring countries with lower wages, causing afall in demand for labour at home (Salderson & Nielson, 2002). This scenario isespecially relevant to the Asia-Pacific region where many geographic neighbourshave very different wage levels. Rodrik (1997) argues that workers in developedcountries face a serious threat, having been subject to a significant change inthe relative bargaining power of workers, particularly of the low-skill type.In Rodrik’s view, MNCs have gained the upper hand in industrial relations throughbeing able to substitute one country’s workers with another’s, either through tradeor through foreign direct investment. This has led to a decrease in the demand forlabour in advanced countries and an increase in its elasticity, causing a reductionin average earnings for low-skilled workers. Similarly, Salderson and Nielson(2002) argue that MNCs are in stronger bargaining situations than domestic firmsbecause multinationality brings workers from different countries into moreintense competition with each other and because, as new entrants to the industry,they can ignore prevailing industrial practices as mere ‘historical baggage’.This negative view of globalization, if taken to an extreme, implies that the

permeability of national boundaries for the transfer of production by MNCs willeventually lead to the creation of a single, global labour market in which MNCs

96 R. Edwards et al.

Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

are able to push wages in developed countries down to the lowest point (Debrah& Smith, 2000). This levelling of wages is likely to commence in a region suchas the Asia-Pacific where proximity facilitates the transfer of production. Intime, low labour standards will spill over from poor countries to rich through thereplacement of local production in developed countries with imports from lowwage countries, and through MNCs moving production and therefore jobs to lowwage locations (Rowley & Benson, 2000a). Rodrik (1997) describes this as the‘race to the bottom’, in which workers in the North have to acquiesce tostandards that are low enough to prevent footloose capital and employers fromdeserting them for the South. In this context, the following hypothesis isproposed:

Globalization, manifest through the strategies of multinationalcorporations, weakens the bargaining power of labour in high incomecountries in the Asia Pacific, thereby causing income disparity toincrease.

Fortunately, from the perspective of workers in high wage countries, there islittle evidence that MNCs pursue a primary strategy of directing FDI to countrieswith cheap labour costs, substituting high wage workers with low wage workers indeveloping countries. Writing in the field of international economics, Braconierand Ekholm (2000), studying Swedish MNCs, find that the relationship betweenemployment in affiliates in different geographical locations is mainlycomplementary, while substitutability is found between parent employment inSweden and affiliate employment in other high income countries. Similarly,Bruno and Falzoni (2003) find in their study of US multinationals thatemployment in US parents and Latin American affiliates, although substitutes inthe short term, are complementary in the long run. This result suggests a verticaldivision of the firm’s economic activities, taking advantage of different factorproportions in high and low wage countries. Efficient management of thesedifferent factor endowments allows all elements of the firm to grow. Importantly,Braconier and Ekholm (2000) found that labour substitution prevails both in theshort and in the long run between high wage locations in North America andEurope, which is supportive of the idea that proximity to the final market mattersin deciding where to locate production.Research in the field of international business has reached similar conclusions.

In this field, data are collected primarily by surveys in which firms weight thevarious possible reasons for choosing the location of their subsidiaries. Althoughlow wages are a factor, the majority locate their production facilities in or neartheir major markets (Dunning, 1993; Calof & Beamish, 1995; Edwards &Buckley, 1997). For example, service industries, which receive the bulk of worldforeign direct investment, must in large part be located near their customers(UNCTAD, 1998). Recent innovations, such as data entry and call centres, havegiven only limited scope to vary this rule. It is therefore not surprising that theUnited States (US), the largest market, is also a favoured destination for FDIdespite its high wage rates. Low wages are important but are not the primary factorexplaining the location of production.

Wage Negotiations in the Asia Pacific 97

Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

Multinational Corporation Strategy and Structure and Shop-floor Labour

Although the great majority of FDI is directed to service industries in high incomecountries, and therefore does not act in the manner feared by Rodrik (1997) andothers, there may still be scope for MNCs to create competition between workersin different manufacturing subsidiaries. Are MNCs free to move production fromone country to another in the Asia-Pacific and beyond in order to put pressure onworkers to increase productivity, or to secure a negotiating advantage over tradeunions during wage negotiations? This depends in part on the global structure ofthe firm (Edwards, 2003). The number of production sites controlled by the MNCis crucial for the issue of relative bargaining power. Assuming trade unions exist,the firm is highly vulnerable to industrial action if production is centred atone site. World sales can be held up by a single dispute. Ironically, management‘best-practice’ initiatives such as ‘just-in-time’ stock handling systems and sub-contracting, further increase the vulnerability of the MNCs’ production networkand therefore also shift some power to the workers (Breitenfellner, 1997). On theother hand, if production takes place at a number of locations, the company canpotentially replace output from a plant that is disrupted by an industrial disputewith output from other plants. Strategies of retaining surplus capacity orpermanent stocks to be called upon in the event of industrial unrest are costly andplace the firm at a cost disadvantage relative to others that avoid such strategies(Van Liemt, 1992,). Further, such flexibility is limited due to the individualnature of countries’ cultural norms and beliefs (Debrah & Smith, 2000; Warner &Zhu, 2002).Even where MNCs have surplus stocks or production capacity, they may not

have the opportunity to use these to counteract union action. Many, for example,have joint venture partners, especially in Asia-Pacific countries with markedlydifferent business contexts to those with which they are familiar (Davidson, 1982).Dual ownership means that these subsidiaries need to be relatively autonomousfrom an industrial relations point of view. Disputes are likely to arise betweenjoint venture partners if one is expected to incur costs to help weaken unions in asubsidiary in which it has no interest. Keeping in mind that US and EuropeanMNCs are more likely to have joint venture partners in Asia than elsewhere(Davidson, 1982), the real potential to use these subsidiaries to replace productionlost during strikes, say in Australia or New Zealand, may be limited to firms thathave not taken the joint venture path.In addition to constraints on the relocation of production facing single

production site MNCs, and those in joint ventures, the organizational structureof an MNC may limit its ability to move production from high to low wagecountries in the region to neutralize trade union pressure. The global operationsof multinationals have been found to fall into two broad categories, described asregionally and vertically integrated (Stopford & Wells, 1972). The formerinvolves dividing the company into regional divisions, each supplying their‘territory’ somewhat independently of the others. This arrangement offers somepotential for a plant in one region to divert output to another region in the eventthat industrial unrest there disrupts production. A vertically integrated, orworldwide production arrangement, divides the value-adding process and


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

locates each element in a different setting, possibly selected on the basis of leastcost for that particular activity. Potentially, each component or sub-componentof the product might be produced in a different country with a view to costminimization. For example, General Motors produces engines at its Fishermen’sBend plant in Melbourne for assembly in European cars. Where internationaloperations are vertically integrated, there is no potential to transfer output, aseach plant undertakes different activities. In these circumstances, the MNC’sbargaining position is weak. Industrial action at any one plant can disruptthe flow of intra-firm trade. For example, if overtime is stopped in a plantproducing gearboxes, the completion of cars worldwide may be impossible(Enderwick, 1984).Which of these two types of organizational structure is more common? There is

evidence to suggest that multinationals are progressively replacing regionallybased structures with vertical structures (Birkinshaw, 1996). Regional structuresare perceived as the higher cost option, there being duplication of activity. Hence,the trend appears to be against MNC organizational structures that allow thesecompanies to move, or threaten to move, production between plants to weaken thebargaining situation of trade unions.Segal-Horn and Faulkner (1999) add that a firm will adopt an international

strategy if it allows it to better achieve efficiency, manage risks or enableinnovation and learning within the firm. This theoretical framework could be usedto explain findings in Lemoine and Unal-Kesenci’s (2004) and Lemoine’s (2000)studies which show how the availability of low labour cost in China has resulted inincreasing number of foreign companies relocating their downstream and labourintensive stages of production there. Such relocation strategy could have beenimplemented to capitalize on China’s comparative advantage in the traditionallabour intensive industries. These scholars also confirm that such firmsconcentrate their higher value- added activities, such as design, research anddevelopment and customer service centres in higher income countries in theregion, such as Malaysia, to benefit from these countries’ comparative advantagein skilled labour (Felker, 2003)Questions of ‘where’ and ‘in how many’ countries each activity of the value

chain is performed are closely linked with the MNCs’ subsidiary strategy (Porter,1986). For example, Birkinshaw and Morrison’s analysis (1995) has shown that ifthe subsidiary strategy is to serve the local market through product adaptation,then the entire range of value-adding activities are located in that country. On theother hand, if the subsidiary has considerable expertise in certain functions oractivities, it may be assigned the role of a specialized contributor in a certainproduct range. As such, its activities must be tightly coordinated with the activitiesof other subsidiaries (Birkinshaw &Morrison, 1995).This is also characterized bya narrow set of value activities and high levels of interdependence with affiliatedsubsidiaries (Roth & Morrison, 1992).The dispersal of productive activity can also be influenced by customer

expectations. For example, activities can be divided into downstream andsupport activities (for example, outbound logistics, marketing and sales,and service) and upstream value activities (for example, inbound logisticsand operations) (Porter, 1986). Commonly, downstream activities are largely


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

country-specific and are vital for competitive advantage (for example, the firm’sreputation and brand name). Hence, the location of these activities is usuallytied to where the customers are located. In this regard, even though Japanesecompanies in the electronics industry tend to locate production in Japan, theyhave also built their presence where they have a strong reputation and brandname in most of the countries in East Asia, including Malaysia and China(Lim & Edwards, 2004).On the other hand, if an MNC’s competitive advantage is derived from its

operations across countries, upstream activities and support activities can beseparated from the customers. For example, MNCs are increasingly locating theirinformation technology, call centres and regional service centres away from theirhome countries. For example, Dell and Lehman Brothers’ offshore call centres inIndia, IBM’s information technology and business process outsourcing datacentres in Hong Kong and Shenzen, China, and Motorola, Ericsson, IBM, Shell,DHL, HSBC and BMW’s regional offshore service centres in Malaysia, all followthis pattern (Kearny, 2004). Similarly, Toyota has recently opened an engineeringdesign centre in Melbourne to service its manufacturing subsidiaries across theAsia-Pacific region.

Multinational Corporation Strategy and Structureand Senior Executive Staff

While the bargaining context facing shop-floor workers may not be as dire ascritics of globalization portray, there is strong evidence that the salaries of seniorstaff may be considerably boosted by the global context of the labour market inwhich they operate. Although comparative wage studies such as Buckley andEnderwick (1983) have generally found that foreign-owned affiliates offer higheraverage wages than indigenous firms, these reviews only extend from unskilledworkers to middle management. To the best of our knowledge, no research hasbeen undertaken to compare the salaries of senior staff in MNCs with those inlocal firms either in the Asia-Pacific or elsewhere. Nevertheless, the gap betweensalaries of shop-floor workers and chief executives is growing. Blumenthal (2000)reports research by the Institute of Policy Studies which found that chief executiveofficer pay in the United States increased 535 per cent between 1990 and 1999,outpacing the 116 per cent increase in corporate profits and the 32 per centincrease in average worker pay. Similarly, Slaughter (2000) reported that theUnited Kingdom and the United States experienced rising income inequality in the1990s. However, he also reports declining earnings dispersion in Canada andGermany.Senior executives for companies in the Asia-Pacific must be drawn from the

global market for such people. In fact, the increasingly global economiclandscape has created a need for managers with new, global skillsets (Adler &Bartholomew, 1992; Gupta & Govindarajan, 2002). Organizations around theworld are competing to attract highly skilled personnel in various professionalareas (Mahroum, 2000). Hence, as Vicere (2000) points out, talent recruitmentin the new economy is a sellers’ market. Various factors contribute to this trend.The role of scale, administrative complexity, the need to provide incentive for


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

subordinate managers, the skills required when leading a company in a ‘foreign’culture or with a workforce drawn from diverse cultures, and the special natureof markets for people with ‘celebrity’ status will be considered.The first factor promoting demand for executives and hence higher salaries is

the scale of MNCs. According to Deckop (1988), it is ‘common wisdom’ amongprofessionals that firm size, as measured by revenue, is the best predictor of chiefexecutive officer (CEO) compensation. Research has confirmed this view.Kostiuk’s (1990) study of US data found that the relationship between executiveincome and firm size is significant and relatively stable over time, even whencomparing US firms to British companies. Interestingly, he found that thesize effect was much stronger for executives than for other workers. While firmsize is the dominant factor in setting executive compensation, other factors aresignificant. For example, more dynamic industries may require greater skill, somefirms may be better organized and require less leadership talent, and firms that areseeking to emerge from a period of poor performance may pay premiums.Nevertheless, to the extent that global markets are larger than purely domestic orregional ones, and can therefore support larger firms, higher executive salaries canbe expected in MNCs. Indeed, Becker (1981) argues that market forces will assignthe best manager to the largest firm, the next most capable with the second largestand so on.In addition to scale, a reflection on the characteristics of the functions of global

CEOs also suggests that salaries need to be high in consideration of the level ofdifficulty involved. Carpenter and Sanders (2002), for example, argue that CEOcompensation is related to the organizational complexity that they manage(Henderson & Fredrickson, 1996; Sanders & Carpenter, 1998; Ryan & Wiggins,2000). Agarwal (1981) also viewed job complexity as a factor in executivecompensation, noting that as organizational structures become more differentiatedfunctionally, vertically and spatially, the interactions and relationships thatexecutives have to manage, especially across cultures, also become complex, andthe worth of those positions increases.Studies of MNCs indicate that they are very complex organizations, requiring

highly skilled people to lead them. Gupta and Govindarajan (1991) describe theMNC as a network of capital, product and knowledge transactions among unitslocated in different countries, with the strategic context of the subsidiariesvarying in terms of the magnitude and direction of these transactions, aperspective that is consistent with the analyses of Bartlett and Ghoshal (1989)and Teece (1976).Examination of the ‘knowledge management’ component of the CEO’s role

indicates the extent of the leadership skills required. For the purposes of theirresearch, Gupta and Govindarajan (1991) define knowledge flow as the transferof either expertise (for example, skills and capabilities) or external market data(for example, market knowledge). Focusing on the knowledge flows transaction,they define four generic subsidiary roles by reference to the extent to whichthey engage in knowledge inflows from the rest of the corporation, and theextent to which they engage in knowledge outflows to the rest of thecorporation. The Global Innovator subsidiary serves as the fountainhead ofknowledge for the other units. High levels of knowledge flow in and out of this


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

type of subsidiary. The Integrated Player is similar to the Global Innovator rolein that it has responsibility for creating knowledge that can be utilized by othersubsidiaries. However, unlike the Global Innovator, an Integrated Playersubsidiary is not self-sufficient in the fulfilment of its own knowledge needs.The Implementer subsidiary engages in little knowledge creation of its own, andrelies heavily on knowledge inflows from either the parent or peer subsidiaries.Finally, the Local Innovator subsidiary has almost complete local responsibilityfor the creation of relevant know-how in all key functional areas, however, thisknowledge is seen as too idiosyncratic to be of much use to subsidiaries inother countries.Gupta and Govindarajan (1991) do not consider the salaries that senior

managers might command, but they point out that the more a subsidiary isrequired to engage in knowledge transfers to other subsidiaries, the greaterwould be the scope of the general manager’s global responsibility. Further, thegreater the magnitude and scope of knowledge creation expected from asubsidiary, the greater should be the need for the exercise of autonomousinitiative by the subsidiary’s management. For example, subsidiary managers inthe information technology, design and regional service centres in India, Chinaand Malaysia that were discussed earlier, might be expected to have especiallybroad leadership roles and will therefore command appropriately high salaries.Accordingly, it is reasonable to infer that the gap between salaries of the CEOin such subsidiaries and that of shop-floor workers will be greater than forother subsidiaries that may be very similar to purely domestic firms in thisrespect.This logic is continued by Gupta and Govindarajan (2002), with an

examination of the role of modern managers and the ‘mind-set’ required in anincreasingly global economic landscape. They conclude that creating a globalmind-set in company managers is a central ingredient required for companysuccess. Defined by Gupta and Govindarajan (2002) as combining ‘an opennessto and awareness of diversity across cultures and markets with a propensity andability to synthesize across this diversity’, the requirement for global mind-setshas increased in contemporary organizations. This could be expected given anemerging consensus that the proportion of complex global/transnational MNCsis rising, while export-oriented global and multidomestic MNCs are declining insignificance (Porter, 1986 ; Gupta & Govindarajan, 1991). The implication isthat there is an increasing demand for managers with more sophisticatedcapacities, with upward consequences for their bargaining power in wagenegotiations.Vicere (2000) perceives the explosive growth in personnel search firms and

talent ‘raiding’ by rival firms as reflecting this increasing demand. Importantly, healso notes the changing nature of work and the altered skillsets required formanagers following the emergence of globalization. It is reasonable to assumethat the greater the global responsibility, the greater will be the salary commandedby the subsidiary’s general manager. This assumption is supported by Vicere(2000) who speculates that even lower level managers will increasingly demandstock options and other equity arrangements that have traditionally supplementedthe wages of only their organization’s elite.


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

Adler and Bartholomew (1992) see firms evolving over time from domestic,to international, through multinational to transnational in their strategy andstructure. They argue that the skills of managers must develop with thestrategic orientation, with managers of transnational firms, roughly equivalent toGupta and Govindarajan’s (2002) ‘global innovator’ subsidiary, transcendingthe competencies required of managers in domestic, international or multinationalfirms. These managers must understand the worldwide business environment froma global perspective, have broad multicultural knowledge and the ability to workwith people from many cultures, treating them as equals rather than from aposition of cultural dominance (Adler & Bartholomew, 1992). Transnational firmsselect managers from throughout the world for potential positions anywhere in theworld. Such managers will use high income country benchmarks and will beunenthusiastic about wage offers that reflect Asia-Pacific levels. Rewards andcareer opportunities must meet world-class standards.Although it is not possible to be specific, the new talents identified by Adler

and Bartholomew (1992) suggest subsidiary CEOs may be able to commandincome premiums in much the same way as celebrity performers in films, musicor sport (Rosen, 1981; Manasse & Turrini, 2001). The global market gives suchcelebrities the opportunity to earn very much more than when they operate indomestic markets alone. Rosen (1981) argues that in industries such as sportand films, a few stars earn vast sums, while the runners-up are left well behind.In such jobs, the market pays individuals not according to their absoluteperformance but on their performance relative to others. Whereas the income ofwindow-cleaners depends on how many windows they clean, investmentbankers’ pay depends on their performance ranking. Productive window-cleanerscan increase their income marginally by washing more windows, but in theglobal markets in which CEOs operate, the ‘edge’ is everything. The reward forbeing the best is disproportionately high. Frank and Cook (1995) describe suchmarkets as ‘winner-take-all’, and, partly because of developments in informationtechnology and globalization, these market conditions apply to more and moreoccupations, including CEOs. Organizations that can attract the best talent willhave a distinct edge in the marketplace (Harari, 1998), and are willing to payaccordingly.In recent times, models have emerged from the economics literature that

offer a deeper understanding of the structure of internal compensation schemesthat may assist in understanding the effect of globalization on CEO salaries(Conyon et al., 2001). Tournament theory, developed by Lazear and Rosen(1981), argues that top executive salaries may well exceed what might besupported by the individual’s output, but are still efficient, because they act asan incentive for those lower down the ladder who enter a ‘rank-ordertournament’ with the top job as the prize. That is, it is efficient for firms to paydisproportionately high salaries to senior executives because of the incentiveeffect on subordinate managers to aspire to the top job (Rosen, 1986; Mainet al., 1993). The additional efforts of the subordinate managers justify the topexecutive’s salary.How might the global dispersion of subordinate managers affect the situation?

The tournament will be conducted in each of the subsidiaries as well as the


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

parent operation, causing wage dispersion to be greater than otherwise within thesubsidiary. Tournaments may also apply between subsidiary managers and itmay be that for the motivation effect to reach the more distant subsidiaries, thesalary of the parent CEO has to be high enough to generate a ‘globaltournament’ among subsidiary managers. CEOs of MNC subsidiaries willtherefore be part of global tournaments. Even where the headquarters is locatedin a middle-income country, such as Malaysia, if subsidiaries operate in high-income locations such as Australia and Singapore, then parent CEO salaries haveto take on a global character, divorced from their domestic labour market forces.If this were not the case, then there would be potential for the salary of asubsidiary CEO to exceed that of the parent CEO, or at least to be close enoughto impede the tournament effect.

Discussion

Commentators on globalization emphasize that improvements in communi-cations and transportation, and reduced barriers to trade and capital flows, haveled MNCs to develop strategies that exploit the opportunities that suchconditions offer. They can locate production in least cost locations, to thedisadvantage of workers and their unions in higher wage countries. Thisobservation applies both to MNCs that originate in the Asia-Pacific region andthose from elsewhere that have operations in the region. Certainly, MNCs aresubject to changes in relative costs, as are locally owned firms. They may bemore alert to cost differentials and more experienced in relocating to lower costsites. For example, they may be the first to close plants in Australia ifregionalization or globalization makes New Zealand, Asia or elsewhere, lowercost options. However, shop-floor workers and their unions should be awarethat only a minority of MNCs are likely to do so. The role of labour,particularly the effect of wages on calculations of global competitiveness, is nota simple issue (Rowley & Benson, 2000b). A range of market, organizationaland strategic factors limits their behaviour. Hence, while the frequent threats torelocate make the issue a high-profile feature of the industrial relationsenvironment, in practice, there is little evidence to suggest that MNCs arerelocating large elements of production to low wage countries followingindustrial disputes. These threats are often made in the heat of disputes butrarely enacted, suggesting their impact on aggregate wage levels is minimal.Rather, the location of elements of the production chain reflect longer-termstrategic imperatives that involve a more fine-grained division of labour acrossthe region.When MNCs negotiate with senior executives, however, there is a clear shift

in monopoly power in favour of the employee. The scarcity of the skills andknowledge required to lead an MNC, or a strategically important element of anMNC, the need for the CEO to be seen as a winner, and to offer incentives toother managers to aspire to the top job, imply that executives are in a strongbargaining position. In their case, the potential to take positions in othercompanies that need managers with complex skillsets, either in the Asia-Pacific


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

region or beyond, place them in highly priced markets. Even CEOs of multi-national firms that originate in middle income countries will operate in globallabour markets and will command appropriate wage levels.

Implications

Multinational corporations in service industries and manufacturing firms thatpursue vertically integrated global production systems, apply just-in-timeinventory management, operate as near as possible to full capacity, or havejoint venture partners, will have little opportunity to move production from onecountry to another in response to trade union demands. Indeed, companies thatfollow a vertically integrated strategy will be highly vulnerable to strikeactivity as global production may be held up by industrial action at any onesite. On the other hand, MNCs that have wholly-owned, multiple productionsites capable of producing identical products, and with spare productioncapacity, will have the opportunity to resist wage increases by calling on othersites to replace lost production during strikes. They operate in a buyer’s marketand may succeed in using their multinational character to keep shop-floorwages in higher income Asia-Pacific countries lower than would otherwise bethe case.The market situation facing senior executives is rather different. The more

significant a subsidiary is in the overall activities of the parent company, the largerits size, the more demanding the role of the chief executive officer in managingpeople from different cultures, flows of knowledge, capital and products, and themore global the product market, the greater will be the premium paid to seniorstaff. These individuals operate in a seller’s market.Managers in MNC subsidiaries in the Asia-Pacific region would be wise to

anticipate long-term shifts in the location of production within their parent’snetwork of facilities. Changes in relative wages may lead to closure of particularsubsidiaries if they do not remain competitive. Strategies to lift skill levels of theirworkforce, at least in line with rising wage relativities, should enhance theirability to retain a role in the parent’s global strategy.

Conclusion

Globalization, manifest through the strategies of multinational corporations, hascomplex effects on negotiations in labour markets. Although the downwardeffect of globalization on wages of shop-floor workers is open to debate, there isevery reason to believe that executive wages are boosted by globalization,thereby generating an increase in income disparity. The hypothesis developedfrom the literature is therefore supported. Shop-floor workers, trade unions andsenior executives might keep these market realities in mind when they enterwage negotiations.Firms should prepare their public relations stance so as to deflect media and

public criticism of their ‘excessive’ senior staff salaries, and to mitigate anynegative public response to their threats to ‘leave the country’, likely to be issuedduring industrial disputes.


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

Finally, governments in the Asia-Pacific region, with its diverse income levels,should also be aware that a broadening gap in the incomes of the rich and poor isan inevitable consequence of their country’s participation in global labour markets.In the long run, strategies to boost the skill levels of the domestic workforce aremore likely to achieve sustained levels of FDI inflow than short-term strategies tolower wages or erode working conditions.

References

Adler, N. & Bartholomew, S. (1992) Managing globally competent people, Academy of Management Executive,

6(3), pp. 52–65.

Agarwal, N. C. (1981) Determinants of executive compensation, Industrial Relations, 20(1), pp. 36–46.

Bartlett, C. A. & Ghoshal, S. (1989)Managing Across Borders: The Transnational Solution (Boston, MA: Boston

Business School Press).

Becker, G. (1981) A Treatise on the Family (Cambridge, MA: Harvard University Press).

Birkinshaw, J. (1996) How multinational subsidiary mandates are gained and lost, Journal of International

Business Studies, 27(3), pp. 467–495.

Birkinshaw, J. & Morrison, A. J. (1995) Configurations of strategy and structure in Multinational Subsidiaries,

Journal of International Business Studies, 26(4), pp. 729–753.

Blumenthal, R. G. (2000) The gap between workers and chiefs looks like a chasm, Barron’s, 80(36), p. 10.

Braconier, H. & Ekholm, K. (2000) Swedish multinationals and competition from high and low wage locations,

Review of International Economics, 8, pp. 448–461.

Breitenfellner, A. (1997) Global unionism: a potential player, International Labour Review, 136(4),

pp. 531–555.

Bruno, G. S. F. & Falzoni, A. M. (2003) Multinational corporations, wages and employment: do adjustment costs

matter?, Applied Economics, 35(11), pp. 1277–1291.

Buckley, P. J. & Enderwick, P. (1983) Comparative pay levels in domestically-owned and foreign-owned plants in

UK manufacturing: evidence from the 1980 workplace industrial relations survey, British Journal of

Industrial Relations, 21(3), pp. 395–400.

Calof, J. L. & Beamish, P. W. (1995) Adapting to foreign markets: explaining internationalisation, International

Business Review, 4(2), pp. 115–131.

Carpenter, M. A. & Sanders, W. M. G. (2002) Top management team compensation: the missing link between

CEO pay and form performance, Strategic Management Journal, 23, pp. 367–375.

Conyon, M. J., Peck, S. I. & Sadler, G. V. (2001) Corporate tournaments and executive compensation: evidence

from the U.K, Strategic Management Journal, 22, pp. 805–815.

Davidson, W. (1982) Global Strategic Management (New York: Wiley and Sons).

Debrah, A. Y. & Smith, G. I. (2000) Introduction: globalization and the workplace in Pacific Asia, Asia Pacific

Business Review, 7(1), pp. 1–21.

Deckop, J. R. (1988) Determinants of chief executive officer compensation, Industrial and Labor Relations

Review, 41(2), pp. 215–226.

Dunning, J. (1993) Multinational Enterprises and the Global Economy (Wokingham: Addison-Wesley).

Edwards, R. (2003) Plant relocation: when is it a viable threat?, Journal of Industrial Relations, 45(1),

pp. 23–34.

Edwards, R. W. & Buckley, P. J. (1997) European integration: strategic consequences for Australian

multinationals, International Journal of Business Studies, 5(2), pp. 22–32.

Edwards, S. (1997) Trade policy, growth and income distribution, American Economic Review, 87(2),

pp. 205–210.

Enderwick, P. (1984) The labour utilization practices of multinationals and obstacles to multinational collective

bargaining, The Journal of Industrial Relations, 26, pp. 345–364.

Felker, G. (2003) Southeast Asian industrialisation and the changing global production system, Third World

Quarterly, 24(2), pp. 255–282.

Frank, R. & Cook, P. (1995) The Winner-Take-All Society (New York: The Free Press).

Gupta, A. & Govindarajan, V. (1991) Knowledge flows and the structure of control within multinational

corporations, Academy of Management Review, 16(4), pp. 768–792.


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

Gupta, A. & Govindarajan, V. (2002) Cultivating a global mindset, Academy of Management Executive, 16(1),

pp. 116–126.

Harari, O. (1998) Attracting the Best Minds, Management Review, 87(4), pp. 23–26.

Henderson, A. & Fredrickson, J. (1996) Information processing demands as a determinant of CEO compensation,

Academy of Management Journal, 39, pp. 575–606.

Henry, K. & O’Brien, T. (2003) Globalization, poverty and inequality: friends, foes or strangers, The Australian

Economic Review, 36(1), pp. 3–21.

Kearny, A. T. (2004) A. T. Kearny’s 2004 offshore location attractiveness index. Available at: http://www.

atkearney.com/shared_res/pdf/Making_Offshore_S.pdf.

Kostiuk, P. (1990) Firm size and executive compensation, The Journal of Human Resources, 25(1),

pp. 90–105.

Lazear, E. P. & Rosen, S. (1981) Rank-order tournaments as optimum labor contracts, Journal of Political

Economy, 89(5), pp. 841–864.

Lemoine, F. (2000) FDI and the Opening up of China’s Economy. CEPII Working Paper 2000–11,

Centre d’Etudes Prospectives et d’Information Internationale, Paris.

Lemoine, F. & Unal-Kesenci, D. (2004) Assembly trade and technology transfer: the case of China,

World Development, 32(5), pp. 829–850.

Lim, N. C. & Edwards, R. W. (2004) Location of multinational corporation investment in East Asia: a strategic

approach, ANZIBA Conference Proceedings.

Mahroum, S. (2000) Highly skilled globetrotters: mapping the international migration of human capital, RandD

Management, 30(1), pp. 23–31.

Main, B. G. M., O’Reilly, C. A. III & Wade, J. (1993) Top executive pay: tournament or teamwork?, Journal

of Labor Economics, 11(4), pp. 606–628.

Manasse, P. & Turrini, A. (2001) Trade, wages and ‘superstars’, Journal of International Economics,

54, pp. 97–117.

Morris, M. & Western, B. (1999) Inequality of Earnings at the Close of the Twentieth Century, Annual Review

of Sociology, 25, pp. 623–657.

Porter, M. E. (1986) Competition in global industries: a conceptual framework, in: M. E. Porter (Ed.)

Competition in Global Industries, pp. 15–60 (Boston, MA: Harvard Business School Press).

Porter, M. E. (1986) Changing patterns of international competition, California Management Review, 28(2), p. 9.

Roth, K. & Morrison, A. J. (1992) Implementing global strategy: characteristics of global subsidiary mandates,

Journal of International Business Studies, 23(4), pp. 715–735.

Rodrik, D. (1997) Has globalization gone too far?, Institute for International Economics, Washington.

Rosen, S. (1981) The Economics of Superstars, American Economic Review, 71(5), pp. 845–858.

Rosen, S. (1986) Prizes and incentives in elimination tournaments, American Economic Review, 76(4),

pp. 701–715.

Rowley, C. & Benson, J. (2000a) Global labour?: issues and themes, Asia Pacific Business Review, 6(3–4),

pp. 1–14.

Rowley, C. & Benson, J. (2000b) Globalization, labour and prospects, Asia Pacific Business Review, 6(3–4),

pp. 300–308.

Ryan, H. E. Jr. & Wiggins, R. A. III (2000) Differences in the compensation structures of the CEO and other

senior managers, Journal of Business & Economic Studies, 6(2), pp. 22–39.

Salderson, A. & Nielson, F. (2002) Globalization and the great u-turn: income inequality trends in 16 OECD

countries, The American Journal of Sociology, 107(5), pp. 1244–1299.

Sanders, W. G. & Carpenter, M. A. (1998) Internationalization and firm governance: the role of CEO

compensation, top team composition, and board structure, Academy of Management Journal, 41(2),

pp. 158–178.

Segal-Horn, S. & Faulkner, D. (1999) The Dynamics of International Strategy, 1st edn (London: International

Thomson Business Press).

Slaughter, M. J. (2000) Globalisation and wages: a tale of two perspectives, The World Economy, 22(5),

pp. 609–629.

Stopford, J. & Wells, L. (1972) Managing the Multinational Enterprise (New York: Basic Books).

Teece, D. (1976) The Multinational Corporation and the Resource Cost of Technology Transfer (Cambridge,

MA: Ballinger).

UNCTAD (United Nations Conference on Trade and Development) (1998) World Investment Report 1998:

Trends and Determinants. United Nations, New York.


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

Van Liemt, G. (1992) Economic globalization: labour options and business strategies in high labour cost

countries, International Labour Review, 131(4–5), pp. 453–471.

Vicere, A. A. (2000) New economy, New HR, Employment Relations Today, Autumn, pp. 1–11.

Warner, M. & Zhu, Y. (2002) Human resource management ‘with chinese characteristics’: a comparative study

of the People’s Republic of China and Taiwan, Asia Pacific Business Review, 9(2), pp. 21–43.

Watkins, K., Dollar, D. & Kraay, A. (2002) Point/counterpoint: making globalization work for the poor,

Finance and Development, 39(1), pp. 24–28.


Dow

nloa

ded

by [

UN

IVE

RSI

TY

OF

AD

EL

AID

E L

IBR

AR

IES]

at 1

5:43

16

Nov

embe

r 20

14

wage negotiations in the asia pacific: does globalization increase the wage gap?

Documents