Sunday, 17 June 2007

Zero Sum Game

Waverley TBS, a company based in Gateshead are planning to restructure their packaging operations by moving part of their business to Irlam. This news story provides a great example for any students of economic geography out there to use in an essay on inward investment and regional development.

First it demonstrates the problems of remote decision making. Waverley TBS's HQ is in the South East, but their decisions directly influence people located elsewhere, as in this case firms and employees in both the North East and North West regions. I'd imagine their senior managers have little regard for the livelihoods of people living in either region, their aim to is to maximise profits. This is a major issue. Indigenous companies, ones that have grown and remained within a place will be embedded in local social and economic relations, and tend to be more loyal to their workforce than inward movers. The decision to relocate the jobs probably doesn't reflect at all on the committment of the North East workers who are to lose their jobs, they have become victims of circumstance and decisions beyond their control.

Second, this illustrates the structural relations in economic power which exist in the UK. The North East has been particularly successful in attracting inward movers compared to other English regions, but this structurally weakened the regional economy by leaving it increasingly vulnerable to external decision makers or to change in national and global markets. Power will reside with the parent companies, a vast majority of which tend to be located in and around London or abroad. In global terms the North East, therefore, has become a weak and powerless place.

Third, this example demonstrates the fundamental problem when inward investment is used as a tool of economic development. It kind of makes sense if you are attracting new investment from outside the UK (although the problem of external decision making becomes worse), because at least it provides a source of new investment and employment which otherwise would not have been created. However, a bulk of inward investment in the UK is based on inter-regional movement of companies. In other words regional and local policies to support inward investment often result in one British company simply moving its offices or production facilties from one British town to another (some times at the cost of taxpayers money as businesses are often encouraged to move by ruthless development agencies with short term priorities, who dangle grants and tax breaks to businesses as carrots). So one place's gain is another's loss. Hence the zero-sum gain, lots of public money is spent on place marketing, providing infrastructure and premises to companies which just ends up with investment and jobs been moved around the country, with little new opportunties created. Indeed, as this case illustrates, the opposite is true. Waverley TBS are making 63 people redundant in Gateshead, but only 27 staff are to be offered redeployment. This often happens, because when businesses make relocations as they frequently decide to rationalise their workforce during the process. So we have a situation in which policies designed to foster economic growth in lagging regions actually results in higher unemployment in deprived areas.

Another fundamental problem with inward investment, is that it is becoming increasingly easy and flexible to attract in companies, but it is just as easy for those companies to move out again. Nike are notorious for this with their operations in the Far East. Nike will shift the bulk of its sub-contracting operations from one country to another on a 5 year cycle, as they source out even cheaper places to make their shoes. The pressure is on governments to provide incentives to attract and retain these what are hugely profitable companies, e.g. by offering more tax breaks and holding down labour costs/power. This is hardly the basis, therefore, of a sustainable economic strategy.

A fourth points relates to the structure of UK brewing industry. Waverley TBS, themselves are part of a complex corporate web tied to Scottish and Newcastle, whjo are now considered as global player in the beer game. S&N, themselves were a regional company (like most brewers in the UK), but have expanded to dominate the UK market nationally and are expanding overseas to establish market prescence in 15 countries. However, they themselves have been subject to aggressive takeover bids from foreign companies and despite their recent growth are not invulnerable to the vagaries of the global economic system.

S&N have expanded not only by making more beer, but also expanding horizontally and vertically. They have moved up and down the supply chain to capture distribution, production and processesing aspects of brewing. In 2006 S&N restructured its logistics operations to form a new international venture known as KNDL (Kuehne + Nagel Drinks Logistics) on a 10 year contract. Waverley's fortunes, therefore, appear to be at the mercy of their large parent company, a situtation a lot of British SME's find themselves in.

Managment gurus such as Micheal Porter, would see most of the above the developments as a positive development, because according to him aggressive place competition is the only way economic can become flexible and competitive in a global market place. I am not entirely sure therefore whether brewing logistics in the UK is a competitive industry.

In the end this is some good news for Irlam, which will gain some new business and 27 new jobs, but for how long?

Source: icNewcastle - 63 jobs go with loss of packaging plant

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