Corporate Germany Between Globalization and Regional Place Dependence: Business Restructuring in the Ruhr Area

Corporate Germany between Globalization and Regional Place Dependence Business Restructuring in the Ruhr Area Christian...

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Corporate Germany between Globalization and Regional Place Dependence Business Restructuring in the Ruhr Area

Christian Berndt

Corporate Germany between Globalization and Regional Place Dependence

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Corporate Germany between Globalization and Regional Place Dependence Business Restructuring in the Ruhr Area Christian Berndt Wissenschaftlicher Assistent Lehrstuhl für Kulturgeographie Katholische Universität Eichstätt Germany

© Christian Berndt 2001 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 W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–91281–0 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Berndt, Christian. Corporate Germany between globalization and regional place dependence : business restructuring in the Ruhr Area / Christian Berndt. p. cm. Includes bibliographical references and index. ISBN 0–333–91281–0 1. Corporate reorganizations—Germany—Ruhr Region. 2. Ruhr (Germany : Region)—Economic conditions. I Title. HD2860.15.R84 B47 2000 338.7'0943'55—dc21 00–053047 10 10

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

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For Itta and my parents


Contents List of Figures, Tables and Maps

x

Preface

xiii

Acknowledgements

xv

List of Abbreviations 1

Putting Business Restructuring in Context: Globalization, the Crisis of the German Model and Rhineland Capitalism 1.1

2

3

xvi

1

Business restructuring, globalization and the German Model

1

1.2

Regional variation and Rhineland capitalism

5

1.3

A map of the book

13

Situating Business Strategies: Institutions and Regulation

15

2.1

Introduction

15

2.2

Regulation theory and institutionalism

16

2.3

The coordination of recurring relations

27

2.4

Conclusion: a contextual framework for empirical enquiry

39

Scaling Business Strategies: Globalization, Place Dependence and Institutional Distance

43

3.1

Introduction

43

3.2

The region in a globalized world: discourses of distance and proximity

45

Spatial rescaling, institutional distance and place dependence: a power and scale framework for business strategies

52

Conclusions

59

3.3

3.4

vii

viii Contents

4

Globalization, ‘Americanization’ and the Changing Corporate Power Geometry

61

4.1

Introduction

61

4.2

Detraditionalization, selective internationalization and uncertainty

62

Putting Anglo–American business culture to work: shareholder value, return on capital and corporate organization

78

The changing corporate power geometry: shareholder value, labour, and the ‘ratchet effect’

82

Concluding remarks: upscaling, institutional distance and power asymmetries

85

4.3

4.4 4.5

5

The Territorialization of Ruhr Conglomerates: Regional Engagement and Place Dependence

91

5.1

Introduction

91

5.2

Dimensions of regional interdependence

91

5.3

Spaces of protective engagement: inter-firm relations and the state–capital nexus

99

5.4 5.5

5.6 6

Spaces of assertive engagement: regional ties and upscaling

106

What is there for the Ruhr Area? The thin line between the enabling and constraining effects of regional place dependence

110

Conclusions

119

The Ruhr Mittelstand: The Institutional Limits to Restructuring in Space 6.1

121

Introduction: different pathways to adjustment and profitability

121

Political economic turbulence: Mittelstand firms between internationalization and state ‘overregulation’

124

6.3

Organizational space: upscaling and institutional distance

129

6.4

Conclusions

149

6.2

Contents ix

7

The Regional Responses by Mittelstand Firms: Falling Back on ‘Tested and Tried Relations’, Transmission of Pressure and Systemic Change

151

7.1

Introduction

151

7.2

The regional production system: traditional interaction structures, successful learning and the new quality of inter-firm relations

151

The fragmented firm: segmentation and coercion into cooperation

165

The geography of labour re-regulation: redrawing of boundaries, downscaling and exclusive cooperation

173

Conclusions

188

7.3 7.4 7.5 8

Making the (Re)connections: Governance Dilemmas, Discursive Regulation and the Scaling of Organizational Space 190 8.1 8.2

Connecting the economic and the non-economic: the negotiation of governance dilemmas

190

Scaling the social: spatial abstractions, organizational space and place dependence

199

Appendixes

206

Glossary

226

Notes

229

Bibliography

237

Index

251

Lists of Figures, Tables and Maps Figures 1.1 2.1 4.1 4.2 4.3 4.4 5.1 6.1 7.1 7.2 7.3

People in employment, Ruhr Area, Nordrhein-Westfalen and Germany, 1980–98 A ‘hierarchy’ of interdependent contextual settings Domestic and international employment, 1990–9 The ratchet effect, Veba and RWE, 1981–98 Cash-flow/capital-expenditure ratios, 1985–97 Stock prices and employment 1985–97 Interlocking supervisory boards and capital linkages Classification of Mittelstand firms Temporary labour, Germany and Nordrhein-Westfalen, 1976–96 Temporary labour, total and unskilled, West Germany and Nordrhein-Westfalen, 1976–96 The re-regulation of capital–labour relations in Germany

10 40 66 84 87 89 93 127 174 182 187

Maps 1.1 Ruhr Area and Nordrhein-Westfalen in Germany A.1 The Ruhr Area, counties and cities

7 207

Tables 1.1 2.1 2.2 2.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 6.1 6.2

Ruhr Area and Nordrhein-Westfalen, structure of unemployment, 1992–9 Institutional forms and recurring relations The different faces and dimensions of power Ideal-type modes of coordination Turnover share according to divisions, 1980–99 Internationalization, 1990–9 Financial capital involvement in supervisory boards Shareholder structure of major German companies, 1996 Veba AG, breakdown of shareholders, 1986–97 RWE AG, breakdown of shareholders, 1993–8 Thyssen AG, breakdown of shareholders, 1988–96 Ideal-type adjustment strategies, production policy and capital–labour relations Employment changes, 1990–5 x

12 18 25 28 63 64 72 74 74 75 76 123 128

Lists of Figures, Tables and Maps xi

6.3

Mittelstand firms, upscaling trends and definition of ‘in-situ’ spatial scale 6.4 The international expansion of organizational space: crucial contacts for innovation and diversification 7.1 Career background of young firm-founders 7.2 General contracting systems and ‘piggy-back’ rides 7.3 The labour strategies of the 28 sample firms, 1990–5 7.4 Relocation of production to East Germany and Eastern Europe 7.5 Organization rates within the metal and electronics industry, West Germany, 1980–97 7.6 Structure of temporary labour in West Germany, 1976–95 7.7 Temporary workers, share of average monthly income, Germany, 1980–95 8.1 Organizational interaction, dynamic change and structural persistence A.1 Regional and local employment distribution according to main industries, 1994 A.2 Mittelstand contacts to regional conglomerates, 1995–6

130 142 156 158 165 178 180 183 183 192 208 210


Preface Although this was only slowly recognized by people in the West, German unification has challenged old certainties and established routines in both parts of the country. This holds for corporate actors in particular, who – rudely awakened from a post-unification demand-led economic boom by the recession in 1992–3 – were hit by globalization with particular force. For corporate Germany, the first half of the 1990s can therefore without exaggeration be regarded as a decisive period. Corporate stakeholders in small and large firms were faced with increasing competitive pressures. And their strategic responses, in turn, combined in ‘reworking’ the way in which the German economy is regulated. In this book I investigate the tightrope walk which capital owners, managers and labour representatives had to perform during this critical period and ask about the role of ‘non-economic’ factors in shaping adjustment strategies as actors struggled between the need for change and the persistence of traditional ways of solving problems. This is done from a geographical perspective, stressing the importance of relative mobility differences in asymmetric power relations and of traditional interaction structures at the regional level. The research presented here stems from work on my PhD dissertation at the University of Cambridge and at the Katholische Universität Eichstätt. The material at the heart of this book was collected during fieldwork with large and Mittelstand firms in the Ruhr Area in 1995 and 1996, and in further investigations until submission in the summer of 1998. Additional follow-up work has been carried out for the purpose of this book where appropriate. A long-term research project cannot be completed without the help from a great many people, from friends, colleagues and others involved at various stages. First of all, I would like to thank those without whom my project would not have been possible, that is, all those people who provided me with information for my dissertation. Thanks to the interview partners for taking part in sometimes very long interviews and for being patient enough to answer additional follow-up questions, often months after the original interviews had been conducted. Special thanks to Frau Nagel from the Kommunalverband Ruhrgebiet, Herr Westram from the RWI library, Herr Laudwein and Herr Pieper from the IHK Gelsenkirchen and Herr Lamfried from the Gelsenkirchen City Council, who went out of their way to support me. I would like to thank the Economic and Social Research Council, the Deutscher Akademischer Austauschdienst, the Cambridge European Trust, St Catharine’s College, the Trustees of the xiii

xiv Preface

Philip Lake Fund and the Maximilian-Bickhoff-Stiftung for providing financial support at different stages of my research. Thanks to the staff at the Cambridge Department of Geography, particularly Jane Robinson and Colin McLennan in the library, Maria Constantinou at the graduate office and Owen Tucker in the drawing office. Thanks also to the staff in Eichstätt, particularly Sandra Pfeifer, for helping me to manage the problems which occur if one tries to be ‘at two places at the same time’. My colleagues in Cambridge have provided a stimulating and exciting atmosphere in which to do research. In particular I would like to thank Ron Martin, Linda McDowell and Michael Chisholm, who at various stages provided encouraging and critical feedback. Thanks also to the many other colleagues who were so friendly in answering my various cries for help, in particular Bernhard Butzin, Kevin Cox, Rainer Danielzyk, Heiner Dürr, Meric Gertler, Gernot Grabher, Peter Hall, Robert Hassink, Ray Hudson, Heiderose Kilper, Adam Tickell, Erik Swyngedouw, Eike Schamp and Gerald Wood. And last but not least my colleagues in Eichstätt who have been very understanding during the hectic 15 months until submission and the additional time I needed to complete this book. Hans Hopfinger kept my workload down and gave valuable feedback during the final stages of the dissertation, and the discussions with Marc Boeckler stimulated me during the difficult writing-up period and the preparation of this book. Thanks to my thesis supervisor, David Keeble. There is little need for words, there cannot be a better supervisor. David provided a perfect mix of encouragement, support, critical feedback and inspiration. But work is only one thing. Thanks to Itta who gave me enormous stimulus during the final stages and to Andrea for going such a long way with me. In Cambridge, I found in Alan not only a stimulating colleague but also a real friend. Anna, Mary, Easan, Russ, Dougie and Kristian made sure I know more about life in Cambridge than the Department and the library. In Nürnberg, Rich, Pfiff, Brigitte, Susanne, Annette and Robert helped me through some very difficult months. Finally, I would like to thank my parents, and my sister and Peter who supported me enormously throughout the three and a half years of research. CHRISTIAN BERNDT

Acknowledgements The author and publishers acknowledge with thanks permission from the following to reproduce copyright material: Cambridge University Press, for Table 2.3, from R. Boyer and J. R. Hollingsworth (eds), Contemporary Capitalism – The Embeddedness of Institutions (1997); Mitteilungen aus der Arbeitsmarkt- und Berufsforschung, for Tables 7.6 and 7.7, from H. Rudolph and E. Schröder, ‘Arbeitnehmerüberlassung: Trends und Einsatzlogik’ (1997); WSI-Mitteilungen, for Figure 7.3, from T. Schulten, ‘Tarifpolitik unter den Bedingungen der Europäischen Währungsunion’ (1998).

xv

List of Abbreviations

ADR

American Depository Receipt

AktG

Aktiengesetz (= code for listed companies)

ANBA

Amtliche Nachrichten der Bundesanstalt für Arbeit (= official newsletter of the Federal Labour Office) Bundesverband der deutschen Arbeitgeberverbände (= Federation of German employers associations)

BDA BDI

Bundesverband des Deutschen Industrie

BfA BFZ CDU

Bundesanstalt für Arbeit Berufsförderungszentrum Essen Christlich-Demokratische Union Deutschlands (= German conservative party) Deutscher Gewerkschaftsbund (= Federation of German labour unions)

DGB DOL

Division of labour

ELA

Emscher-Lippe-Agentur

EU

European Union

EWG

Essener Wirtschaftsförderungsgesellschaft (= Economic Development Agency, City of Essen) Financial Times Handelsblatt Hertener Entwicklungsgesellschaft (= Economic Development Agency, City of Herten) Handelsgesetzbuch (= commercial code) Institut Arbeit und Technik (= Institute for Work and Technology) Internationale Bauaustellung (= International building exhibition) Industriegewerkschaft Metall (= Metalworkers’ union) Industrie- und Handelskammer (= Chamber of industry and commerce) Innovations- und strukturpolitische Beratung für die Metallindustrie im Ruhrgebiet (= Innovation and structural policy consulting for the metal industry in the Ruhr Area)

FT HB HEG HGB IAT IBA IGM IHK IKS

xvi

List of Abbreviations xvii

INAP

NRW

Institut für angewandte Photovoltaik (= Institute for applied photovoltaics) Institut der Deutschen Wirtschaft (= economic think-tank of German industry) Kommunalverband Ruhrgebiet (= Association of Ruhr local authorities) Nordrhein-Westfalen

NYSE

New York Stock Exchange

R&D

Research and development

RWE

Rheinisch-Westfälisches Elektrizitätswerk

RWI

Rheinisch-Westfälisches Institut für Wirtschaftsforschung (Economic think-tank) Small and medium-sized enterprise Sozialdemokratische Partei Deutschlands ( = German social democratic party)

IW KVR

SME SPD SV

Shareholder value

SZ VDMA

WAZ

Süddeutsche Zeitung Verband Deutscher Maschinen- und Anlagenbau (= Business association for the machinery and mechanical engineering industry) Westdeutsche Allgemeine Zeitung

WTO

World Trade Organization

ZEUS ZVEI

Zentrum für Energieumwandlung und -speicherung (= Centre for innovative energy transformation and storage) Zentralverband Elektrotechnik- und Elektronikindustrie (= Business association for the electronics and electrical engineering industry)

ZZH

Zukunftszentrum Herten


1 Putting Business Restructuring in Context: Globalization, the Crisis of the German Model and Rhineland Capitalism This German Model is history, the politicians know it, the labour unions, the employers’ associations, the remaining countless lobby groups within the society. The parties know it as well … the economists know it, pension experts, tax experts. And the … population? The unemployed have known it for a long time, the pensioners have already recognized it too, and those in jobs at least foresee it. (Süßkind, 1996, my translation1)

1.1 Business restructuring, globalization and the German Model This book has two aims. First, it seeks to investigate how companies in Germany adjust and restructure in the context of globalization and an apparent crisis of the German Model, putting emphasis on the reconstruction of the strategies of capital owners, of managers and of labour representatives. This is done by deliberately choosing, in the Ruhr Area, a traditional regional production system as both setting and point of departure. Second, the theoretical interest lies in providing explanations of how ‘non-economic’ aspects – that is, institutional, organizational and socio–cultural factors, are influencing processes of change and restructuring. Here, investigation adopts a specifically geographic perspective, linking and connecting processes across various spatial scales: the local, the regional, the national and the global. The fact that capitalist firms have to cope with change is nothing new. And in the light of the far-reaching changes in the global space economy identified by scholars since the early 1970s, the need for local firms to respond to rapidly changing international competition and globalization is also well rehearsed in the literature. Recent theoretical advances notwithstanding, what is still missing in the debate, I believe, is a theoretically informed empirical investigation into how processes of corporate change are shaped by what many authors delegate to the realm of the ‘non1

2 Corporate Germany

economic’. In the light of the apparent dualism in the literature between those who equate globalization with abstract, homogeneous space (the end of geography) and those who cling to traditional spatial concepts, that is the nation-state or the region as territorial containers, a stress on spatial scales as being produced by social practice is especially important. This book will therefore analyze the processes of socio–spatial change without assigning priority to any particular spatial scale and instead stress conflicts between business strategies and forces originating from spatial scales produced political–administratively (for instance, the nation-state, the administrative region), economically (for instance, investment decisions, movements of goods and capital) or socio–culturally (for instance, ‘subjective space’ defined by the perception and actions of individual actors). Before providing a ‘map’ to the book, let me set empirical research in its wider context. To start with, ‘globalization’ has become a buzzword in academic discourse to an extent that it has almost become a ‘dead metaphor’, to use a term from Barnes (1996: 155). As I will develop in more detail in Chapter 3, globalization is understood in this book as a dynamic historical process, which on the one hand leads to increasing substitutability of place and thus to deterritorialization, stretching social relations in time and space. As such, it is deeply linked to processes of disembedding and detraditionalization. On the other hand, however, globalization is simultaneously accompanied by spatial fragmentation and differentiation, and by persistent and rearticulated traditions. Both forces are different sides of the same coin, they are dialectically linked. Moreover, globalization should not be seen as an all-encompassing and unstoppable force. Rather, the motivation for this book lies precisely in a dissatisfaction with the neglect of relatively persistent institutional structures and place dependence, and with the problematic use of one-sided notions of globalization in popular and academic discourse. The latter concern neoliberal readings of global integration, stressing spatial and cultural homogenization and the benefits of globalization, and ‘conservative’ ones, often culminating in the fetishisation of place and territory, and emphasizing the negative features of the process. It is the currently hegemonic neoliberal perspective which increasingly regards the ‘German Model’ as being no longer tenable in the wake of global integration, demanding a substantive change of the system (see the epigraph to this chapter). This line of argument has been increasingly put forward both by representatives of large corporations and *Mittelstand 2 firms across industries and sectors (see Hundt, 1996; SZ, 28 February 1996). The Anglo–American reader, recalling the somewhat similar discussions and the decisive changes in the USA and in Britain during the 1980s, might wonder about this time-lag. It is important to note that both the delayed acknowledgement that the world has changed dramatically and the intensity with which the ‘problem’ has emerged almost overnight in Germany can only be explained by the events following reunification. For it was the

The German Model and Rhineland Capitalism 3

euphoria and optimism, accompanied by a resurgence of nationalism, immediately after 1990, that contributed to the post-unification economic boom. This boom glossed over the structural problems which many observers had already identified as the 1980s were drawing to a close. And what is important for this book is that, after the nation woke up to the reality, these apparent weaknesses came to the fore with even greater force. It is, therefore, that what may be regarded as a severe, but nevertheless cyclical economic downturn (the recession of 1992–3) had wider implications. It marked the beginning of a period of uncertainty and structural change in Germany, a period which only slowly has started to come to an end. An investigation of the changes which corporate Germany went through during this period can therefore be expected to yield important insights. Having started to move to the concrete situation in Germany, let me briefly explain what is meant by Modell Deutschland (see Esser and Fach, 1981). A telling initial description stems from the economist Herbert Giersch: In principle, corporatism includes the following: Rather than on the coordination of single economies through anonymous competition it puts faith in the solidarity between those who know each other, and this in markets which are protected against anonymous outsiders and social climbers. What matters is cooperation between guilds, cooperation in cartels, the interrelation between bureaucracy and interest groups, the hegemony of associations. The decisive thing here is the closure of markets – through protection against free-trade, through state-created market entry barriers, through compulsory membership [and] all forms of discrimination of outsiders. (Giersch, quoted in SZ, 9 May 1996) Note that a crucial aspect concerns the propensity of German institutions to constrain price competition and to cushion against market forces (see also Streeck, 1997: 244). The best way to come to terms with the concept is to unpack the term as it is used in the academic literature. Three main levels of application can be identified: 1. In the widest sense ‘German Model’ is used as a label for a specific form of capitalism, a nationally contingent coupling of accumulation regime and mode of regulation, to use the language of regulation theorists. Regulationists have coined the term ‘flex-fordism’ or ‘export-oriented fordism’ in this context (Boyer, 1990a; Häusler and Hirsch, 1989; Jessop, 1989; Peck and Tickell, 1994). Other scholars describe the German political economy as ‘organized capitalism’ (Herrigel, 1996), as a virtuous interaction of consensus, corporatism and economic competence (Esser and Fach, 1989), as ‘stakeholder capitalism’ (Hutton, 1995) or as

4 Corporate Germany

‘corporatist welfare state’ (Lash and Urry, 1994). It is argued that the international competitiveness of German capital was until recently maintained through corporatist arrangements aimed at modernization and austerity, above all by coopting the labour unions into a constructive role in the decision-making process. A further aspect of ‘corporate capitalism’ concerns the fact that German financial and industrial capital have always been deeply interlocked. 2. At a more meso level the German model is associated with a particular form of the organization of production, with stable and long-term interfirm and capital–labour relations playing an important role. In particular, close ties between large and small firms, between producers and users, and producers and suppliers, figure prominently at this level (see Dunford and Kafkalas, 1992: 16; Harrison, 1994: 20; Herrigel, 1996; Kern, 1994). 3. Finally, at the micro level it depicts a specific production culture and organization of work within the firm, with emphasis on quality, formal training, skills and technological know-how, as embodied in the German institutions *Facharbeiter and *Meister, and the *Dual System (Kern and Schumann, 1989; Kern and Sabel, 1994). These three levels are closely connected, a feature translating through to the main institutions of German capitalism. 3 Markets are politically instituted and socially regulated and regarded as creations of public policy deployed to serve public purposes, with wide areas of social life (for instance, health care, education and social insurance) not governed by market principles; firms are social institutions, not just networks of private contracts or the property of their shareholders. Corporate control thus is an ‘insider system’ involving all stakeholders (for instance, employees, suppliers, clients, creditors) as opposed to the Anglo–American ‘outsider system’. Tradition-conscious small and medium-sized firms (SMEs), the *Mittelstand, play an important role in the economy, displaying a strong sense of autonomy and a general hostility towards stock markets as a source of equity capital. The internal order of companies is a matter of public interest and is subject to extensive social regulation by law and industrial agreement; the post-war German state is neither laissez-faire nor étatiste, and is best described as an enabling state. Vertical fragmentation between the federal government and the Länder closely limits what political majorities at the national level can do, making political change very slow. An important feature here concerns the constitutional obligation to provide for ‘equal living conditions’ in all Länder, which has given rise to an extensive redistributive system of revenue sharing; widespread organized cooperation among competitors and bargaining between organized groups, conducted through publicly enabled associations, is probably the most distinctive feature of the German political economy; it is through


state enabled collective action and quasi-public, ‘corporatist’ group selfgovernment that the German political economy generates most of the regulations and collective goods that circumscribe, correct and underpin the instituted markets of the soziale Marktwirtschaft (social market economy). Finally, German economic culture is to a large degree traditionalist, with high saving rates, comparably low levels of consumer credits and price competition being mitigated by socially established preferences for quality and an aversion to speculation. Observers in the country as well as abroad increasingly question the long-term stability, the competitiveness and innovativeness of German corporatism, seeing the German model as being in a state of crisis. There is a general sense of Angst and uncertainty as to the capacity of the society and economy to reinvent itself in the face of globalization and to develop a sustainable after-fordist version of the German Model, the Anglo–American counterpart being regarded as superior in the current environment. While scholars generally agree upon the current problematic state of the German social economy, there are differences with regard to the long-term sustainability of the German Model, ‘pessimists’ (for instance, Albert, 1992; Streeck, 1997) standing against more optimistic scholars (for instance, Hollingsworth, 1997; Kern and Sabel, 1994).

1.2

Regional variation and Rhineland capitalism

This book starts from the assumption that rather than assigning priority to any one spatial scale an approach is needed which looks at processes across the spatial scale hierarchy, with the ‘regional’ level playing a crucial role. This argument can be justified, if one looks at the historical development of the German political economy, in particular with regard to the evolution of the post-1945 political order. The German political economy is profoundly regionalized and spatially fragmented. Pointing at the existence of two ideal-type industrial orders in Germany, Herrigel (for instance, 1996; see also Schamp, 1995) criticizes much of the work done on Germany for neglecting regional variation. On the one hand, he identified a ‘decentralized industrial order’ which is ‘composed of multitudes of highly sophisticated small- and medium-sized producers’, on the other, an ‘autarkic industrial order’ which is ‘dominated by very large scale, vertically integrated enterprises with close ties to universal banks’ (Herrigel, 1996: 2–3). Both industrial orders have been faced with the same sorts of pressure historically, but have followed different trajectories of adjustment. Herrigel sees the former as the older order stemming from artisan roots in the seventeenth and eighteenth centuries, the latter as a product of industrialization which came into existence in the late nineteenth century. Regionally, Baden-Württemberg assumes role model status for the decentralized, Nordrhein-Westfalen and the Ruhr Area for the autarkic industrial order.

6 Corporate Germany

What this work illustrates is that any allusion to an apparently homogeneous ‘German Model’ in the literature should be treated with suspicion. The concept should therefore be seen as a heuristic device against which to ‘measure’ the concrete reality, for instance, as it is being presented by corporate stakeholders. And this justifies the decision to look at the subnational level and the various regional manifestations of German capitalism. However, while Herrigel provides strong support for the inclusion of the regional level in any investigation, one might question the extent to which his ideal type distinction actually translates into truly distinct real world production systems. Just as Baden-Württemberg has elements of the autarkic order (take the role of companies like Bosch or Daimler-Benz), the Ruhr Area of course may have elements of the decentralized one. What one might agree on is the differing degree to which these orders may be present and integrated in any region. With the Ruhr Area I chose a regional case-study which is more closely related to the autarkic order (Map 1.1). The main motivation for this stemmed from the conviction that Nordrhein-Westfalen and the Ruhr Area constitute one of the major nuclei of German capitalism, in particular with regard to the post-1945 era (see Abelshauser, 1983; Petzina, 1990; Schlieper, 1986), and that many of the problems confronting the German Model today have for a long time already been present in the Ruhr. In what follows, let me briefly introduce the general features of the Ruhr production system. This necessarily includes both exemplary and specific aspects. A review of the literature on the historical evolution of the Ruhr economy revealed three general, exemplary features which serve to underline the claim that the Ruhr Area can be regarded as one of the nuclei of German post-war capitalism. The first concerns regional inter-firm relations and the form of competition. From the early years of industrialization onwards the regional economy was to be dominated by large conglomerates of the coal, iron and steel industries (= *Montankomplex). By 1880 at the latest, large integrated companies began to dominate the regional economy, a development which was accompanied by an internalization of economic transactions hitherto coordinated by external market competition. This ultimately resulted in the vertical concentrated conglomerate so typical of the Ruhr Area and industrial Germany more generally (Weber, 1990: 237). What is more, the late nineteenth century saw an increasing propensity of iron, steel and coal producers to form cartels and syndicates in order to protect the industry from cyclical and structural pressures. The influence of cartels on the German economic system is regarded as having been more decisive than in any other country, and here cartels and syndicates in the Ruhr Area are seen as the ‘most fateful in the history of German cartels’ (Maschke, 1969: 233). Whether in the form of cartels or integrated conglomerates these developments in the heavy industries have widely been interpreted as a major factor behind a decisive change of German economic and political culture. Simply put, competitive capitalism

The German Model and Rhineland Capitalism 7 Map 1.1

Ruhr Area and Nordrhein-Westfalen in Germany

Hamburg

Bremen

Berlin Hannover Ruhr Area Duisburg

Dortmund Essen

Leipzig

Nordrhein-Westfalen

Düsseldorf Köln

GERMANY

Frankfurt

Nürnberg

Stuttgart München

Note: Ruhr Area as defined by the Kommunalverband Ruhrgebiet.

was superseded by organized or controlled capitalism, with powerful steel, iron and coal *conglomerates (*Montankonzerne) increasingly forcing their way into national political circles and being able to influence decisions accordingly. Powerful and charismatic industrialists, such as Friedrich

8 Corporate Germany

Krupp, August Thyssen, Hugo Stinnes or Friedrich Grillo, played a crucial role in this. What mattered in the Ruhr was technologically efficient production and not orientation towards costs, prices and markets. The regional industrial elite thus solved economic crises ‘non-economically’, using instruments such as tariffs, cartels or associations, directly lobbying political decision-makers and seeking consensus amongst the relevant regional actors (Rohe, 1984: 140). This practice soon became institutionalized nationally and was to be used time and time again in subsequent decades. A second characteristic and interrelated feature was the emergence of quasi-symbiotic relations between the local state on the one hand and industrial conglomerates on the other. Nowhere was this specific state form more evident than in the case of electricity and gas supply, the history of one of the case-study firms investigated in this book, the utility RWE, illustrating the amalgamation of public and private interests particularly well. When in the 1880s the explosive growth of the City of Essen made an expansion of electricity supply necessary, the city authorities opted for a solution which should have secured maximum public control. In a move similar to that of other cities Essen accepted an offer to build a power station by W. Lahmeyer, a large producer of electrical products from Frankfurt. The city authorities secured the right of close involvement and control of the building works, together with the understanding that the city would buy the infrastructure after some years in operation. The year 1898 thus marked the birth of the ‘Rheinisch-Westfälische Elektrizitätswerk’ (RWE), which soon produced enough electricity to supply the neighbouring towns and cities. When in 1902 the city authorities attempted to buy RWE as agreed with Lahmeyer, they found themselves initially outmanoeuvred by Hugo Stinnes and August Thyssen who took over the utility instead. Yet, the period of purely private enterprise ended when Essen and neighbouring Gelsenkirchen, worried about their dependence on a large private company, blackmailed Stinnes and Thyssen with regard to access to public land and acquired shares when the company went public in 1905 (Wiel, 1970: 278). In doing so, the soon-to-become largest electricity utility in Germany and Western Europe was transformed into a ‘mixed-economy’ company (Passow, 1916 quoted in Weber, 1990: 298). As we will see below, this historic development still carries implications for events in the 1990s. A third crucial aspect relates to capital–labour relations and to the development of specific, institutionalized practices in the Ruhr Area. Although workers in the *Montanindustrie have traditionally developed a strong sense of solidarity and a specific culture, a process which led to a distinct regional identity and regional political culture, miners and steelworkers in the Ruhr always were less class-conscious than their counterparts in other countries (see Rohe, 1984; Tenfelde, 1990). With this the Ruhr working class displayed socio–cultural features which are characteristic for Germany as a


whole, two main factors explaining this peculiarity. The first concerns the fragmentation of labour in the Ruhr, the ‘working class’ being divided between ‘native’ and migrant labour, between different generations of immigrants, and between Christian–catholic and social-democratic traditions. These divisions had spatial dimensions, too, above all the north–south divide between the Emscher-Lippe region and the Hellweg heartland. Secondly and perhaps more importantly, the labour unions from early on exerted a moderating influence whenever radical demands were voiced from below. Accordingly, Tenfelde (1990: 201) concluded that during the turbulent late nineteenth and early twentieth centuries strikes would have been much more frequent without the labour unions’ policy of containment. And similarly, after some tensions and upheaval, a lack of open conflict and an inclination towards cooperative problem solutions soon dominated capital-labour relations in the years following the Second World War. In other words, Germany’s industrial heartland thus contributed to one of the main features of German capitalism, namely the cooption of organized labour into the German variant of the welfare state. The main institutional vehicle for this is the codetermination system (Mitbestimmung) which developed in various steps from 1945 onwards. The first of these steps originated in the Ruhr Area, when in 1947 codetermination in the mining, iron and steel industries (Montanmitbestimmung) was introduced in the British occupation zone. The Montanmitbestimmung law from 1951 constitutes the most far-reaching form of codetermination and thus the furthest labour was able to get involved in the ‘insider system’, legally enshrining the parity of votes between labour and capital representatives on the supervisory boards of all companies employing more than 1000 workers. The codetermination model was then in various steps expanded to the rest of the economy, with the important exception that in cases of a stalemate between labour and capital representatives the latter have the final say on the supervisory board. ‘With the regulations within the Ruhr iron and steel industry’, Petzina (1990: 504–5, my translation) concluded, ‘a social and political model was predefined which constituted an essential element of the original consensus of the later Federal Republic’. Overall, these characteristic historical patterns played a decisive role in laying the foundation of what has come to be seen as the German model of capitalism, as opposed to the Anglo–American one. Although not being diffused completely to the national arena, developments in the Ruhr Area had important repercussions for the German political economy (see Abelshauser, 1983; Petzina, 1990: 499). Not surprisingly, scholars, such as Albert (1992, 1997) or Hutton (1995) have therefore labelled the German Model with the term ‘Rhineland capitalism’, which aptly sums up the crucial role of the steel, metal and coal industries in the immediate postwar years and the influence of regional politicians from both main political parties (SPD, CDU) in shaping the German political–economic system.

10 Corporate Germany

Take, for example, the CDU’s Ahlener Programm, the decisive politician of the immediate post-war era, Konrad Adenauer, or the dominant role of NRW and Ruhr representatives in both the SPD and the labour union movement. However, general validity notwithstanding, industrialization of course assumed a specific quality within the regional production system, increasingly disadvantaging the Ruhr Area as it became locked-in to a specific development trajectory. After being at the heart of what has become known as Wirtschaftswunder (economic miracle) during the 1950s and 1960s, the Ruhr economy saw itself confronted with unprecedented problems as a result of industrial restructuring. 4 A look at employment figures clearly illustrates that the Ruhr has since 1980 underperformed the rest of NRW and the rest of the country (Figure 1.1). The increasing gap vis-à-vis the rest of the country and higher cyclical volatility is a reflection of the difficulties of finding a way out of the trajectory the region had become locked-in to (see also Grabher, 1993a). This is a direct consequence of the historical domination by the regional *Montankonzerne. From the very beginning supplier sectors such as mechanical engineering were heavily focused on these leading industries and consequently show less sectoral Figure 1.1 1980–98

People in employment, Ruhr Area, Nordrhein-Westfalen and Germany,

Ruhr Area

120

Nordrhein-Westfalen (excl. Ruhr) West Germany (excl. NRW)

110

100

90

1998

1996

1997

1995

1994

1993

1991

1992

1990

1989

1988

1987

1986

1985

1983

1984

1982

1981

1980

80

Data sources: BfA Sozialversicherungsstatistik, unpublished; KVR. Regionalinformation 9/97; own calculations.


diversity than in other German regions. A corollary of this was a limited range of products and product groups (Abelshauser, 1990: 441–2). A further manifestation of this was a one-sided firm size structure, manifested by an almost complete absence of SMEs towards the end of the nineteenth century (Weber, 1990: 273). This specific historical feature has left its mark on the economy until today, the Ruhr still displaying a disproportionate share of larger firms as compared to the West German average (Kilper and Rehfeld, 1994). Finally, the traditionally dominant role of large industrial companies means that even today important service-related activities in the Ruhr Area are closely linked to and thus highly dependent on ‘manufacturing’ (Petzina, 1990: 516). National and regional state governments throughout the period of economic restructuring explicitly adopted a policy of ‘socially cushioned change’, that is, the coal mining and steel industries were enabled to gradually reduce employment and capacity with the help of government subsidies. The phased-out transition is widely credited with limiting the social costs of restructuring and the extent of marginalization and deprivation associated with rapid deindustrialization. This is the main reason for the paradoxical situation that a region with persistent below-average employment performance and high unemployment rates is relatively better off than the rest of the Land NRW, if one looks at changes in unemployment numbers (Table 1.1, Figure 1.1). Regionally specific negative forces, that is, the one-sided industrial structure, are to some degree balanced by the elaborate national welfare and social benefit system as the numbers of the economically inactive increase through options such as early retirement. The social system of production which evolved over time around coal, iron and steel had without any doubt been sufficiently territorialized as to justify the label ‘regional production system’. However, the changes briefly portrayed above have at same time challenged this territoriality. There is reason to believe, and this will be elabourated further below, that the traditional spatial congruence between economic, political and cultural definitions of what is the Ruhr Area has increasingly become porous and hollow. In other words, what exactly constitutes the Ruhr Area cannot be grasped by applying a traditional understanding of the region as a clearly mappable container. This is a further reason for the decision to start from the business firm and its actors, grounding changes in their spatial relations against traditional spatial configurations and then asking about what remains of the ‘regional’. To sum up, although in a particularly accentuated way, the Ruhr has since the early 1970s had to struggle with problems with which the German political economy is increasingly confronted today. This concerns above all the sobering fact that political efforts to increase competitiveness and capacity for innovation endogenously have little positive effect on the labour market. On the contrary, in order to cope with and cushion ongoing

12

Table 1.1

Ruhr Area and Nordrhein-Westfalen, structure of unemployment, 1992–9

Total unemployment Non-manual workers Manual workers Germans Gastarbeiter Younger than 25 years Males Females Unemployment rates (%) Note: 1 Excluding Ruhr Area. Data source: KVR; own calculations.

Ruhr 6/92

6/99

214 667 68 447 146 220 186 852 27 815 27 677 125 390 89 277 10.3

302 211 107 966 194 245 250 231 51 980 32 040 179 886 122 325 13.9

% change 1992–9

NRW1 6/92

6/99

40.8 57.7 32.8 33.9 86.9 15.8 43.5 37.0

342 032 123 532 218 500 289 887 52 145 44 257 180 116 161 916 8.0

527 027 205 208 321 819 427 878 99 149 57 606 289 218 237 809 10.1

% change 1992–9 54.1 66.1 47.3 47.6 90.1 30.2 60.6 46.9


restructuring costs, the regional political economy still relies heavily on the German welfare system. This links regional specificity with the general national context and – given the signs of strain in the German Model – provides further support for investigating regional processes of restructuring in a context of wider national and international changes. Although not necessarily generalizable to the whole German political economy, an analysis of regional restructuring and changes can be expected to provide findings which go beyond the narrow focus on Nordrhein-Westfalen and the Ruhr Area. This holds all the more, since Herrigel’s (ideal-type) definition of the autarkic order, in particular with regard to the inter-relatedness of small and large firms, appears to come closer to the situation of the German political economy as a whole (see the discussion of the German Model above). In other words, while I am cautious about equating the situation in the region with the one in the whole country, Herrigel may be criticized for discarding any notion of a German form of capitalism. This book, however, starts from a position closer to Kern and Sabel (1994: 605) who, while putting much of the current crisis rhetoric down to cyclical problems, nevertheless observe a qualitative break and departure from previous economic downturns, arguing that what is at stake is nothing less than ‘the strategy of a specific German combination of product perfection, flexible process automatisation, intelligent work organization and consensual regulation’ (1994, my translation and emphasis). And finally, rather than focusing on firms located in a regional ‘success’ story such as Baden-Württemberg, attention is drawn to a region which could be labelled a ‘zone of intersecting industrial practices’ (Gertler, 1992: 267) and which has already undergone a longer-term process of structural change. As an aside, and Herrigel (1996) himself acknowledges this, insofar as there are two distinct industrial orders or systems there is evidence of a convergence in recent years, a process which, for instance, includes decentralization and disintegration tendencies within large conglomerates and, as some observers believe, the possibility of an even closer interconnection between large and small capital in the future (Kern and Sabel, 1994).

1.3

A map of the book

After introducing the reader to the book (Chapter 1) and outlining the theoretical framework (Chapters 2 and 3), the argument is developed using the following structure. The empirical part starts with large regional conglomerates, arguing that, as a result of their own internationalization strategies, large corporations are becoming increasingly dependent on international financial capital. This results in a partial adjustment of organizational practices and corporate cultures along Anglo–American lines (Chapter 4). By pointing to persistent practices and interaction structures at the regional


level, the ‘Americanization’ and ‘cultural homogenization’ theses are subsequently qualified. An important finding concerns the extent to which large regional firms continue to utilize traditional ties to other firms and to the state, and engage in both ‘defensive’ protection of traditional markets and ‘offensive’ expansion of the spatial reach of their activities (Chapter 5). Following events down the production chain, medium and small firms in the Ruhr Area are indirectly affected by ‘globalization’, firms reporting the restructuring of large clients and regulatory rigidities as the main sources of environmental pressure. Investigating the reasons for failures and successes of ‘upscaling’ in the face of environmental turbulence, it is argued that political, economic and socio–cultural structures constrain international and national expansion of organizational space (Chapter 6). Like their large counterparts, the Mittelstand firms instead respond by falling back on routinized interaction structures and on traditional, predominantly regional relations. The strengthening of durable and routinized relations with some large clients, partner firms and workers is simultaneously accompanied by a ‘disembedding’ of others, with pressures being transmitted down the regional production system (Chapter 7). This chapter order is chosen to reflect the apparent contradiction in the responses of the firms analyzed. Accordingly, Chapters 4 and 6 are mainly written from an analytical perspective stressing disembedding and de-territorialization, Chapters 5 and 7 from a position which emphasizes persistence and place dependence. Answers to the two central questions – the changing regulation of social relations and the role of geography in this – are developed in an incremental way, repeatedly abstracting from empirical observations. Chapter 8 is designed to draw the findings together, connecting competitive and cooperative impulses, the macro and the micro level of social relations, and social structures and space.

2 Situating Business Strategies: Institutions and Regulation

2.1

Introduction

The methodological individualism underlying orthodox economic thought has traditionally been challenged from two directions. According to the first, strategic action is rooted in far-reaching political–economic structures which determine the scope for action and a firm’s development path. There is agreement in the political–economic literature that since the early 1970s advanced capitalist economies have undergone momentous change and that changes in the spheres of production and consumption are deeply intertwined with shifts in the way the economy is regulated and sustained (see Boyer, 1990a; Esping-Andersen, 1994; Martin, 1994; Offe, 1984; Tickell and Peck, 1992). The second view, the socio–cultural or socio–economic perspective, focuses on the fact that economic activities are shaped not only by an instrumental economic rationality, but are also deeply implicated in social, cultural and political institutions. From this perspective economic action is embedded in a dense web of ‘non-economic’ factors. Here, ‘new economic sociology’1 and institutionalist approaches have been extremely influential. ‘Embeddedness’ or ‘institutedness’ of economic action (Granovetter, 1985; Polanyi, 1992/1957) have become issues of growing concern in the social sciences, networks, learning, innovation and governance constituting key concepts. Economic geography has been no exception, increasingly stressing localized rules, institutions, practices and conventions as key factors behind both the geographical concentration and technological performance of production systems (Cooke and Morgan, 1993; Storper, 1995a; Storper and Salais, 1997; Thrift and Olds, 1996). Social–cultural embeddedness has been widely neglected by those who adopt a ‘political–economic’ framework. While adopting a more balanced view as regards the role of ‘non-economic’ factors, regulation theory still does this from a perspective which emphasizes structure over agency and form over practice (Painter and Goodwin, 1995: 341). The socio–economic literature, on the other hand, is criticized for putting too much emphasis 15


on the microeconomy, neglecting the wider macro level and being innocent of political effects and conflicts (Sadler, 1992; Sayer and Walker, 1992). Some scholars therefore insist that political–economic approaches looking at the total package of relations and arrangements, and the conflicts and contradictions within them, are still required for academic inquiry (Harvey, 1982, 1989; Lovering, 1996). However, the achievement of French regulationism notwithstanding, I believe that there still exist two fundamental weaknesses. The first concerns deficits regarding the micro level of social interaction. Following recent trends towards a reconciliation of both camps (see Boyer and Hollingsworth, 1997; Dicken and Thrift, 1992; Giddens, 1984; Ingham, 1996; Sayer, 1995; Zukin and DiMaggio, 1990), I seek to account for this weakness by linking regulationist thought with recent advances in institutionalism. Secondly, in both the political–economic and the sociological or institutionalist literatures space and geography are widely neglected. These weaknesses constitute the starting points for the theoretical discussion in this and the following chapter. Section 2.2 briefly discusses regulationist and institutionalist thought, identifying two key concepts: ambivalence and power as being central in the coordination of economic and social relations. By introducing the problem of coordination of economic action, Section 2.3 then attempts to bring both branches of heterodox economic thought together. The chapter closes with the introduction of a heuristic framework with which to analyze real life interaction and business strategies.

2.2

Regulation theory and institutionalism

Consequently, if a revitalised institutional economics is to emerge in Europe it is likely to draw on some or all of these alternative sources of inspiration. These will include such developments as Post Keynesianism and strains of Marxism such as that associated with the French régulation school. (Hodgson, 1994a: 377, author’s emphasis) Theories of régulation constitute an area of research which has focused on analysing long-term transformations in capitalist economies … These combine Marxian intuitions and Kaleckian or Keynesian macroeconomics in order to revive institutionalist or historicist studies. (Boyer, 1990b: 331, author’s emphasis) 2.2.1

Accumulation, mediation and regulation

The core concepts and basic elements of regulation theory are well rehearsed. It should therefore suffice to provide a brief summary. The regulation school seeks to analyze long-term transformation processes of capitalist political economies, focusing on the role of specific institutions and

Institutions and Regulation 17

practices in modifying the universal laws of capitalism. This involves both economic and ‘non-economic’ norms, values and rules (see Boyer, 1990a; Jessop, 1994a). Regulationists start with capital accumulation as the central process within capitalism. Accordingly, a regime of accumulation (RA) is defined as a ‘set of regularities that ensure the general and relatively coherent progress of capital accumulation’ (Boyer, 1990a: 35–6). These regimes constitute nothing else than complementary patterns of production and consumption which are reproducible over time. The counterpart of accumulation is distribution. This can be illustrated with regard to the national accounts statistics (what is referred to in Germany as Volkswirtschaftliche Gesamtrechnung or as ‘Blue Book’ in the UK). On the one hand, accumulated capital may be transformed into wages, distributable or withheld profits. On the other hand, capital thus distributed may be put to consumptive or productive use. And if the state is included, we have to add public consumption and investment. What is important is that all actors play different and often contradictory roles. The fact that every worker is always consumer means that there is a conflict of interest between the desire for higher wages and the wish for as low as possible prices. Capital owners may face a similar and not necessarily acknowledged dilemma between their interest in low labour costs dictated by market competition and the fact that they depend on the collective consumption of the workers (see Aglietta, 1998). Smooth and stable long-term capital accumulation therefore depends on the ‘management’ of distribution conflicts, that is, ways of organizing and coordinating possible arenas of conflicts and contradiction. Through time these coordination efforts bring about sets of fundamental institutions or – to use the term introduced by Boyer (1990a) – so-called institutional forms, which mediate and renegotiate between individual accumulation strategies and collective interests (compare Aglietta’s, 1998, concept of ‘mediatory mechanisms’). ‘In long-term dynamics as well as in short-term development’, Boyer (1990b: 333, author’s emphasis) argued, ‘institutions are important.’ The five crucial institutional forms identified in empirical research, predominantly on France and the USA, are summarized in Table 2.1. What the regulation school seeks to analyze and theorize is how inherently contradictory relations between individual and collective actors are becoming coordinated and stabilized. Any temporary existing stable ensemble of such norms, rules, habits, laws and so on is called the ‘mode of regulation’ (MR). Relatively stable couplings of RA and MR are called ‘modes of development’. Even 20 years after entering the scene, the regulation approach is still not a coherent theoretical approach, but constitutes an open research program intending to provide stimuli for empirical research (see Aglietta, 1998: 42). This cautious interpretation notwithstanding, observers note two substantive deficits. First, regulation theory is accused of falling into the trap of

18

Table 2.1

Institutional forms and recurring relations

Institutional forms (mediatory mechanisms)

Recurring relations

Manifestations

Forms of competition

Inter-firm relations, social division of labour firm ¤ firm

Perfect vs monopoly competition? ex post allocation vs ex ante planning?

Forms of monetary constraint

Credit relations, monetary demand, monetary supply industrial capital ¤ financial capital

Restrictive vs expansive monetary policy? Equity vs liabilities? National sovereignty?

Configurations of the wage relation

Capital ¤ labour

Industrial relations, wage bargaining

Forms of the state

State ¤ economy

Laissez-faire vs planning economy? Enabling state

Position within the international regime

Nation-state ¤ ‘rest of the world’

Free trade vs protectionism? Integration vs decoupling? Supranational cooperation?

Source: After Boyer (1990a).


functionalism. Albeit having different intentions, regulationists tend to endow capitalism with specific needs which are then met by what is termed the mode of regulation. In doing so, the regulation school reduces diverse institutional configurations to their stabilizing function (see Danielzyk, 1998: 123ff; Jessop 1994a: 237). The second, related criticism concerns an inherent structuralism. By giving structure preference over agency, regulationists neglect that we are knowledgeable and reflexive human beings. It is because of this that Görg (1994) criticizes regulationists for using a truncated, regulative notion of institutions. This will be taken up below. Insofar as regulationist research emphasizes the search for coherent, stable and ‘perfect’ modes of regulation these critics certainly have a point. In what will be outlined in more detail below, however, if one conceptualizes regulation as an open social process, mediated in time and space, I believe these deficiencies can be overcome (see also Painter and Goodwin, 1995). Such a view would point to the contingency and openness of modes of development, acknowledging, for instance, dysfunctional modes of regulation, and would see regulation as a dynamic process which has to be negotiated between the actors involved. However, such a view of regulation requires a more sophisticated understanding of the process of coordination. Here, I believe, recent developments within institutional economics (IE) provide interesting starting points. 2.2.2

Institutionalism old or new?

Thus an institution is collective action in control, liberation and expansion of individual action. These institutions are really trans-actions instead of either individual behaviour or the ‘exchange’ of commodities. It is this shift from commodities and individuals to transactions and working rules of collective action that marks the transition from the classical and hedonic schools to the institutional schools of economic thinking. (Commons, 1931: 651–652, author’s emphasis) [Institution] connotes a way of thought or action of some prevalence and permanence, which is embedded in the habits of a group or the customs of a people … Institutions fix the confines of and impose form upon the activities of human beings. (Hamilton, 1932: 84) Heterodox alternatives to methodological individualism have in recent years seen a renaissance across disciplinary boundaries, a renaissance which has been accompanied by a convergence between branches of economics and the social sciences (see DiMaggio, 1998; Ingham, 1996). In this context Hodgson (1994b) distinguishes two camps within institutional economic thought: new institutional economics (or transaction cost economics), on the one hand, and new ‘old’ institutional economics, on the other. There have of course always been different schools within institutional econom-


ics. Accordingly, Samuels (1987: 864) identified two partly contradictory classical traditions: the classical institutionalism associated with Thorstein Veblen and the work of John R. Commons, and traced current differences back to these two traditions. Transaction cost economics, methodological individualism and the heterodox challenge At first sight, both sides use the concept of ‘institution’ in a way familiar to social science. ‘Institutions’ are not solely conceptualized as formal organizations, like the business firm or the political party, but in a broader sense as systems of rules and norms. Institutions understood in this way are the result of intended and unintended consequences of intentional action, and are shared collectively between individual actors (institutionalization as a process). Classical, from today’s point of view somewhat restrictive definitions stem from Hamilton and Commons (compare the quotes at the beginning of this section). Crucially, institutions can be distinguished by their degree of formalization, that is, the extent to which they impose some form of sanction mechanism on actors. In other words, whether ‘sets of rules and norms’ are formulated and codified so as to give expression to what actors are supposed to do or not to do. Formal arrangements contrast with more informal ones, or as Giddens (1984: 23) puts it, with discursively formulated rules, that is, a common understanding of rules which do not have to be written down in contracts or laws and may involve weaker forms of sanctioning ‘rogue’ behaviour. It should be noted that wider, more general institutions include informal cultural aspects and practices (for instance, taste, see DiMaggio, 1994) and formalized ones, such as the national legal and economic system, the financial system or the labour market. Habits and routines, which are components of every institution, often are only tacitly grasped by actors and constitute embodied practical knowledge. The difference between both is that habits are personal and relate to single individuals, while routines may involve a group of people. The fact that the concepts are closely linked can be illustrated with respect to the firm. The skills learned by a worker in a given firm become partially embedded in his or her habits. These act as carriers of information, ‘unteachable knowledge’ and skills, resulting in a common perception of ‘ways of doing things’. As Hodgson (1993: xiv) argues: The structures and routines of the firm are durable institutions, and may be more difficult to alter than the skills of a single worker … Habits and routines thus preserve knowledge, particularly tacit knowledge in relation to skills, and act through time as their transmission belt. The conceptualization of an institution as employed by transaction cost economics differs in crucial ways from the one laid out above. First, in


transaction cost economics institutions are conceptualized as constraints, limiting the actions of rational individuals (see Hodgson, 1994b). Second, even if this constitutes an important step beyond orthodox economics, these issues are shifted to the margins of inquiry, if it comes down to ‘hard’ academic reality: This emphasis on property rights, customs, norms, conventions, and the like is especially pertinent for purposes of doing intertemporal, international, or cross-cultural comparisons. What the economics of organization is predominantly concerned with, however, is this: holding these background conditions constant, why organize economic activity one way (e.g., procure from the market) rather than another (e.g., produce to your own needs: hierarchy)? (Williamson, 1994: 80) For Williamson and others, therefore, it is not institutions but transactions which occupy the centre of academic analysis. Individuals, in other words, compare and weigh different organizational arrangements using the minimization of transaction costs as a yardstick. By limiting academic inquiry to different types of transactions (bargaining, managerial and rationing transactions; see Ramstad, 1994) and by focusing on contractual relations, activities are neglected which by their very nature cannot be coordinated contractually. For instance, this includes issues such as practical learning, the production of knowledge and the construction of competences (see Hodgson, 1998; Langlois, 1988). It is because of this that Hodgson criticizes transaction cost economics for still drawing on methodological individualism and for being close to the neoclassical orthodoxy: For Williamson the unit of analysis is the given, abstract, atomistic, and ‘opportunistic’ individual … he does not consider the possibility that the preference functions of the individual may be molded by circumstances, such as the structure or culture of the firm. (Hodgson, 1994b: 70, my emphasis) This abstract discussion gets clearer by performing a simple thought experiment. Imagine a continuum with atomism and holism as extreme poles at either side. An atomistic view of the world depicts all relations as being exogenously pre-given and attributes to individual parts (‘atoms’) an existence independently and autonomously from these relations. Social and collective categories are not more than the sums of (individual) parts and have no bearing on individual agency. From this follows that institutions, such as the firm, are from this extreme point of view no more than the product of individual decisions to minimize transaction costs. Now, of course, transaction cost economists do not see the world in this crude way. By using concepts such as bounded rationality, imperfect information or


endogenous preferences, a certain dependency of individual decisionmaking on existing institutional structures is acknowledged. Transaction cost economics, however, still occupies a position closer to the atomistic end of our continuum. As an aside, if social institutions have little bearing on individual behaviour, it is futile to conceptualize institutions as crucial analytical categories. Towards a heterodox alternative: ambivalence, structuration and power Recent years have seen the emergence of a more sociologically oriented institutional economics, a renaissance of classical, Veblenian institutional thought which has been advanced most forcefully by Geoffrey Hodgson. Put simply, Veblen and other early institutionalists (and this also includes what is referred to as the Deutsche Historische Schule) set a holistic view of the world against the atomism and methodological individualism beginning to dominate economic thought at that time. This led to a framework of thought which gave habits, routines and durable, stable traditions priority over individual creativity and sensuality. This leads us to the other end of the atomism–holism continuum. In what has been labelled somewhat awkwardly ‘new old institutional economics’ institutions shift to centre place in academic inquiry, being closely connected with cultural values and norms. New ‘old’ IE asks about the role of social institutions in individual frameworks of action and for the complex interrelations between institutions and individual action. Power and asymmetry in power relations in this view are integral part of economic theory, not residual categories, and can therefore not be delegated to the ‘social sciences’ (see Hodgson, 1994b: 64–5). In what follows I will briefly discuss two crucial dimensions of institutions as understood by this school of thought, dimensions which will occupy me throughout this book: first, ambivalence and the relationship between institutionalization (as a process) and agency, and, second, the crucial role of power and power relations in interaction. In doing so, I try to show that the current renaissance of classical IE can be linked to structuration theory, which claims to have put an end to the structure–agency debate (see Giddens, 1984; Görg, 1994), and ‘new economic sociology’ (see Granovetter and Swedberg, 1992; Smelser and Swedberg, 1994). 2.2.3 Ambivalence: regulatory, normative and cognitive dimensions of institutions The discussion starts from the assumption that we live in a world full of uncertainties, that is, the world with which we deal in our daily lives bears no resemblance to the abstract world of full market transparency of neoclassical economics. In such a world social institutions assume important stabilizing roles, that is, they help us to navigate through the turbulent seas of daily decision-making. Institutions are therefore characterized by a


certain stability and persistence through time and provide guidelines for interaction and social life. In any given interaction situation they achieve this by reducing the amount of information necessary for the interactants to understand each other (see Hodgson, 1988; Scott, 1995: 234). However, this necessarily means that institutions are Janus-faced. This relates to two important dimensions of institutions. On the one hand, institutions stabilize and constrain individual action (the regulatory dimension of institutions). Or as Hamilton puts it (1932: 86) established routines, conventions and specific ways of doing things ‘may stand in the way of the performance of new duties’. This means that reduction and filtering of information may lead at a certain point to rigidity and inflexibility. What I have in mind here is what is called ‘lock-in’ and path dependence in evolutionary economics (see David, 1985; Langlois, 1988; Nelson, 1994). At the same time, however, institutionalized routines and habits help agents to estimate the potential action of others in a world of high complexity and uncertainty (Giddens, 1984; Hodgson 1988, 1993; Matzner, 1991). By making interaction and communication possible in the first place, values, rules and norms have therefore an important enabling effect (the normative dimension of institutions: obligations and rights; see Scott, 1995). It is important in this context to stress that what matters is how institutions evolve over time, in other words the process of institutionalization. What we have here is an initially open balancing act between constraining and enabling effects. Actors within a business firm, for example, are confronted with uncertainty and ambivalence, institutionalized habits and routines preventing new trajectories of development, but at the same time constituting crucial resources which can be mobilized for innovation and adjustment (see Grabher, 1993b; Storper and Salais, 1997). In my view, the negative effects of embeddedness in social structures are often underestimated in the socio–economics literature (see Portes and Sensenbrenner’s, 1993, critique of Granovetter). In any case, a key property of institutions is that the development of new social practices and new institutional forms is invariably conditioned by existing ones (Cox, 1996a; Mäki, 1993). This brief discussion links up with the reconceptualization of agency and structure in structuration theory. Institutions – or, better, institutionalization as a process – cannot be conceived of in isolation from action and interaction. At the same time they provide us with a framework for action and, in doing so, influence what we do or not do. It is important to point out for the purpose of this book that rules, norms or values are subject to continuous questioning and reinterpretation by individual actors (this is the third, the cognitive dimension of institutions; see Hodgson, 1994b: 69; Scott, 1995). Accordingly, Hodgson repeatedly refers to Giddens and as such ‘places’ the new ‘old’ IE in vicinity to structuration theory (for instance, Hodgson, 1988: 9 or 71). These parallels notwithstanding, there remain of course important differences. Giddens is highly sceptical of insti-


tutionalism. His criticism in particular concerns the evolutionism and functionalism inherent in much institutional thought, and a neglect of the individual as knowledgeable, reflexive human being. In this context, Görg (1994: 36) argues that Giddens may not sufficiently distinguish between different variants of institutional and evolutionary thought. A detailed elaboration of this would go beyond the scope of this book. It should suffice therefore to point out that – as outlined earlier – more recent institutional thought has responded to these charges. The acknowledgment that the choices of individuals may be constrained in certain circumstances should not be confused with substituting mere reaction for action. Rather, creativity and innovation play a crucial role in accounting for processes of economic change (see Hodgson, 1994b). Social phenomena such as ‘culture’, ‘institutions’ or ‘organization’ are conceptualized here as normally ‘possessing’ collectively ‘objective’ and individually subjective characteristics at the same time. To put it differently, we are born into a world of formal and informal institutions, of collectively shared beliefs and images, and although we play an active role in processes of institutionalization, we have to deal with these structuring institutions. 2.2.4

The different faces of power

In contrast to orthodox economics and transaction cost theory, power relations play a decisive role within new ‘old’ IE (see Samuels, 1987: 865). Following from Giddens’ (1984: 9) argument that ‘agency refers not to the intentions people have in doing things but to their capability of doing those things in the first place’, any action necessarily involves power. I can wield power only in relation to others, that is, power is a relational concept and can therefore be analyzed only in processes of interaction and communication. Again, a crude methodological individualism makes little sense from this point of view. In recent years a vast body of literature has attempted to expand traditional conceptualizations of power. Although there is a multitude of different voices that speak to power, recent work on this issue distinguishes three broad conceptualizations, in fact differentiating between critical/realist and functionalist/collective notions of power, and the poststructuralist challenge to them (see Allen, 1997; Clegg, 1989; Hardy and Clegg, 1996 for an overview). The failure to include issues of power asymmetries (that is, the critical view of power) is perhaps one of the main reasons for the overemphasis on positive aspects of embeddedness in the socio–economics literature. While this book does not necessarily adopt a zero-sum notion of power, I am also sceptical of the collectivist conceptualization found in wide parts of the networking literature. Power asymmetries are deeply ingrained in economic action and allow more powerful actors to appropriate more of the benefits and socialize more of the costs vis-à-vis other agents. The Foucauldian insight that power is an all-encompassing force


(‘capillary power’) implies that dominant and weaker parts of a power relationship are both subject to forces beyond their control, tied closely together, and ultimately even locked-in to each other. This provides an interesting perspective from which to investigate power relations. On the other hand, however, the Foucauldian view is devoid of any conviction that it may be empowering to transform prevailing power relations. As Hardy and Clegg (1996: 635) argue ‘the death of the sovereign subject was accompanied by the killing of originating sources of actions: none were to inhabit the poststructural world’. A schematic overview of different approaches to power is provided in Table 2.2. It is important to recognize the difference between power resources and power, the former being media through which power is exercised by knowledgeable agents in the course of interaction (Giddens, 1984). Power is derived from these resources which have to be mobilized in the moment in which power is exercised. Normally, capital (including money, material and technology) and authority are regarded as the main sources of power (Giddens, 1984; M. Taylor, 1996). Instead of strictly separating between Table 2.2

The different faces and dimensions of power

Power over

Episodic agency concept power as opportunity to impose one’s own will on others ● concrete decisions and observable open conflicts ● collective interests = individual interests The second face of power: control and nondecisions ● power as possibility/capacity to do or not to do something ● control over social situations and actors ● covert conflicts ● prevention of certain activities or decisions ● collective interests { individual interests Networked conception of power ● power as positive sum game ● capacity of certain groups to mobilize power resources as means for certain aims ● capacity to reduce systemic complexity ● group empowerment Decentered conception of power ● disciplinary power as all-encompassing mechanism ● power moving through the hands of the powerful and powerless ● power without sovereign subject ●

Power to

Collective

Discursive

Sources: After Allen (1997), Clegg (1989), Giddens (1984), Imbusch (1998).

Hobbes Marx Weber

Bachrach/Baratz Giddens Lukes Habermas

Parsons Luhmann Arendt Giddens

Foucault


allocative and authoritative resources, however, it can be argued that both sources must be seen as mutually interdependent (Harvey, 1989: 102). Individual power depends on access to these resources, and access can in turn vary depending on the social position of an actor, in terms of class, gender or ethnicity, as well as to some extent depending on subjective, individual characteristics such as ‘charisma’. With respect to the social division of labour and interaction between organizations, the same holds insofar as individuals from these organizations interact. Here, the notion of organizational power should be clarified. By this I mean that regardless of the fact that organizations, such as firms, do of course not act, they provide individual agents with an independent source of power. Put simply, as a representative of a major international player, any member of the purchasing department of Mercedes–Benz can normally be expected to be in a powerful bargaining position vis-à-vis his or her counterpart at a small supplier firm. In addition to this, an actor’s position within an organizational hierarchy is also regarded as being an independent source of power (Sayer and Walker, 1992; M. Taylor, 1996; Walker, 1985). All these power relations are regulated by and ‘translate’ constraints stemming from wider structures, for instance, the political system or the economy. This point will be elaborated further below. From this perspective, divisions of labour are to be regarded as both an object and an outcome of struggle (Clegg, 1989: 198). Better positioned actors, for instance, are able to induce ‘interaction partners’ to engage in precisely those types of joint activities most beneficial for them. The capacity to exercise power – be it through force, authority, manipulation or persuasion – depends also crucially on whether the source of power is recognized as legitimate by those subject to it. If legitimization is questioned, this may result in resistance and counter-measures. Thus, responses to crises of legitimization of formal political and economic institutions may result in a circumvention of rules and laws, for instance by ‘going informal’, that is the reversion to informal institutional arrangements (Boyer, 1990a; Moulaert, 1996). This point will be taken up in the following section which discusses the role of power and power asymmetries in collective action in more detail. To sum up, and this is important for the empirical research constituting the base of this book, power and domination are complex, multifaceted phenomena and cannot be grasped with a methodological design which aims at quantifiability (Imbusch, 1998: 9). To do justice to the different ‘faces’ and dimensions of power, an open approach is needed. Accordingly, the approach chosen here starts from such an open position and seeks to determine the degree to which one or the other concept is more relevant in explaining and understanding processes of change and restructuring. As argued at the beginning of this chapter, the regulation school privileges structure over agency and it is because of this that regulationist


research remains curiously unclear and ambiguous if it comes down to the micro and meso level of social relations. Müller-Jentsch (1996: 45) argued that it is this weakness that makes it so difficult and problematic to apply the approach to concrete empirical research. What is missing is a more detailed and differentiated understanding of the recurring relations and the mechanisms which mediate collective and individual interests. The question is how institutions and the coordinatory mechanism which they give rise to are produced, reproduced, transformed and how they fall apart. Such an approach connects rule-driven and resource oriented notions of agency and may allow us to close the conceptual gap (Görg, 1994: 33). In the following section I will try to do this, focusing on the business firm and its principal actors.

2.3

The coordination of recurring relations

Integration of regulationist and institutionalist approaches starts with the institutional forms and the coordination of situations in which two or more persons interact. Here, stakeholders of the business firm (for instance, owners, managers, workers, suppliers or clients) have to deal with uncertainty regarding the organization and control of activities based on divided labour. It is reasonable to assume that this uncertainty will be the stronger, the greater the differences between ways of doing things, frameworks of action and perceptions of the actors involved. Institutional difference or institutional distance results in different judgements of a given problem, requiring adjustment from all interactants. In other words, institutional distance has to be ‘translated’ and negotiated by the actors involved, leaving no interaction partner unchanged (see Bauman, 1999). I would like to stress once more, therefore, that institutions cannot be reduced to their regulatory dimension. Rather, we have to include normative and cognitive aspects of institutionalized behaviour and action at the same time. Whenever decision-makers within the firm attempt to deal with uncertainty and as such to coordinate institutional distance, they give rise to specific modes of coordination. Here, recent years have ‘across the academic disciplines’ seen a growing theoretical interest in those institutional configurations. From the point of view of this book, five ideal-types stand out: market, private hierarchies, networks/communities, public hierarchies (state) and associations (see Hollingsworth and Boyer, 1997). In what follows, I discuss – after briefly introducing with market and (private) hierarchy the two classical modes of coordination – the network paradigm at greater length. This is done because of the recent prominent place of networking within the socio–economic literature. The section closes with a few words on the state and on associations. A summary of the main characteristics of the five ideal-types is given in Table 2.3.

28

Table 2.3

Ideal-type modes of coordination

Modes of coordination

Organizational structure and rules of exchange

Individual rules and norms of participation

MARKETS

●

‘hard’ economic coordination ● economic imperative of action ● free entry and exit ● bilateral exchange ● voluntary exchange at a certain moment at a certain place formal economic exchange

●

complex organizations which tend to become bureaucratic ● restricted to members ● exchange based on asymmetric power, bureaucratic rules formal non-economic exchange

●

PRIVATE HIERARCHIES (e.g. firms)

●

●

ability to pay contract stipulations

Collective rules and norms of participation ● ● ● ● ●

● ●

rewards to individuals asymmetric power relations threat of sanctions

● ● ●

norm of private property legitimacy of free market regulations to maintain a public market legal framework (e.g. freedom of contract) price mechanism through aggregate individual decisions (ex post allocation, invisible hand) highly institutionalized rules members socialized into corporate ‘culture’ use of sanctions

Table 2.3

Ideal-type modes of coordination (continued) Organizational structure and rules of exchange


NETWORKS

●

‘soft’ social coordination informal/semiformal membership (e.g. family, personal ties) ● bilateral or multilateral exchange ● voluntary exchange over a time period based on group solidarity and high degree of trust semiformal/informal non-economic exchange

●

‘hard’ political coordination public hierarchy ● de jure and imposed membership ● tendency to become bureaucratic ● unilateral action ● indirect and global political and economic exchange formal non-economic exchange

●

●

STATE (public hierarchy)

●

● ● ●

●

●

Collective rules and norms of participation

social norms, moral principles, obligations, reciprocity personal ties trust resource dependency

●

exit option (e.g. tax evasion, migration) voice option (vote, lobbying)

●

● ● ●

● ● ● ● ●

social/contractual bonds personal relations collective identity– collective control inclusion–exclusion

coercion social rules and norms legitimization of the state imagined community inclusion–exclusion legal definition of nationhood (ius solis, ius sanguinis) 29


30

Table 2.3

Ideal-type modes of coordination (continued)


Organizational structure and rules of exchange


ASSOCIATIONS

●

formal membership hierarchical organization ● multilateral exchange ● restricted to members ● opposition insider/outsider formal non-economic exchange

●

●

●

Source: Hollingsworth and Boyer (1997: 15–18) (altered).

self-interest reputation effect

Collective rules and norms of participation ● ● ●

some degree of compulsion partially private administration membership statutes


2.3.1

Markets and (private) hierarchies

Using a distinction attributed to Marx, the main difference between markets and (private) hierarchies (that is, firms) concerns the fact that the latter plan and coordinate the (technical) division of labour ex ante, while the former involve the ex post governance of the (social) division of labour. The latter concerns the division of labour (DOL) among ‘organizational units of capital’ (Walker, 1985: 174) and connects flows of goods, money and knowledge across different sectors and industries. The former applies to task specialization under the control of a single owner and is closely intertwined with a firm’s internal authority structure (see Sayer, 1995; Walker, 1985 for a more detailed account). Ideal-type markets involve ‘hard’2 coordination, that is they are driven by self-interested rational actors who engage in decentralized arm’s-length bargaining. Actors in markets are generally weakly organized, autonomous and pursue their own interests. The parties of market exchange are institutionally distant insofar as their identities do not influence the terms of exchange, the ‘only’ entry barrier being the capacity to pay (see Hollingsworth and Boyer, 1997: 7). Efficient allocation then is an (unintended) product of self-interested action (Adam Smith’s invisible hand). The explanation for the existence of (private) hierarchies, or, as Coase puts it (1937), the question why firms do exist has traditionally been explained by market inefficiencies (excessive opportunism) and the possibility of reducing transaction costs. In other words, firms allow for lower levels of costs and higher levels of productivity through administrative coordination. Private hierarchies above all coordinate the interaction between employers and employees, raising the question of the role of power, authority and sanctions (see Hollingsworth and Boyer, 1997: 8; Williamson, 1994). These issues, however, are not at the heart of transaction cost theory. Playing a crucial role for the research presented here, however, capital–labour relations will be discussed in more detail in the next section which focuses on networking. Finally, and linking up with the earlier discussion of power, both ‘hard’ coordination through markets as well as through hierarchies is most closely linked with ‘power over’ notions of power, the former mainly drawing upon allocative, the latter on authoritative resources. 2.3.2

Networks

Following the rise of economic sociology and institutional economics, the last few years have seen increasing emphasis on a further mode of coordination, namely ‘networking’, which – associated with personally mediated coordination based on mutual trust, reciprocity and information sharing – has become an increasingly dominant metaphor in academic discourse (Castells, 1996; Grabher, 1994; Scharpf, 1993). Network theorists point to the role of informal ‘non-economic’ institutions in linking individuals and


organizations together. Accordingly, economic interaction is stabilized (= institutionalized) by routines, norms, trust and personal links, and the stress is on these factors as opposed to material and economic ones (Amin and Thrift, 1995; Dicken and Thrift, 1992; Murdoch, 1995). Although network-type relations can exist independently from property relations and are thus able to coordinate both the social as well as the technical division of labour, the economic networks literature focuses mainly on inter-firm relations. This constitutes a major omission and will be taken up below. With respect to horizontal inter-firm cooperation and strategic alliances scholars have generally pointed to increasing multidirectional networking, joint ventures, multilateral business groups, equity investments and licensing agreements during the 1980s (Castells, 1996, Ch.3; Grabher, 1993b; Sayer and Walker, 1992). Two aspects can be identified where the network approach has considerably widened our understanding. First, the growing attention paid to networks has considerably ‘flexibilized’ and broadened the rigid markethierarchy dualism. This permits a more open view of what constitutes a firm, for instance, allowing the inclusion of different legally defined business enterprises (Granovetter, 1994; Marginson, 1994). In general, loose and weak ties are regarded as being better able to prevent interaction from getting locked-in to rigid paths and as providing a better basis for adaptation. To put it differently, networking assumes a middle ground between the almost costless substitution of one partner for the other as associated with ideal market competition and the near non-substitutability in hierarchical relations (Grabher, 1994). Second, and inter-relatedly, the stress on close interaction and cooperation between firms and other organizations is particularly relevant in the context of dynamic technological change. Organization theorists have suggested that in the wake of increasing technological complexity and a more finely articulated social division of labour, close interaction between users and producers or buyers and sellers is crucial for innovation. Innovation or learning in these accounts is regarded as a process of interaction which has technical, communicative and social dimensions (Dosi, 1988a; Gertler, 1993, 1995; Lundvall, 1992a, 1993; Teece, 1988). Product and process innovation need considerable inputs – traded and untraded – from other parts of the social division of labour. Here, Lundvall (1992a) made the important observation that organized markets or networking reduce what he called ‘organizational distance’3 between interactants, thus providing the conditions for learning by interacting. In sum, the network approach has much to offer, and it is no surprise that networking has played a powerful role in the social sciences during the last few years. This positive influence notwithstanding, there has been considerable criticism of parts of the networking literature. Again, two aspects stand out: the ‘relation’ to other modes of coordination and the role of power in networks.


The confusion between ideal and real modes of coordination As I read some of the contributions of the networking literature, it is not always clear if what is referred to are heuristic ideal-types or real modes of coordination. Powell and Smith-Doerr (1994: 370, my emphasis; see also Powell, 1990), for instance, argue that ‘trust, mutual forbearance, and reputation may supplement and/or replace the price mechanism or administrative fiat’. Yet, critics like Sayer (1995) argue rightly that networks usually supplement rather than displace market exchange and that despite the rootedness in personal networks ex post market coordination continues to play an important role. If one looks at real production systems, a rigid distinction between modes of coordination makes little sense. Rather, they are part of complex configurations in which networks, markets, hierarchies and so on are deeply intertwined and linked with each other. The best example in this context is market exchange. Real markets are complex social institutions, where exchange is regulated by prices (codified formal norms), contract stipulations (specific formal institutions), legal systems (general formal institutions) and personal relations (informal institutions) (see Hodgson, 1988, Ch.8; Sayer and Walker, 1992). ‘Hard’ regulation through prices is necessarily dependent on opinions and views regarding the adequate price of the good in question. And these opinions are always socially and culturally constructed. With a view to inter-firm relations Hollingsworth et al. (1994: 8, my emphasis) illustrate this complexity as follows: For example, in managing relations with their suppliers, manufacturing firms may try to ensure stable and reliable provision at sufficient quality and acceptable prices through ‘hard contracting’ mechanisms of market relations, through vertical integration in corporate hierarchies, through authoritative regulation by state agencies, through ‘soft contracting’ based on informal network relations, through long-term agreements with supplier associations, or through any combination of these. In real production systems markets and hierarchies therefore ‘function coherently because of … ‘imperfections’ (Hodgson, 1988: 191, author’s emphasis). Here, personal networks have to be regarded as additional contextual structures supplementing but not replacing the market exchange logic, with competition and cooperation coexisting at any time (Sayer and Walker, 1992; Simmel, 1903; Swedberg, 1994). This raises the question of how to deal with this in empirical investigation. Here, I would like to make three statements which informed the research reported in this book. First, what is undoubtedly possible is a shift of the importance of individual elements within a given configuration. Take, for instance, the process of marketization and disembedding which implies a relative increase in importance of those elements associated with


the ideal market.4 Second, there is nothing wrong in analytically separating different modes of coordination, provided this is made sufficiently clear and there are efforts in the end to (re)connect what has been separated. I will follow this approach, analytically distinguishing between ideal-type markets, networks, hierarchies and so on, always keeping in mind that in reality we are confronted with overlapping and contested ‘boundaries’. Third, I am not interested in analyzing static configurations. To repeat, what interests me is how coordination configurations change, that is how underlying institutions get produced, reproduced, transformed or how they fall apart. Power and power asymmetries in networks The second criticism, and here a more detailed discussion is necessary, concerns a one-sided view of power in much of the work associated with the network approach. This refers to the stress on positive-sum and on collectivist notions of power. Much of the work stressing the role of networks of reciprocal trust relations in facilitating cooperation both between firms and between capital and labour has, however, little to say about situations where these informal incentives may not be sufficient and where networking requires authority in order to work. Hierarchies and the exercise of power may, however, be needed to enforce trust (Cox and Wood, 1997; Portes and Sensenbrenner, 1993). Moulaert (1996) has argued that the discussion of the ‘network firm’ cannot be conducted exclusively in terms of economic functionality (for example, claims that cooperation in networks is always more ‘efficient’ than markets or hierarchies), but should include a political dimension as well. Networks can in themselves be structured in an extremely hierarchical way, divisions of knowledge and unequal access to information being at least as common as the pooling of resources depicted in the network literature, an aspect which mitigates against mutually beneficial self-regulation (Giddens, 1984; Hayek, 1937; Sayer 1995).5 As mentioned earlier, while the networking literature has discussed unequal power relations with regard to vertical inter-firm relations, that is user–producer and buyer–supplier interaction, it has been less outspoken with regard to capital–labour relations. Here, two trends have provoked discussion and controversy with work conducted from a political–economic perspective. First, a blurring of boundaries between previously more rigidly demarcated tasks has been observed within many enterprises. This is linked to attempts to integrate the workers concerned into the firm to such a point that they identify their interests with those of the enterprise (Grahl, 1994). The central argument here concerns a declining importance of class differences and growing incentives on the part of both capital and labour to work together in a context of flatter intra-firm hierarchies and competition from other firms. Related to this is a growing emphasis on cooperative relations and ‘human capital’, with considerable training and skilling


efforts and a stress on functional rather than numerical, or qualitative rather than quantitative flexibility (Peck, 1996; Sadler, 1992; Scott, 1988; Tomaney, 1994). However, critics argue that because of the coexistence of different processes the changes are extremely difficult to interpret. Functional coexists with numerical flexibility, external with internal, collective and cooperative trends contrast with individualization and coercion, and stable relations exist alongside increasing job insecurity (Boyer, 1993; Hudson, 1989; Peck 1996; Sadler, 1992). Integrating regulationist thought, newer developments in institutionalism and labour segmentation approaches and taking up the distinction between ‘defensive’ and ‘offensive flexibility’, Peck (1996) has pointed to the difference between ‘low-’ and ‘high-road’ strategies. Relations may be more cooperative with regard to core labour, where significant investment in training and skilling makes it imperative to include workers. Measures to achieve this aim at the establishment of trust and loyalty, and may range from the institutionalization of what is called the internal labour ‘market’, to the introduction of team work, the co-ownership of the means of production (for example employee stock ownership plans), and the establishment of institutions which give workers a share in the decision-making process. Relations with more peripheral parts of the workforce, on the other hand, may be more authoritarian and hierarchical, accompanied by job insecurity and rigid specialization, and result in the fragmentation of the workforce (Block, 1990; Hakim, 1990; Peck, 1996). The second and inter-related trend concerns the discussion of skills and learning. With regard to the effects of the organization of production on the skill levels of employees, the general validity of the ‘deskilling’ thesis (Braverman, 1974) has for a long time been disputed. While some occupations may indeed be deskilled in the labour process, and these may often be found within the labour periphery, others may be upgraded. Yet, deskilling and reskilling effects may work side by side and may result in an overall contradictory pattern (Block, 1990; Burawoy, 1985). This can be illustrated with regard to the introduction of new technology in the production process, such as the implementation of computerized machinery. The precise impact, that is de- or re-skilling, of such technology, is open and depends on additional factors, for instance, an accompanying change in the whole firm’s organization (Duimering et al., 1993; Morgan and Sayer, 1983; Schamp, 1995). And while flexible production technology may have functional flexibility and cooperative work forms as an important prerequisite, it may at the same time result in a re-hierarchization process associated with the centralization of information and control (Sayer, 1985). Again, a closer look at power relations and power asymmetries and what Peck (1996: 134) refers to as ‘the imperatives of labour control’ allows a more differentiated account. Coercion does not stop at the fact that the potential worker must sign on with an employer, but includes submission


to the authority of the employer once a contract is signed (Block, 1990; Harvey, 1982). Power asymmetries stem from an agent’s social position within a firm hierarchy. Importantly, however, labour is not without power itself and both sides may have an interest in collaborative relations. As Harvey (1982: 35) argued ‘the relation between capital and labour is both symbiotic and contradictory’. Thus, employees may have some degree of autonomy and what Block (1990: 82) called ‘cooperative impulse’, in other words, a desire to engage cooperatively with other employees and with management to complete work tasks. Hodgson (1988), taking up Marx’s distinction between labour and labour power and an argument made by Akerlof (1982), argues that many labour contracts consist in part of a gift relationship. The reciprocal nature of this gift is reflected in socially determined traditions and norms (for instance, ‘a fair day’s work’ or ‘the appropriate level of pay’) and in reciprocal ties of allegiance between workers and the management of the firm. Conflicts may arise whenever these institutionalized norms and traditions, or ‘implicit contracts’, are violated. To repeat, the crucial point is the acknowledgement that labour is not passive and powerless in this process. In sum, depending on their position within hierarchically structured networks, actors have different degrees of scope for strategic action. As Moulaert (1996: 167) argues, what matters is therefore ‘[the] hierarchy in markets and alliances and the markets in hierarchies and alliances’. Cooperation and discipline, cooperation and competition are in these accounts seen as being always present in capital–labour and inter-firm relations. Given the general lack of empirically grounded research on this matter an empirical investigation focusing on this contradictory unity and on a conceptualization of power as outlined above may help to improve our understanding of the tensions and conflicts arising as a consequence of restructuring. Inter-firm cooperation and networking may, for instance, increase intra-firm pressure and coercion, as the private appropriation of the gains associated with socialization of costs and the pooling of resources may allow reductions in employment and production costs more generally (Swyngedouw, 1992a). Cooperative strategies on the part of employers can be seen as a means of increasing productivity, aiming at the appropriation of the surplus resulting from it. The question of whether and how powerful actors are able to ‘get’ other actors to act collectively and to appropriate the benefits of social collaboration therefore remains an important one for empirical investigation. 2.3.3

State

A fourth and classical mode of coordination is the state. Although the relationship between the state and the economy is not the focus of this book, there is nevertheless a need to clarify the position as regards the situation within the German social economy. In the literature, the state is in addi-


tion to being an economic actor itself seen as the ultimate enforcer of rules and norms. As such the state clearly differs from the coordination mechanisms discussed so far. For rather than being the result of individual actions in response to uncertainty and problems of coordination, the state creates the conditions for economic activities, that is, the state maximizes the possibility of attaining a general common good for those who participate as members. Accordingly, the state’s legitimization crucially depends on its ability to enforce and sanction collective and individual action (see Hollingsworth and Boyer, 1997; Storper and Salais, 1997: 208). Recent years have seen a discussion similar to the one around private hierarchies and the market. Again, there is a tendency in the literature to posit a network conception of the state as an alternative to classical conceptualizations which oscillate between the absent ‘night watchman state’ of classical liberalism and a strong, external state understood as the embodiment of popular will and as such standing above the economy (see Block, 1994; Storper and Salais, 1997, Ch.10). Advocates of the ‘network state’ portray informal institutions and self-regulation as a third, and more democratic and progressive, way than market or state regulation (Amin, 1996; Christopherson, 1993; Martin and Sunley, 1997). From the point of view of the research presented in this book, there is no doubt that we have in recent years witnessed a profound change in the position and the role of the nation-state. In particular, this concerns the spatiality of the territorialized compromise between civil society, polity and economy. This will be taken up in Chapter 3. Here, I would like to argue that just as with the earlier discussion of networking as a mode of coordination alternative to firms and markets, we have to be cautious about mixing up ideal-types and real state forms. First of all, I think it is fair to say that the often ideologically framed opposition between private and public interests, which underlies confrontations between ideal state forms, is predominantly an Anglo–American phenomenon (see Christopherson, 1993). In Germany, for instance, differences between public and private interests have always been drawn less sharply. There is reason to argue that the (real) state form characteristic for the German Model has always been a mixture between the external and the network state, giving rise to what is referred to as the ‘enabling state’ in the literature. With a view to the situation in Germany three features of the enabling state stand out. The first relates to the establishment of general rules of the game by the state, or what in Germany is known as Wirtschaftssystem and Wirtschaftsordnung (economic system and economic order), and their relation to the political system and society as a whole. Rather than being the obstacle portrayed in the neoclassical/neoliberal rhetoric, the state provides the necessary regulatory context in which markets operate and is thus crucial for the functioning of markets (Hodgson, 1988; Martin and Sunley, 1997). Markets are always regulated and, what is more, ‘markets and state


do not just interact, they are crucially implicated in each others’ production and reproduction’ (P. J. Taylor, 1996: 1926). Second, by providing the regulatory context for economic decisions and interaction the state exerts a particular significant influence in coordinating recurring relations (see Block, 1994). Among these are those between employers and employees and those between organizations, for instance between buying and selling firms. It is this influence which is regarded as the reason behind stronger and more cooperative inter-firm and capital–labour relations and distinct industrial and economic cultures in Japan, Germany or Scandinavian countries (see, for example, Amin, 1996; Leborgne and Lipietz, 1988). Overall, the relationship between the state, individual actors and organizations in Germany is a complex one, involving both a degree of autonomy and a degree of mutual interdependence. Third, and finally, a classical case of market failure and therefore a justification for state intervention concerns innovation and technological change. The state is regarded in the literature as providing and structuring the institutional context in which innovation and interactive learning take place. Some even view the state and the public sector as driving forces behind technological change (see Gregersen, 1992). In Germany this includes direct and indirect state influence. With respect to the former, government laboratories play an important part in promoting technological advance and supporting industry (as for example through the Max Planck Institutes and Fraunhofer Laboratories). On the other hand, the nature of a country’s system of schooling, training and higher education, the financial system, the wage bargaining and negotiation mechanism, and thus the overlap with other state–economy intersections, contribute to what various scholars have called ‘national innovation systems’ (see Lundvall, 1992b; Nelson and Rosenberg, 1993). Here, a note of caution is appropriate. This concerns the degree to which one can still speak of distinct national innovation systems in a period of increasing international integration of technology and economic activities, linking up with the discussion in Chapter 3 of the changing territoriality of the nation-state. 2.3.4

Associations

Finally, with associations I briefly mention an additional mode of coordination. These concern multilateral coordination of actors which typically engage in the same or similar kind of activities. Although associations share many characteristics with networks, they differ from them insofar as associations are formally regulated and more hierarchical organizations. In Germany in particular, associations perform an important intermediary role between individual interest (for instance, the business firm) and group interest, additionally linking individual/organizational actors with the state. Good examples are labour unions and business associations (see Jessop, 1994b; Martin et al., 1996; Peck, 1996: 138). An additional function


of associations – traditional ones such as unions, employers’ associations or chambers of commerce as well as ‘softer’ and less bureaucratic, networktype ones – is their coordinatory role in periods when individual firms attempt to restructure the production and consumption environment in order to enhance their individual competitiveness (Fürst, 1994).

2.4 Conclusion: a contextual framework for empirical enquiry The question now is how to connect the arguments presented so far and to utilize the insights from the theoretical discussion for concrete empirical work. In what follows I would like to propose a heuristic framework which accounts for the complex ways in which institutions ‘work’, in particular how the relations between individual and collective actors can be linked across different levels of social interaction, that is, the micro, meso and macro level (see Figure 2.1). The ‘vertical’ dimension includes the question of how to connect more specific, relational institutional forms and those which have a wider reach. Following Layder (1981, 1997) I will conceptually distinguish between more formal contextual structures and what he called ‘interaction structures’. These structures or institutions give rise to three levels of contexts, forming a ‘hierarchy’ of overlapping settings (see also Boyer, 1990a: 44). At the top of this hierarchy is the systemic context that is institutions of the widest generality. These can be regarded as ‘external’ to individuals in the sense that they are products of complex social processes over which the individual has little or no control. From the point of view of the stakeholders of the business firm we talk about institutions with the widest possible reach, for instance political–economic entities such as the state and the economic order, but also about socio–cultural aspects such as collectively shared values and collective identities (for instance, what Anderson, 1983, has termed ‘imagined communities’) or a common language. Let me stress here that ‘external’ and ‘pre-given’ should not be understood as if these institutions have a reality of their own, existing independently from the activities of reflexive human beings. Rather, and following from the discussion of institutions, what we have here are forces and structures which can be conceptualized as actions ‘coagulated’ through time (Berg and Fuchs, 1995: 53) which cannot be influenced immediately. The second level is occupied by institutions which are confined to a limited set of actors and organizations and are realized in direct and personal interaction. The interaction context constitutes the focus of the research presented in the following chapters. Among these are particular forms of intra-firm organization and of dealing with ‘outsiders’, in other words, the rules and norms institutionalized in order to coordinate uncer-

40 Corporate Germany Figure 2.1

A ‘hierarchy’ of interdependent contextual settings

Systemic Context • •

political–economic entities and their institutions (state form, economic order/system, etc.) socio–cultural aspects (collective values, common language)

Reproduction

Transformation

Interaction Context • •

specific organizational institutions rules and norms institutionalized to coordinate uncertainty in direct interaction

Concrete Interaction •

Transformation

Reproduction

e.g. corporate cultures as institutionalized system of material practices (technology and organization of production), social relations, knowledge and ways of thinking

concrete situations of interaction and communication between individuals e.g. intra-firm: daily interaction between workers and employers e.g. inter-firm: daily interaction between managers/owners of different firms

tainty in direct interaction. This is the realm of specific configurations of coordination modes with their particular institutions. Systemic and interaction contexts are related via what Layder (1981: 98) called ‘the mediation of constraint’. With respect to the firm, for instance, the context of firm-specific capital–labour relations is constrained by the


political and economic context in which it is situated, such as the type of markets for its products or the way the labour market is regulated. The ‘lowest’ level is made up by concrete interaction between individual actors. Here, Layder highlights a core property of all interactions, namely the ability to develop their own situation-specific features. These features are ultimately dependent upon contextual ones: they refer to ‘interpreted’ versions of these contextual features. Through the processes of interpretation (of meanings, rules, definitions, etc.) interactants are able to construct working definitions of the situation which allow action to go forward in both a facilitative and constraining way. (1981: 102, my emphasis) In other words Layder, referring to Giddens, puts emphasis on ‘the active subject’ while at the same time acknowledging the contextual constraints and boundedness of human agency. This conceptualization of action therefore avoids both undersocialized and oversocialized notions of the economy (see Granovetter, 1985). What is important is that the three contextual dimensions (systemic structures, interaction structures and situation-specific features) are realized in the interaction process, that is, systemic and interaction contexts give rise to action, but are at the same time produced, reproduced and transformed by agents. Strategically acting agents can anticipate the impact of their actions on others to a certain extent and are as such not totally conditioned by ‘external’ forces. For the most part, however, reproduction and transformation of wider contextual structures is the unconscious effect of conscious activity, that is, interactants are ‘actively passive’ (Thrift, 1983: 38). This links up with an important point, namely the role of power within this framework. The view of power adopted here follows from the arguments developed so far, namely that the capabilities of agents and groups of agents to enact decisions cannot be separated from the differences built and institutionalized in wider structural contexts. In Layder’s terminology contextual structures are pre-constituted power structures, mediating and transmitting constraints, facilities, rules and resources that actors draw upon. Thus, the unequal distribution of the means of production under capitalism (class differences in the narrow sense) provides individuals with different power resources, making power asymmetries a common feature in social structures and translating through to asymmetries in social interaction (see Harvey, 1993; Schoenberger, 1994). This is however neither to say that class position is the only source of power nor that individuals are, as mere bearers of these differences, automatically and always exercising power, or that power is always associated with conflict. The main question for this book concerns the utility and applicability of this heuristic framework in relation to empirical work and thus


identification of the levels of institutions and structures which matter most for an investigation of business strategies. The emphasis of this book is on changing interaction structures, both between capital and labour, and between organizations. To start at the ‘lowest’ level, firms are made up of agents (owners, managers, workers) who interact with each other, giving rise to specific institutionalized routines and habits which contribute to what could be called a specific organizational culture. A firm’s corporate culture(s) constitute(s) an institutionalized system of material practices (for instance, technology and organization of production), social relations, knowledge and ways of thinking, which in line with what has been said earlier may be resistant to change but at the same time is also never static and achieved (see Schoenberger, 1997, Ch.5). At the next level, the firm interacts with other organizations – to be more precise, agents in different organizational entities relate with each other. At this level, different ‘sites of interaction’ come together, resulting in a collision of organizational cultures.6 In addition to the organization of intra-firm relations, this confronts decision-makers with further coordination problems. These coordination or organizational problems are assumed to be the greater, the further apart, or the more ‘distant’ these institutional frameworks are. At the ‘highest’ level is the systemic context, providing the structural setting in which strategic actions are rooted and which determine the scope for strategic action and a firm’s development path. To repeat, these levels cannot be separated in a strict sense. The systemic context, for instance, is present and has constraining and facilitating effects on interaction contexts as well as on concrete individual interaction. On the other hand, these structures are reproduced or transformed by these actions.

3 Scaling Business Strategies: Globalization, Place Dependence and Institutional Distance

A banal sense of space location creates the illusion of the coincidence of political space with economic and human space. More precisely, we go on depicting to ourselves the relations between different nations as consisting exclusively in men [sic] and things in one space, conceiving them as material objects contained in a container. (Perroux, 1950: 90, author’s emphasis)

3.1

Introduction

Both in regulation theory and in institutional economics spatial differentiation and its complex relationship to processes of globalization does not count among the key aspects of theorization. Within the latter, time and evolution clearly dominate the agenda. Only Hodgson (1996) has in recent years discussed the spatiality of social relations. Regulationists traditionally focus on historical change (fordism, post-fordism), and confine spatial differences to nationally territorial couplings of accumulation regimes and modes of regulation. It has been geographers, in particular Adam Tickell and Jamie Peck, who have argued that nationally hegemonic modes of regulation may be mediated by subnational scales (see for instance, Peck and Tickell, 1994; Tickell and Peck, 1992; and also Peet, 1998: 136–7). In what follows I will argue that any attempt to explain the fortunes of regional production systems has to take this ‘scaled’ nature of regulation seriously. Having dominated academic discourse throughout much of the 1990s, ‘globalization’ continues to be an ambiguous and multidimensional concept, a concept which is deeply contested. Conflicts about the meaning and consequences of globalization by way of simplification fall into two extreme camps. On the one hand, there is a neoliberal logic which celebrates globalization and presumes the process to be inherently beneficial. The different aspects of globalization are in this rhetoric viewed as having to be strengthened and promoted in order to at last fully realize the promise of modernity (Scholte, 1996). From this perspective, national and regional 43


economies and societies are believed as having no other choice than to adapt to the new global economy, a process which would ultimately result in perfect mobility of the factors of production and thus in a homogenization of differences and in deterritorialization. The neoliberal globalization rhetoric therefore is designed and employed to demand the abolition and destruction of barriers against mobility. The conservative logic, on the other hand, tends to underestimate and play down the significance of globalization, proponents often arguing that globalization is nothing new and that international economic integration has occurred since the early days of capitalism. More importantly, the ‘conservative’ globalization logic also includes attempts to resist deterritorialization processes by invoking the revival of regional or national traditions and specificity. This includes efforts by government authorities or other actors to prevent national or regional economies from disintegrating into a deterritorialized ‘space of flows’ by adopting measures and policies with which to protect regional or national systems of production. Both logics have to be seen as extreme positions and have been subject to extensive criticism in the geographical literature, above all with respect to their treatment of place and space (that is, spatial fetishism vs total neglect of spatial differentiation). However, this has not prevented these interpretations from acquiring prominent positions within the political decision-making process, the current situation in Germany being a particularly striking example. This book seeks to go beyond these ultimately fruitless discussions, adopting a more balanced view which avoids both extreme positions. Before turning to the ‘problem’ crucial for the purpose of this book, namely the place of the region in an increasingly globalized world, let me briefly summarize those aspects of globalization which can be regarded as common ground across the disciplines. It is generally agreed within the academic literature that globalization includes more than can be depicted in narrow, economistic terms, cultural, political and social processes playing an equally important role. Moreover, participants in the ‘globalization debate’ broadly agree that although the processes associated with globalization have been occurring for a considerable time, there has been a qualitative intensification during the last two decades (see Altvater and Mahnkopf, 1997; Amin and Thrift, 1995; Noller et al., 1994; Perraton et al., 1997; Petrella, 1996). Following from this, four aspects over which there is broad consensus can be identified. The first concerns the internal connectedness of the processes at work. Compartmentalization of globalization should not obscure the fact that the different aspects, such as globalization of financial markets, the transnationalization of technology or globalization of modes of life and consumption patterns are closely inter-related. Second, commentators seem willing to agree that there is a link between a changing role of national economies and societies and globalization, whether it is the

Place Dependence and Institutional Distance 45

decline of fiscal and monetary sovereignty in the wake of financial integration or the national implications of corporate internationalization. The nation-state appears to have become a vulnerable scale of social organization (Komlosy, 1995; Smith, 1993). Some observers even go further and identify an additional erosion of the national scale downwards to the local and regional level, as at the same time more attention is being paid to local and regional responses and restructuring processes. As a consequence, a process of ‘hollowing-out’ or ‘glocalization’ of the nation-state is depicted (Jessop, 1994b; Swyngedouw, 1992b). Rather than declaring the nationstate obsolete, however, both authors identify a relative loss of importance during recent years. It should be made clear that to accept this view as a general trend is not to imply that this is an automatic and symmetrical process. Rather, the state changes its territoriality, losing importance in crucial areas, but at the same time reasserting its power in others (for instance, immigration policies). Third and relatedly, the ‘dialectic’ between the global and the local has changed as a result of these processes. Giddens (1994: 57) has argued that ‘few people anywhere in the world can any longer be unaware of the fact that their local activities are influenced and sometimes even determined by remote events or agencies’ and that globalization is an ‘in here’ matter rather than an ‘out there’ phenomenon far removed from the concerns of everyday life (1994: 95). For Giddens and for others globalization is associated with ‘action at distance’ (1994: 96), an expansion of the organizational space of consumption and production. Finally, and this insight is shared by geographers and non-geographers alike, globalization does not imply ‘the end of geography’ and a one-way homogenization across space, as some observers seem to believe (see, for instance, O’Brien, 1992; Ohmae, 1995). 1 Rather, it has profound implications with respect to the position of localities within the changing global economy and for the role of other spatial scales, such as the nation-state or the region (Cox, 1993; Hudson, 1996). After discussing alternative views regarding the future of the region in an increasingly globalized world (Section 3.2), this chapter introduces the conceptual building blocks underpinning the empirical research which is at the heart of this book. This includes the notions of organizational space, the scale hierarchy, place dependence and the relation between spatial and institutional distance/proximity (Section 3.3).

3.2 The region in a globalized world: discourses of distance and proximity The question of the extent to which places can actively influence their position within the changing global economy has for a long time been a matter of considerable dispute in the geographic and regional studies litera-


ture. Again, two perspectives may be distinguished: on the one hand, there is a political–economic view which I will term ‘discourse of distance’, depicting a dependence on structural forces and maintaining that globalizing tendencies are shaping the contemporary space economy, particularly through the investment and locational behaviour of multinational firms. Proponents of this view stress the crucial role of capitalism as the underlying force of the changes currently under way. In this view, spatial extension of economic activities has been made possible through a rapid acceleration of social and economic processes, referred to as ‘time–space compression’ (Harvey, 1989). With respect to production this is, for instance, associated with an ever-shortening period between research and innovation, between innovation and its transformation into marketable products and between the beginning and the end of a product’s life cycle. Scholars such as Harvey and Swyngedouw, for instance, argue that processes of globalization cannot solely be attributed to improvements in transport and communication alone, rather they insist that ‘globalization’ is a logical result of the accumulation imperative in capitalism. This led Smith (1993: 111) to argue that ‘with the capitalist mode of production, the global is primarily a construct of the circulation of capital’. In this context, companies have increased their power to coordinate and organize increasingly far-flung and complex labour systems (Sayer and Walker, 1992: 151). The question of organizational power and the capacity to control interaction in space is a crucial one and will be taken up below. It would be wrong to equate this position with the neoliberal ‘end-ofgeography’ thesis. As Harvey (1989: 295–6) has argued, ‘the less important the spatial barriers, the greater the sensitivity of capital to the variations of place within space, and the greater the incentive for places to be differentiated in ways attractive to capital’. However, this is a discourse of distance in so far as it privileges capitalism, and as such iron economic laws over specificity, tradition and individuality. Or to put it differently: the emphasis ultimately is on the ‘disembedding’ of social relations and on deterritorialization. It is precisely this thinning out of place and space which proponents of the other, ideal-type, camp take issue with. This perspective my be termed ‘discourse of proximity’, a socio–cultural view on the spatiality of globalization which can be linked with the ‘new regional geography’ which came to prominence in the early 1980s and which – responding to the conceptual exhaustion of structural Marxist geography – linked new developments within social theory (above all structuration theory) with geography. While there is little use to repeat the well rehearsed debates of the 1980s (for nongeographers interested in this debate, Peet, 1998, provides an excellent summary; see also the contributions to the section ‘Reconsidering social theory: a debate’, in Society and Space, for instance, Harvey, 1987), it is nevertheless important in my view to make these connections visible, given


that it is to a large extent the same protagonists who are dominating the discussion today. The proximity or regionalist camp is an inter-disciplinary project which draws on institutionalist and evolutionary insights and connects these with an interest in the region as ‘actor’ in an increasingly globalized world. This holds in particular for the extensive literature on industrial districts, regional mileux or learning regions (see for instance Amin and Thrift, 1995; Morgan, 1997; Pratt, 1997; Sternberg, 1995; Storper, 1997a). With a view to the ideal-type coordination modes discussed in Chapter 2, regionalists focus on modes of coordination which depend on personalized trust and socio–cultural ties, that is on what I termed ‘institutional proximity’. This holds above all for networking. Crucially, following from and extending the agglomeration literature it is assumed that institutional proximity is linked to geographical proximity, the capacity to learn and decentralized institutional coordination being regarded as territorialized relational assets which determine success and failure as regions attempt to position themselves in a globalized world (see Amin and Thrift, 1995; Storper, 1997a). Proponents of and enthusiasts for a ‘resurgence’ or ‘re-emergence’ of regional economies (Sabel, 1989; Storper, 1995a) therefore argue that regional economies have been able successfully to position themselves within the after-fordist global spatial order. Drawing from the economic success of regions as diverse as the Third Italy, Baden-Württemberg or Silicon Valley, they insist that regions are able to learn endogenously and to adjust to the changing economic environment. This literature has greatly advanced our understanding of what Thrift (1994: 213) has called the ‘messiness of local spatial variation’. However, there are a number of weaknesses which are particularly important if one deals with those regions which are not at the forefront of innovation and learning, such as the Ruhr Area. In so far as these concern the conceptualization of networking as the underlying mode of coordination, this has already been discussed in Chapter 2. Here, I would like to focus on the relationship between social processes and space. The first issue concerns my feeling that underlying this discourse is a wider argument which depicts the region as increasingly becoming the basic unit of economic, cultural and political organization, regional success being frequently explained with certain collective traits, that is with specific regional cultures. Let me illustrate this on the example of Amin and Thrift’s (1995) notion of institutional thickness. Four aspects are identified as contributing to institutional thickness and thus for regional success in a globalizing economy: First, the widespread presence of (formal) organizations of different kinds. These include firms, local chambers of commerce, local authorities, development agencies, innovation centres, unions and so on. Second, a high level of interaction amongst the actors in the local area, with high levels of contact, cooperation and information exchange. Third,


the development, as a result of these high levels of interaction, of sharply defined structures of domination and/or patterns of coalition resulting in the collective representation of what are normally sectional and individual interests. Finally, the development among participants in the set of institutions of a mutual awareness that they are involved in a common enterprise (1995: 102). With a view to successful empirical examples it is arguably the already mentioned success stories, the Silicon Valleys or Third Italies, which may be regarded as coming close to what Amin and Thrift have in mind. Close regional horizontal linkages between firms (mostly small ones) and public and private organizations have been at the centre of work on ‘milieux innovateurs’, technopoles, industrial districts and on flexible specialization more generally (see for example, Aydalot and Keeble, 1988; Brusco, 1986; Castells, 1994; Hirst and Zeitlin, 1992; Piore and Sabel, 1984; Scott, 1993). Given the emphasis on information sharing, high levels of interaction and mutual understanding, the concept of institutional thickness is therefore again firmly rooted within the network paradigm. Yet, while it is one thing to argue that the institutions arising out of frequent and repeated personal interaction may become territorialized and as such may give rise to systems of innovation which are capable of territorial integration, it is quite a different thing to talk about collective regional identities and cultures and explain success and failure by this. This is for two reasons: on the one hand it neglects issues of power asymmetry and hegemony. On the other hand, although it is by no means to imply that Amin and Thrift share such a crude conceptualization of space, it could be easily misunderstood as ‘trait geography’ (Appadurai et al., 1997) where a region or any other territorial entity is defined as a container filled by actors and things, rather than a complex space constructed socially and discursively. This may be responsible for the often tautological reasoning in the regionalist literature, where regional success or failure is often seen as a direct outcome of the existence or lack of relational assets or untraded inter-dependencies (see also Perrons, 1997). After all, if we take seriously notions of globalization which see us as living a complex web of distant and proximate relations, relations that we increasingly experience differently from one another, this makes little sense (see Werlen, 1997). The second issue regarding the relation between space and social– economic processes in the regionalist literature concerns an overemphasis on regional success stories and production systems such as Silicon Valley or the Third Italy, which according to the sceptics cannot be regarded as generalizable models for capitalist commodity production (Moulaert, 1996; Tickell and Peck, 1992). Although the success of the new production districts is not denied in these accounts, the emphasis is put on the ‘time–space contingencies’ of regional development, that is, successful regions and localities may profit from a favourable mix of endogenous and


exogenous conditions at a particular moment of time. Saxenian’s (1994) account of the divergent development of Silicon Valley and Route 128 (Boston), the varying fortunes of both ‘high-tech’ regions during the last few decades and the role of different local cultures of innovation and organization, aptly illustrate how regional industrial systems are created, reproduced and may at a certain moment disappear from the global stage. Work on Baden-Württemberg, a much-cited ideal case for cooperation between small and large firms as well as public and private institutions, supports the view that even under favourable circumstances, increasing global competition jeopardizes regional trajectories of economic development (Cooke and Morgan, 1993; Grotz and Braun, 1994; see also the collection of papers in Braczyk and Schienstock, 1996). Overall, both sets of discourse make valuable points but in their emphasis on distance and proximity, respectively, exaggerate one spatial consequence of ongoing restructuring at the expense of the other. One side accentuates the disembedding and deterritorializing effect of globalization, the other the ability of regions and localities to territorialize or ‘hold down’ global flows, as Amin and Thrift (1994: 10) put it. This is unsatisfactory from the point of view of an investigation which focuses with the Ruhr Area on a region which many observers group amongst the losers and whose actors struggle about how to redefine it. Globalization should perhaps better be conceptualized as a paradoxical process, a paradox in the sense that ‘two adversary propositions equally strongly resist refutation and so can be only accepted jointly or jointly rejected’ (Ricoeur cited in Bauman, 1999: xv). The disembedding and deterritorializing consequences of globalization are held in check by counter-forces which are rooted in territory at different spatial scales (for instance, the nation-state, persisting inter-state alliances, regional or local cultural traditions) (Cox, 1997; Storper, 1997b). Although place-bound knowledge, institutions and traditions are undermined and disembedded, place at the same time continues to play an important role. Acknowledging the advances made in the regionalist literature, the research presented in this book therefore starts from a pragmatic contextual perspective to the region. Confronted with phenomena such as globalization and the emergence of new economic spaces, traditional regional economics has been challenged in recent years. Previously being fundamentally concerned with prices and quantities (the orthodox paradigm), scholars have argued for a ‘heterodox’ approach, involving what Storper (1997a) called a new ‘holy trinity’ by which heterogeneous labour and capital are analyzed: technologies–organizations–territories. While acknowledging that it has identified the right analytical categories, Storper criticized regional economics for continuing to use the metaphor of economic systems as machines, with hard inputs and outputs. ‘The focus on mechanics of economic development must now be complemented by


another focus,’ Storper (1997b: 3, author’s emphasis) argued, ‘where the guiding metaphor is the economy as relations, the economic process as conversation and coordination, the subjects of the process not as factors but as reflexive human actors, both individual and collective, and the nature of economic accumulation as not only material, but as relational assets.’ In other words, the economy is seen as a complex set of relations or networks coordinated by institutions and conventions, a view linking to the literature on embeddedness and networking in the previous chapter (see also Storper and Salais, 1997). The keys for understanding the economy as relations are non-codified, tacit knowledge (that is, the sphere of technology), ‘untraded interdependencies’ and conventional–relational linkages (that is, the sphere of organizations, such as firms). Again, this links to the discussion in Chapter 2, in that conventions, ‘ways of doing things’, or institutions play a central role. The remaining question now concerns the ‘place’ of territory in all this, or how organizational and technological worlds get territorialized and make regions. In Storper’s account, the region is conceptualized as a nexus of untraded interdependencies, regional specific rules and conventions which have a profound impact on how production systems learn and develop. These untraded interdependencies are geographically constrained and territorialized, have been constructed historically and have important implications for the capacity for innovation. As a consequence, and this follows directly from the earlier discussion of institutions, they may block decentralization and spatial diffusion in cases such as in more mature industries where standardization and high-volume production cause geographical input–output constraints to disappear. Hence, Storper envisages a continuing role for regional agglomeration and a continuing renaissance of regional economies. Regional actors – firms, workers or non-economic organizations – are embedded in dense regional networks of relations, conventions and rules (that is, in a regional knowledge structure) which may help them to profit from and to resist globalization processes (see also Storper, 1997b). From a contextual perspective, however, the region has additionally to be seen as being part of wider scale levels, the actors negotiating it (for instance, firms, non-economic organizations, individuals) being present and absent and both being subject to processes beyond their reach and giving rise to globalization in the first place. The region constitutes a structure through which experiences engendered by the global acceleration of production and circulation are filtered. Hence, while changes in the location of production affect the structure of the occupied spaces themselves, and this at different scales, these actions are mediated through institutional frameworks and contexts at the local, the regional, the national and international level (see Swyngedouw, 1997). In other words, the regional interaction structure is an important, but only one of the ‘filters’ which


translate and give rise to wider economic shifts. Storper (1997a: 48, emphasis removed and added) explicitly acknowledged this, arguing that Regional worlds of production can emerge out of technological and organizational worlds that make regions. But this occurs in only some cases; in many others, the regional economy remains – for the most part – a mere locational repository of organizational and technological worlds or artefacts, exogenously-driven, exhibiting little regional coevolution, or what regionalists have traditionally labelled ‘disarticulated’ or ‘peripheral’. There is also a need to acknowledge instances where institutional thickness, conceptualized as institutional proximity plus spatial proximity, may have negative effects and to have a closer look at the winners and losers of the continuing conflict between forces of dynamic change and structural persistence. These points are especially problematic if one studies firms in a traditional industrial region. After all, in dense regional contexts there may be negative and constraining effects of institutional proximity and embeddedness which are related to economic history and long-term co-evolution. I would therefore plead for an integration of the various discourses. From the perspective of the firm the production environment clearly influences its behaviour and interaction with other firms and non-economic organizations, but decisions made by corporate stakeholders will in turn have an imprint on the territorial organization of the economy. Amin and Thrift (1994) acknowledge that in older industrial regions, where institutions, shared conventions and world views have historically evolved alongside a particular industrial development path, ‘institutional thickness’ may thus be an obstacle to adaptability in times of sudden change. Perroux (1988: 60) had this in mind when he described how vested interests of older industries may constrain dynamic change: Established industries often define their strategy over a long period: they have every reason to oppose the constitution of powerful regions and centres of development that will ultimately become competitors able to ‘take off’ with the latest techniques unburdened by the dead weight of assets invested long before. On the other hand, territorialized institutional structures do not need to constrain future development, the thin line between the enabling and constraining role of institutions having direct implications for regional development. Traditional industries have every chance to ‘de-mature’ themselves, as Abernathy et al. (1983) put it. The decisive difference between old and new industrial regions is perhaps that the former often emerged as industrial areas centuries ago and have been continually repro-


duced and transformed down to the present time, pre-defining the context for new rounds of development (see Taylor, 1991). One could perhaps argue that the often stylized differences between regional success stories and the regions on the wrong side of the ‘new industrial divide’ are perhaps due to an overemphasis on ‘extreme cases’ and a neglect of ‘average’ regions (see Florida, 1996). With ‘average’ I mean regions which are neither ‘rusting relics’ nor ‘new production districts’, to use a distinction made by Gertler (1992: 267). 2 To repeat a point made in Chapter 1: what about ‘zones of intersecting industrial practices’ (Gertler, 1992), where one should expect processes and their patterns to be spatially much more complex and less clear-cut? There is reason to assume that the Ruhr Area is such an ambivalent region, an ambivalence which defies a simplistic distinction between regional winners and losers. In sum, we live in a world of conflictual unity between embedding and disembedding, territorialization and deterritorialization, fragmentation and homogenization, a world in which there can be no easy and a priori answer as to the ‘place’ of regions within it. The remainder of the chapter seeks to account for this, introducing a conceptual framework which leaves behind ideas of a forever pre-given and territorially partitioned world without falling into the neoliberal optimism of a truly global economy and society. All this is especially pertinent from the point of view of a region such as the Ruhr Area.

3.3 Spatial rescaling, institutional distance and place dependence: a power and scale framework for business strategies Globalization has profoundly changed the position that regions and localities occupy within the wider world economy. As I have argued above, processes at the regional and local level are part and parcel of the global and can therefore not be looked at in isolation. Moreover, although national actors may to some extent have lost their grip on the restructuring of the economy, the national level still has to be taken into consideration when looking at the dynamics of the ‘global–local interplay’. What is important from the point of view of this book, therefore, is to adopt an approach which integrates the different findings and looks at the role of different scale contexts in shaping business restructuring. A framework is needed through which the ‘global–local’ dualism can be overcome by putting emphasis instead on socio–spatial processes across different scales. These pre-conditions can be best met, I believe, if one starts concrete research from the perspective of the individual business firm, ‘studying a region by studying firms’, as Markusen (1994) put it. Empirical research thus started from the region conceptualized as an interaction context, a filter of wider changes. An important aim is to


disentangle the role which different spatial scales play for the formulation and realization of business strategies and to look in turn at the implications strategic actions have on spatial configurations and on the regulatory framework. In what follows, I briefly introduce the main concepts, starting with the definition of ‘organizational space’. In a second step I then conceptualize the scale hierarchy and discuss conflicts between mobility–immobility and power. The final section approaches the question of how the concept of institutional distance–proximity may be linked with spatial distance–proximity. 3.3.1

Organizational space

Social relations and actions are always positioned spatially as they get routinized in response to collective coordination efforts across space. ‘Coagulating’ in time and space institutionalized interaction between organizational insiders always defines a certain spatial scale, whether this concerns political entities such as the nation-state or the administrative region, socio–cultural realms, for instance Anderson’s (1983) ‘imagined communities’, or economic organizations, such as the business firm. Corporate actors operate within this complex hierarchy and are faced with barriers which they may attempt to transcend or transform. In ideal terms, a firm’s organizational space may be conceptualized as encompassing those aspects of a firm’s environment which can be actively influenced by its strategic actions. Organizational space is an abstract concept, ‘control over organizational space’ being a shorthand for coordination of crucial relations with other actors in space. This may include relations with international clients, the local labour market or national suppliers. From the point of view of corporate stakeholders (owners, managers, workers, suppliers, customers) the other scales constitute relatively passive settings, for instance political–administrative systems or the spheres of influence defined by competitors. This also includes general cultural aspects, the spatial scale defined by the use of languages, for instance, being as pre-given for an individual actor as that defined by state borders. By way of simplification, from the point of view of an individual actor, political–administrative scales may come closer to a bounded conception of space, while the economic sphere bears more resemblance with the space of flows discussed earlier. From a dynamic perspective strategies of business enterprises – both large and small – are understood as attempts to control relevant space, that is, to adapt their organizational set-up as crucial relations and their spatial dimension change over time. In periods of time–space compression and distanciation this may mean a greater role of contacts with international actors, involving the expansion of organizational space in order to bring the organizational set-up in line with relevant space. ‘Relevant’ space will be defined as the part of the division of labour and the production system


which is of direct and immediate importance for the organization of production and innovation, a firm’s task environment, to borrow a term used in organization theory (see Nohria and Gulati, 1994; Taylor, 1987). The ‘boundaries’ between the different scales are dependent on other organizations and actors, a given firm’s scope for action varying considerably, depending on the power position of the protagonists. Everything else being equal, more power sources mean more potential scope for strategic action, more influence on the actions of other agents, and consequently a ‘wider’ organizational space. In this context, large transnationals can in principle be regarded as having an advantage over smaller businesses. It is, however, not firm size and spatial extension which matters, but rather the ability to control the spatial scale which is relevant for the business enterprise; to be more precise, to control and organize relevant relations with other organizations and actors in space. Extensive regional control may be accompanied by very little scope of action at the national or international level, and vice versa. Methodologically, processes are approached from the point of view of the actors comprising the business firm, their interpretations grounded against pre-defined and established scales, for instance the nation-state or subnational administrative units, such as the German Länder. This provides a link to movements up and down the scale hierarchy. 3.3.2 The scale hierarchy: upscaling and downscaling of organizational space It has frequently been argued that what matters is a dynamic perspective, that is whether a firm is able to adjust its organizational space in the wake of strategic repositioning, producing and reproducing spaces by ‘jumping scales’, as Smith (1993) put it. For the reminder of this book any strategy which involves an expansion of organizational space from one scale to another will be labelled as ‘upscaling’ (for instance, from the regional to the national level) and the reverse process as ‘downscaling’. It is because of this that analysis starts from the space organizationally relevant for the business enterprise rather than from any pre-defined territorial unit. It is important to recognize that notwithstanding the fact that the scale contexts constitute predominantly politically and administratively defined mobility constraints from the perspective of the individual firm, and as such are pre-given, the scales are of course the product of institutionalized, individual action in the first place. Nor are these boundaries always fixed and static. Scales are produced and reproduced by individual and organizational action and it is precisely the conflicts between expanding and shrinking organizational spaces and these scale boundaries which are of interest for this book. Hence, changes of spatial configurations, such as those associated with globalization, are the consequences of complex individual actions and decisions at different spatial levels, made within differ-


ent political and economic contexts. Firms try to exploit and utilize spatial divisions of labour, that is, they move between different spatial scales, from the local and regional to the national and global, and vice versa. The crucial point is therefore how the regional, the global and other relevant geographical scale levels are the result of processes of socio–spatial change (Cox and Mair, 1991 quoted in Swyngedouw, 1997: 140). To give an example, internationalization strategies could be conceptualized as efforts to reposition a business enterprise with a view to improve its ‘place’ within the social division of labour. This re-positioning is in turn resisted by other actors and groups attempting to maintain control over their crucial relations in space, be it the labour force of plants ‘down sized’ or closed down because of cheap labour competition from elsewhere or the national or regional state attempting to influence such developments through de- or re-regulation. On the one hand, strategic actions are shaped by existing spatial hierarchies, on the other hand, they to a varying extent reproduce and transform these structures. The decline of the nation-state owing to internationalization of economic activities and the simultaneously increasing salience of local and regional differences for capital is a case in point. Again, acknowledgement of a hollowing-out trend should however not go as far as to declaring the national level obsolete, but rather be understood as a shift in the territoriality of the nation-state (see Jessop, 1994b; Martin and Sunley, 1997; Peck and Tickell, 1994: 311). Before moving on, the scale levels used for concrete research in this book have to be clarified, that is the local, the regional, the national and the international–global. It should be pointed out, following Smith (1993), that this typology does not imply any rigid separation of spatial spheres and that its hierarchical character is deliberate. This definition of different scale levels constitutes a practical tool and preliminary conceptual background against which to analyze the inter-relation of business strategies and space. In what follows, the region for concrete research will be understood as being situated below the national level, encompassing a variety of localities, for instance the city. Smith (1993: 108–9) has argued that ‘the social and cultural construction of the regional scale is less the result of immediate, individual and local agency but mediated to a greater extent through more generalized cultural, political and especially economic structures’. For actors in the Ruhr Area, however, the picture is less than clear-cut. Even if we leave aside the question whether in the past we really could speak of a unified regional identity, daily life perceptions of the Ruhr Area today are increasingly becoming fragmented, undermining any attempt to define a homogeneous entity (see Aring et al., 1989; Eisel, 1982). Although this book concentrates on regional actors in their work context, this holds also for owners, managers or workers in the business firm. In their daily economic activities, however, and this was immediately made clear during the first round of interviewing, regional relations with suppliers, clients or


customers stretch beyond any administrative definition of the Ruhr Area. Rather, interviewees frequently referred to the wider Rhine–Ruhr agglomeration (the Ruhr Area and conurbation stretching alongside the river Rhine from Düsseldorf to Cologne) as their immediate ‘regional’ environment. Unless stated otherwise, the regional will be understood in the latter sense in the following chapters, administrative definitions (above all, the borders of the *Kommunalverband Ruhrgebiet) and everyday notions of what constitutes the Ruhr Area will be included only insofar as they are important for the final interpretation of the findings. The national scale is defined as the site of state power being limited territorially by the borders of the nation-state. While this definition would be problematic in cases where centralized political power encompasses different nations, such as in the case of the UK, it is reasonable in the case of Germany. Finally, just as the international scale will be conceived of as ‘supra-national’ space unless specified more precisely, the term ‘local’ will be used for scale levels below the region. As outlined in Appendix A (p. 206), I have chosen to focus on firms from the central Ruhr Area, including the cities of Essen and Gelsenkirchen, and the county of Recklinghausen. Note that this is not to confine the role of politics to territory nor to define the global as a domain of solely economic actions. To repeat, by using in ‘organizational space’ a notion of space defined from the point of view of corporate stakeholders, the central conceptual idea is to look at and disentangle precisely those conflicts which arise if actors attempt to surpass administratively set or socio–culturally defined mobility barriers. In doing so, the scale hierarchy can be investigated in a dynamic way, avoiding a static division of the world in local, regional, national and global containers. Finally, there is a need for some clarifying words on terminology. Subsequent chapters will distinguish between restructuring in space and in situ. The latter concerns adjustment strategies which involve relations within ‘traditional’ organizational space. As we will see later, this almost exclusively involves restructuring at the regional level. The former concerns all those measures and strategies which accompany upscaling and downscaling. 3.3.3

Power and space: scales, mobility and place dependence

Processes of spatial rescaling always result in changing power relations and new ‘power geometries’ (Massey, 1993). That is, certain groups and actors improve their position while others lose in importance. Starting from the position that the production and reproduction of power differences is central to the operations of any capitalist economy and that power asymmetries arise within technical, social and territorial divisions of labour (Harvey, 1993: 21), we have to ask ourselves what it is that makes some groups more powerful than others. In this context, and this lies – despite


their disagreements – at the heart of the work of Harvey and Massey, it is the command over space which is of crucial importance. What matters here are issues of relative mobility–immobility, of place dependence and of substitutability–non-substitutability of social relations in space. More specifically, how are power relations affected and how do power relations change as social relationships are spatially expanded? What is more, and this links up to the collective notion of power, actors may mobilize and deploy resources by acting together, generating power through networking or by engaging in associations. Here, collective action may assume a territorial dimension, that is, firms and other actors may utilize and control resources at a given spatial scale (for instance, the region, the locality). This links to a central concept of this book, namely the notion of place dependence. Attempts to coordinate activities based on the division of labour have to find answers to the contradiction inherent in capitalist production, namely that business enterprises often have to be mobile in order to survive in competition with other capitals, but at the same time are temporally and spatially bound as they build up fixed capital, labour skills, personal ties and shared conventions (see Harvey, 1982; Storper and Walker, 1989). Strategic decisions of the past influence and limit the scope of action in the present. In short, firm development is both path and place dependent at different spatial scales, and may be locked-in to a particular development trajectory (Cox, 1996b; Langlois, 1988). If this dilemma is acknowledged, both globalization rhetorics can be unmasked as at best adopting a one-sided view and at worst totally missing the point. Advocates of the hyperglobalization thesis appear to believe that the future will be characterized by a borderless and placeless world, capital being freed from territorial ‘constraints’ and able to move production facilities, money and goods around at will. Against this, one may raise two objections. First, as discussed earlier, time–space compression and increasing connectedness of strategic actions makes capital more rather then less sensitive to spatial differentiation. And as places strive to attract capital, competing and attempting to outbid each other, new spatial divisions of labour arise. Second, while capital may become increasingly mobile and deterritorialized, there is a need to point to the fact that there are forces which continue to bind firms, decision-makers and capital-owners to place. There are various place-specific social relations that immobilize organizations, limit their spatial alternatives to particular local, metropolitan or regional economies. In this context, ‘place dependence’ refers to dependence upon and non-substitutability of territorialized social relations. At the same time, the conservative globalization logic, which depicts globalization as something ephemeral and to be stopped, similarly misses the point. Often resulting in protectionism, fetishization of the local, regional or national and thus invoking territory as antidote to global change, ‘conservatives’ totally neglect that, historically, capitalism has always relied on


the tension between spatial fixity and mobility, devaluing, destroying and redeveloping old and creating new places (Harvey, 1993: 7). Overall, it is the relation between capital and labour and the interrelation between business strategies and the labour market which can be expected to play an important role in accounting for place dependence. Massey (1995), for instance, has shown that the labour process is central to spatial differentiation. Every labour process has its necessary conditions, such as premises, physical infrastructure, supplier and market linkages, and – of crucial importance – knowledge and skills. Although certainly not exclusively, these necessary conditions may at least in part be territorialized, that is, they may be difficult to substitute or move around. As Storper and Walker (1989: 47, my emphasis) argued ‘this process renders capital temporarily immobile, making it subject to some leverage by workers, communities and governments, and creating “localized” profit rates’. In addition to the question of exactly how long ‘temporarily immobile’ is, what matters for a regional economy is whether, if there are routinized relations which bind firms to the region, this ‘institutional glue’ improves or obstructs future development prospects. With a view to empirical investigation, it is necessary to cut deeper into this aspect, in particular to identify and explain instances where potentially weaker actors are able to assume a (temporarily) powerful position. It should be added that this should also include inter-firm relations. Overall, this has not been the emphasis of the globalization literature. This is especially true for critical contributions which focus on labour as the ‘victims’ and ‘losers’ of global economic integration (for instance, Kapstein, 1996). However, power relations between different firms and the development of business strategies in the context of the strategies of other firms are equally important. Strikingly, as pointed out in Chapter 2, the networking literature tends to go to the other extreme, favouring inter-firm over capital–labour relations. It is because of this that analysis of these spatial dynamics has to focus on both types of relations. 3.3.4

‘Institutional distance’, organizational interaction and space

Following from what has been said so far and linking the findings of Chapter 2 with those in this chapter, the extent to which a business firm is able to actively govern institutionally distant relations can be a proxy for its capacity to control its organizational space. Yet, rather than searching for a somehow defined ‘optimal’ degree of organization between embedding and disembedding, emphasis should be put on changes in institutional distance as a consequence of restructuring and the interaction between institutional and spatial distance. One would normally expect institutional and geographical distance to correlate, and thus that internationalization or ‘globalization’ processes increase institutional differences. This argument is supported by Gertler and DiGiovanna (1997)


who analyzed the cultural differences between German machine tool producers and Canadian users. Equally, institutional proximity may be influenced by geographical proximity. What is crucial, however, is that economic actions take a spatially concentrated form only under specific, contingent conditions (Sayer and Walker, 1992; Storper, 1997b), and this is why institutional proximity develops into ‘institutional thickness’ only under certain circumstances. In sum, this book starts from the proposition that the closer interactants are in space, the more likely it is that they share a common worldview and similar frameworks of action. Obviously, as pointed out repeatedly, time plays a crucial role in this context. If globalization involves the stretching of social relations across space and a tendency to deterritorialize those relations, then one may hypothetically assume globalization to increase institutional distance. This may in turn increase the organizational problem a firm is faced with, leading to conflicts between mobility and place dependence. As a consequence, decision-makers have to adjust their organizational set-up, that is, the specific mix of coordination modes. Large multinational corporations, for instance, may have to change from hierarchical to more network-type relations as their markets get more and more global. Smaller firms may be confronted with similar challenges as they seek to respond to changes in their environment. The general validity of these assumptions notwithstanding, and this will become clear as the argument develops, the conceptual framework underlying the research presented is at the same time open to other possibilities, that is for contradictions and the ambivalence arising out of spatially and institutionally close relations.

3.4

Conclusions

In the preceding discussion of globalization and the ‘place’ of the region in it I have shown that globalization is a contested and multifaceted process, scholars from different theoretical backgrounds drawing opposing conclusions. However, much of the – often esoteric – debates on whether there is something like globalization can be overcome if one stresses global integration as an ongoing historical process rather than an ideal state of complete integration. The qualifications raised in this chapter are less designed to negate the whole process of globalization but to point to the spatial inequalities and potential dangers in addition to the opportunities associated with it. Rather than being aspatial, as neoliberal readings of the transformation processes at work seem to imply, the disembedding and deterritorializing consequences of globalization should be seen as being held in check by counter-forces which are rooted in territory at different spatial scales. Dynamic processes of deterritorialization and persistent structures in time–space (that is, path and place dependence) are in this book


understood as being two sides of the same coin, actors both using these time–space contingencies and being constrained by them. It is in this context that territory and the process of territorialization may be included amongst the modes of coordination of economic action. While one can hypothetically argue that conflicts between mobility and place dependence are particularly visible in times of accelerated global integration and that the ‘organizational problem’ is exacerbated by globalization, it is not possible to determine from this abstract discussion the precise effects of territorial embeddedness on businesses and the imprint strategic decisions in turn have on territory. This must be left for empirical investigation of businesses in a specific territorial setting, embedded in a particular regional and national context. I have chosen with the Ruhr Area a regional context which has a long industrial history and which in the light of recent developments is to a certain extent representative for the developments in the German political-economy as a whole. The empirical task now is to determine the role which embeddedness – both in political–economic contexts and in socio–cultural structures – plays in struggles to improve or maintain a firm’s competitive position and the regional manifestation of these actions. There is a need to look at processes where regional proximity matters, at those which result in a loosening of regional ties and at the role of national regulatory and institutional contexts.

4 Globalization, ‘Americanization’ and the Changing Corporate Power Geometry

4.1

Introduction

Empirical investigation starts with those regional actors which can be expected to be most actively involved in processes of globalization and internationalization. This chapter therefore analyzes the internationalization and recent diversification strategies of the four regional conglomerates which were found to have a crucial impact on small and medium-sized companies in the Ruhr Area: Veba AG, RWE AG, Thyssen AG and Ruhrkohle AG (see Appendix A, p. 206). At the time of writing the former three belong to the largest companies domestically and at the European level, and are typical representatives of Germany’s extremely diversified conglomerates. Veba and RWE in addition to their quasi-monopoly position in electricity generation and distribution own ventures in oil, chemicals and telecommunications, and are involved in waste management, construction and engineering (RWE) and trading and transportation (Veba), respectively. The traditional steel-maker Thyssen has diversified into automotive parts, elevators, engineering, trading and services and telecommunications. Ruhrkohle, the fourth company, plays because of its special situation as the regional monopoly supplier of coal an extremely important role for the more traditional firms within the Ruhr Area. This company is the most regionalized of the four, but this has not prevented it from venturing into new fields, such as chemicals, environmental technology and industrial services. Applying the framework outlined in the introductary chapters, the argument evolves as follows. I seek to show, first, that these apparently powerful actors have to deal with considerable pressure in their political– economic environment and that many of their recent internationalization and diversification strategies can be interpreted as organizational response to these uncertainties. This will be illustrated using two activities – telecommunications (TC) and environmental technology (ET) – as example. In the second part I argue that as a result of their own 61


diversification strategies, large corporations are becoming increasingly dependent on international financial capital. This results in a partial adjustment of organizational practices and corporate cultures along Anglo–American lines and has implications for the institutionalized power geometry between capital owners, management and labour. Chapter 4 deliberately chooses a one-sided approach; qualification of the ‘cultural change’ thesis is the task of Chapter 5. Here, a brief discussion of the conceptualization of culture is necessary. ‘Culture’ has increasingly become a catch-all category which is often used as a box into which to lump all aspects considered ‘non-economic’. Culture and economy should however not be seen as formal opposites, but as being inter-related. The economy is culturally embedded and constructed just as cultural practices and representations are governed by market forces. To repeat a point made earlier, a firm’s corporate culture(s) is therefore seen as constituting an institutionalized system of material practices (for instance, technology and organization of production), social relations, knowledge and ways of thinking, which may be resistant to change but at the same time is also never static and achieved. This includes both formal institutions and informal institutions, conventions and ways of doing things (see Schoenberger, 1997, Ch.5).

4.2 Detraditionalization, selective internationalization and uncertainty In line with the development at other German transnationals, the case-study firms have during the 1990s followed a strategy which can be summarized under the heading ‘concentration–diversification– internationalization’. First, there is concentration on those core activities in which the firms are ‘competent’ and internationally competitive, the hiving-off of ‘fringe’ activities and those fields with insufficient creation of value constituting a corollary of this process. Second, there is a tendency towards activities with higher value-added, especially in services. And, finally, the conglomerates have taken steps to internationally expand their core activities. All this left its mark on the companies’ portfolios, revealing a general trend away from traditional activities to sectors which appear to have fewer and fewer links with the historical origins (‘detraditionalization’). A look at the development of the main divisions since 1980 supports this view (Table 4.1). As the conglomerates restructure their portfolios and attempt to open up new markets abroad, what evidence is there for an increasing internationalization of organizational space? If judged in terms of the most common indicator, the share of turnover generated with clients outside Germany, Ruhrkohle, Veba, RWE and Thyssen all have increased their international contacts during the 1990s (Table 4.2). Investigation of the geographical distribution of subsidiaries gives, with the exception of RWE, further support for

The Changing Corporate Power Geometry 63 Table 4.1

Turnover share according to divisions, 1980–991

RWE

Electricity Mining, Resources Oil, Chemicals Waste Management Engineering Telecommunication Construction Other

1980–1 (%)

1985–6 (%)

1990–91 (%)

1995–6 (%)

1998–9 (%)

60.8 4.3 27.0

60.7 4.6 24.7 9.9

37.3 3.1 40.5 0.9 11.7

0.1

6.5 0.1

32.6 7.3 36.9 2.0 11.1 0.8 9.1 0.1

29.4 6.2 35.4 3.9 15.8 0.4 8.8 0.1

7.8

Thyssen

Steel/Specialty Steel Capital Goods Trading and Services

1970 (%)

1980–1 (%)

1985–6 (%)

1990–91 (%)

1995–6 (%)

1997–8 (%)

60.3 39.7

32.2 26.4 41.4

35.3 24.1 40.6

34.1 28.1 37.8

25.6 30.7 43.8

29.7 31.3 38.9

Additional source: Grabher (1991).

VEBA

Energy, Electricity Chemicals Oil Trading and Services Telecommunication Silicium-Wafers

1980 (%)

1985 (%)

1990 (%)

1996 (%)

1998 (%)

16.7 15.3 28.7 37.1

21.1 11.6 30.6 35.1

20.5 18.5 20.9 40.1

20.5 13.8 23.8 41.4 0.5

19.0 10.9 24.0 44.0 0.5 1.6

Ruhrkohle

Mining Non-Mining Activities Others

1980 (%)

1990 (%)

1995 (%)

1998 (%)

74.4 25.6

60.3 39.7

49.2 50.5 0.3

44.0 56.0

Notes: 1 Focus on main activities only; numbers might therefore not add up to 100%. Data sources: company reports; own calculations.

64 Corporate Germany Table 4.2

Internationalization, 1990–9

RWE AG

1990–1

1995–6

1998–9

Employment Percentage abroad Turnover/Clients (DM m) Percentage abroad of which Europe Shareholdings (total)1 Percentage abroad of which Europe

102 190 8.3 49 891 19.51 39.40 298 29.87 57.30

132 658 7.43 65 436 17.15 39.21 190 23.68 53.33

155 576 27.4 75 1332 27.6 52.7 72 22.22 68.75

Thyssen AG

1990–1

1995–6

1997–8


148 250 18.09 36 562 45 n.a. 89 25.84 56.52

122 659 24.94 38 673 47 52.43 57 17.5 60.0

116 174 32.61 43 537 56.5 46.8 70 27.14 47.37

Veba AG

1990

1995

1998


106 877 14.00 54 591 28.76 62.54 146 19.18 64.29

125 158 19.92 72 372 29.96 54.66 156 28.21 61.36

116 774 33.59 83 684 38.49 53.96 131 28.24 48.65

Ruhrkohle AG

1990

1995

1998


119 416 n.a. 22 921 14.38 84.37 n.a. n.a. n.a.

102 090 3.434 24 696 13.68 80.91 229 20.52 78.72

104 3303 5.00 27 490 17.95 92.91 208 28.85 56.67

Notes: 1 Major consolidated shareholdings as published in annual reports. 2 Original number in Euro; 1 =( =1.95583 DM 3 This includes 17 500 employees of Saarbergwerke, taken over by Ruhrkohle. 4 Number for 1996. n.a. = not available. Data sources: Employment and turnover figures 1990–1; 1991 RWI 1996 (unpublished); Annual Reports; own calculations.

The Changing Corporate Power Geometry 65

the thesis that the companies from 1990 to 1998 gradually expanded organizational space. For all companies there is a declining role of activities at traditional scale levels, that is, the Rhine–Ruhr agglomeration and also in part the national level. What is crucial is that the degree of internationalization varies considerably across divisions, truly international ones such as Ruhrkohle’s chemicals, Thyssen’s capital goods, RWE’s construction or Veba’s chemicals and services/trading activities contrasting with more traditional divisions (above all, mining, steel, electricity generation and distribution) still very much dependent on national and regional markets. Overall, corporate internationalization is most pronounced in terms of the share of employees outside Germany. Thyssen and Veba significantly increased their share of employment abroad, at the same time reducing the absolute number of their domestic work-force during the last few years (see Figure 4.1). The picture at RWE is more balanced, after a reduction of overall employment in 1995–6 once more increasing the total number of employees subsequently. Interestingly, however, the recent employment growth all but concerns employment outside Germany, while the domestic workforce declines steadily.1 Thus, if linked with the earlier evidence of a growing share of subsidiaries abroad, there is reason to assume an ongoing internationalization of organizational space. Yet, in order to understand this quantitative picture, one needs to look at the conflicting pressures and uncertainties confronting the case-study firms. This chapter focuses on evidence for change and argues that there is a growing pressure to change long-standing corporate practices, pressures most pronounced at the internationally most active of the four companies, Veba. In the remainder of this section I focus on the political–economic systemic context, that is market environment and government policies. Two sources of uncertainty are identified: first, stagnation of traditional activities and domestic markets and, second, regulatory changes. Moves into TC and ET (diversification) and efforts at the same time to internationalize can be interpreted as organizational responses to external pressure. This in turn creates new uncertainties: dependence on financial markets and what I refer to as ‘market distance’. 4.2.1

The stagnating domestic market: upscaling and uncertainty

The following quote from the interview with the assistant to CEO Vogel at Thyssen provides a first hint of the problems encountered by the companies. He refers to Thyssen’s efforts to diversify into telecommunications: Q: ‘Everything appears to be extremely uncertain.’ A: ‘Yes, rather uncertain. For instance, this includes the field of on-line services, everything runs via the internet. Is the internet safe? Nobody knows this exactly, but you have to be active there entrepreneurially, you have to commit yourself to different engagements, out of three


Domestic and international employment Veba

140 000 120 000 100 000 80 000

105092 101772 100228 97782 91914 108077 102981 77554 94989

60 000 40 000 20 000 0

14963 15207 21725 23256 23894 24930 27121 32178 39220 1990 1991

1992 1993

1994

1995 1996 1997 1998

Thyssen 160 000 140 000 119630 120 000 99188 107699 100 000 121425 96907 92058 90134 78293 80 000 60 000 40 000 20 000 26825 27649 29273 30206 29537 30601 37739 37881 0 1990–1 1991–2 1992–3 1993–4 1994–5 1995–6 1996–7 1997–8 RWE

180 000 160 000 140 000 120 000 100 000 112895 122817 104947 128122 93711 80 000 114557 96357 108858 122805 60 000 40 000 20 000 8479 9215 8695 9100 9209 9853 13298 30910 42681 0 1990–1 1991–2 1992–3 1993–4 1994–5 1995–6 1996–7 1997–8 1998–9

Data sources: Numbers 1990–5 RWI (unpublished); Annual Reports; own calculations; all numbers concern end of reporting periods.


engagements, two have to be successful, then you will survive. But out of these three, two can of course fail and then things look pretty dire.’ Q: ‘In the 1980s environmental technology was the industry of the future, and here there have been problems recently. Why are you entering these markets?’ A: ‘You have to think about which industries you are going to invest into. You have to invest in growth markets and at the moment there are not many of these left in Germany [my emphasis]2’ (THY I) This hints at two interrelated phenomena. First, a lack of market opportunities in Germany. Given the lack of other options it is no surprise that Thyssen and the other three case-study companies in their search for new investment outlets and diversification fields chose similar strategies and ended up in telecommunications (TC) or in environmental technology (ET). Domestic stagnation has the additional effect of forcing the firms to look for additional demand internationally and thus to scale up. Competition and stagnating demand at the traditional (regional and national) scale thus leads to an expansion of organizational space in conjunction with concentration and reorganization measures regionally and nationally. Within ET the companies concentrated their efforts on reducing their dependence on regional clients by taking a large share of the booming East German market immediately after unification. International steps were predominantly directed at neighboring states, in particular the Benelux countries. It is striking, and this is the second point, that while these moves appeared to have caused little problems there, the small number of acquisitions in spatially more distant markets were vexed with difficulties. A good example has been RWE’s US activities (American Nukem, ENSR) where, after the acquisition, friction and tensions in merging two different corporate cultures and a lack of market knowledge resulted in considerable losses. Only as late as 1995–6 did RWE finally report a ‘positive development’ of its US subsidiary, after large-scale reorganization which included the withdrawal from the hazardous waste market, the sale of unprofitable activities and the sole concentration on environmental consulting. Upscaling problems are even more pronounced in the case of TC. Institutional distance and uncertainty resulting from moving beyond national boundaries meant that all firms opted for inter-firm cooperation and alliances. The general international competitive environment is, however, not very different from the domestic one, with an enormous concentration process and a few dominating global alliances and carriers. Compared to the main players (such as BT, AT&T, Deutsche Telekom), Veba, RWE and Thyssen play only a marginal role and are therefore forced into niche markets. The lack of power sources at the international level is illustrated by the failure of many of the firms’ international steps. RWE


failed to win any of its bids for mobile licenses, for instance in the Czech Republic or in Austria (Int. RWE II). 3 And Veba’s international ambitions were similarly dealt a severe blow, after Cable & Wireless in February 1997 surprisingly pulled out of an alliance formed with Veba in 1995. By entering new fields of activity, in the case of TC clearly a profoundly internationalized one, the conglomerates have increased the scale of their environmental exposure, an exposure which sits uneasily with the meagre results of their own internationalization efforts. In what follows, I will argue that the expansion of what may be called ‘relevant space’ has not been matched by a similar enlargement of organizational space. In sum, this introductionary section points out two crucial aspects. The first relates to a considerable degree of uncertainty as firms move away from traditional activities. Accordingly, the step from well known and familiar territory into telecommunications has confronted even such powerful national players as Thyssen, Veba and RWE with an organizational challenge with which they have only slowly come to terms. Second, these market entry problems have been exacerbated by attempts to internationalize the new activities at the same time. In other words, we have examples of increasing institutional distance as a consequence of strategic repositioning.4 But a changing competitive environment is only part of the story. Further actors take part in this, as we will see in the following sections. 4.2.2 State regulation: government policies, diversification and restructuring This section illustrates how decisions made by the state have contributed to the strategies chosen by the case-study firms. This will be attempted by distinguishing two aspects of state influence: the connection between state regulation and restructuring of existing activities on the one hand and between regulation and diversification into new fields on the other. State policies and diversification State policies and regulation have had a decisive influence on diversification into both telecommunications and environmental technology/waste management. In the light of decisions and legislation and the information provided by the interviewees it is no exaggeration to see the state as one of the precursors for these diversification moves. Because of the international dimension of TC it is futile to concentrate only on changes at one spatial level, such as one particular nation-state. One simply cannot understand the policy changes at work without for instance including the decisive influence of developments in the USA where TC was ‘deregulated’ as early as 1984, a move which included the decision by the Reagan Administration to break up American Telegraph and Telephones (AT&T). This decision and those of other governments following suit had at least indirect effects for the sample companies, not least


because of the fact that ‘deregulation’ across the industrialized world did not stop at the door of the more cautious members of the EU (including Germany), as the decision to open the national TC market by 1998 illustrates. That liberalization will gather further ‘global’ momentum is illustrated by the WTO telecommunications agreement reached in February 1997 and the decision of the Japanese government finally to allow NTT to become a serious player at the international stage. While a latecomer in telecommunications, Germany’s position in environmental technology is exactly the opposite. Interestingly, this has according to the interviewees to a large degree been due to government policies and regulation. One should also add that the regional focus of many of even the larger players is to a great degree due to the German federal system which gives much of the sovereignty in these affairs to the Länder and to sub-regional authorities (Bezirke = districts). The different regional legal frameworks confront foreign companies with considerable market entry barriers. How then have changing national and international ‘regulatory landscapes’ (Hudson, 1996) influenced the strategies of the four conglomerates? First, in both industries the spatial scale defined and produced by regulatory decisions is directly linked to the scale of the firms’ activities. In ET, for instance, the regionalized nature of regulation appears to have prevented the upscaling of large companies: Environmental protection, environmental activities are like no other industry accompanied and influenced by laws, norms and the regulatory framework. We don’t oppose this. The problem is, however, not only the differences across the European Union … but rather the differences between the Länder and the differences within a single Land, between districts. This gives rise to considerable competitive distortion. (RAG III) Although in TC international liberalization has been the catalyst for decisions to internationalize, the reality is more complex: Well, we have above all due to the uncertain legal situation both in Germany and in the EU decided to focus primarily on the German market. We had once more submitted an application for the second mobile phone licence in France, but have subsequently withdrawn. Apart from that we have … well, there is a small subsidiary in Switzerland, but the focus is without any doubt Germany. (THY II) This leads to the second point, namely that the companies unanimously reported considerable uncertainty and problems in TC because of regulatory changes. Government decisions often took the companies by surprise. In the same vein regulatory change put the companies off guard in ET and


waste management. This shows that diversification success and failure depend on the regulatory context and illustrates the crucial role of government policy. Thirdly, and this in part explains the contradictory nature of state regulation, rather than a clear, continuous direction, government policies in both fields have had to balance conflicting interests. This conflict of aims has in TC been brought most clearly into the open with respect to the treatment of the former state monopoly Deutsche Telekom in the run-up to the privatization on domestic and international stock markets in October 1996. Here, the desire to deregulate and liberalize a monopoly conflicted with the national government’s interest in a successful flotation, not least because of the considerable sums of money which were expected to fill the coffers at a time of fiscal stress. A similar conflict of aims can be identified in environmental technology. Every round of government legislation and tightening of regulations in principle means that companies in the industry have to make additional investments in order to being able to meet the new demands. This disadvantages small and medium-sized companies, in particular those in plant engineering, and given the Mittelstand firms’ need for fresh capital appeared to have made it all the easier for companies such as RWE and Ruhrkohle to acquire the firms and take them over. In other words, government regulation has been an important factor encouraging capital concentration and centralization in a young and innovative industry. State policies and restructuring State regulation at different spatial scales has in addition to diversification into newer industries also had a considerable impact on overall firm policy, in particular with respect to restructuring in the more traditional fields. Not surprisingly, Ruhrkohle’s mining activities, which were from the start in 19695 dependent on state subsidies, have been affected most in this respect. The decision to accelerate the phasing out of these subsidies has to be seen in the light of the tight fiscal policy as Germany struggled to meet the Maastricht criteria. The lack of any coherent long-term policy with regard to the time-scale of the government subsidies is widely regarded as having contributed to complacency on the part of decision-makers at Ruhrkohle, whose confidence in continuing subsidies resulted in only very recent attempts to develop alternative fields. One interview partner at the Ruhrkohle headquarters openly admitted to having for a long time underestimated the seriousness of the situation because of this short-term policy, a cognitive lock-in as a result of a situation which he described as ‘things did somehow always go on’ (RAG Ia). All in all, what has been striking has been the ambivalent attitude towards state ‘de-regulation’ – whether at the national or regional level – in the discourse of the respondents. This is most obvious on the part of the


utilities. While generally interested in measures to break the monopoly of Deutsche Telekom in telecommunications, RWE, Veba and other utilities oppose any attempt towards a similar move with respect to electricity generation and distribution. The following statement by the leader of the national works council (*Gesamtbetriebsrat) of RWE Energie on his views on ‘globalization’ illustrates that labour representatives share this (‘conservative’) worldview with the RWE executive in this regard: [Globalization] has two aspects, you know. On the one hand there is international competition coming to Germany. So far we are not affected very much by this … But if the Federal Government’s new energy regulations become law, then foreign competitors will increasingly rush into RWE markets. This would of course be a slap in the face. But we will try to prevent this with all available means … The second aspect concerns [our own] investment abroad. This happens, above all in Eastern Europe and Portugal. But this is decided using strict financial criteria. Certain return on capital targets have to be met. (RWE IV) Accordingly, executive decision-makers and employees exert considerable pressure on governments in order to influence decisions. This should serve as a further reminder that while the conglomerates have been shown to be dependent on political decisions, they have of course also the means to resist and influence the course of action. This is, as we will see, particularly true for the regional and local political scales. To sum up, this section has sought to qualify the claim made by ‘globalists’ that the state is powerless in the face of globalization. As the links between the strategies of large firms, themselves responding to economic pressure, and state policies show, international integration is by no means a quasi-natural force arising out of thin air but is influenced by decisions and actions on the part of corporate actors and regulatory bodies. 4.2.3 Global financial markets: the increasing influence of Anglo–American financial capital The third group of actors found to play a decisive role in the firms’ environment concerns international financial investors. The general financial environment for the conglomerates 6 changed notably during the 1990s. First, the leading domestic banks increasingly moved into areas hitherto left to big Anglo–American players (for example, the acquisition of Morgan Grenfell and Kleinwort Benson by Deutsche Bank and Dresdner Bank). Given the historically close ties between major banks and conglomerates in Germany, involving direct shareholdings, positions on supervisory boards as well as equity and debt financing, upscaling and adoption of Anglo–American business practices has meant a sea-change in what is


referred to as Finanzplatz Deutschland (= financial place Germany) (see Table 4.3). Secondly, a general trend in the City of London and at other financial centres has in recent years been one of an increasing interest in the German market, a feeling stemming in part from an impression that Germany’s larger and increasingly also medium-sized companies have a lot to catch up with regard to equity finance (Int. FIN I). As the Deutsche Bundesbank (1997a: 28, my translation) observed: ‘The presence of international investors at domestic markets has massively increased since Table 4.3

Financial capital involvement in supervisory boards

Thyssen AG 1997–8 (n = 22) Carl-Ludwig v. Boehm-Bezing Henning Schulte-Noelle Walter Seipp Bernhard Walter Erich Wilke

Member of the executive board of Deutsche Bank AG Chairman of the supervisory board of Allianz AG Honorary Chairman of the supervisory board of Commerzbank AG Leading Member of the executive board of Dresdner Bank AG Chairman of the executive board of BfG Bank AG

RWE AG Supervisory Board 1998–9 (n = 20) Carl-Ludwig v. Boehm-Bezing Diethart Breipohl Friedel Neuber Alfons Friedrich Titzrath

Member of the executive board of Deutsche Bank AG Member of the executive board of Allianz AG Member of the executive board of Westdeutsche Landesbank GZ Chairman of the supervisory board of Dresdner Bank AG

RWE AG Economic Advisory Council (n = 24) Dieter Kauffmann Alfred Freiherr von Oppenheim Wolfgang Röller Hans Peter Schreib Walter Seipp Marcus Wallenberg

Chairman of Schutzgemeinschaft der Kleinaktionäre* Chairman of the supervisory board of Sal. Oppenheim jr. & Cie. KGaA Honorary Chairman of the supervisory board of Dresdner Bank AG Member of the executive board of Deutsche Schutzvereinigung für Wertpapierbesitz* Honorary Chairman of the supervisory board of Commerzbank AG Executive Vice President, Investor AB


Financial capital involvement in supervisory boards (continued)

Veba AG 1998 (n = 20) Rolf-E. Breuer Horst Klose Henning Schulte-Noelle Kurt F. Viermetz Bernd Voss

Leading member of the executive board of Deutsche Bank AG Vice President of Deutsche Schutzvereinigung für Wertpapierbesitz* Chairman of the executive board of Allianz AG Non-Executive Director J.P. Morgan & Co. Inc., New York Member of the executive board of Dresdner Bank AG

Note: * Associations of individual, private shareholders. Sources: Annual Reports.

reunification.’ Major international players have increased their activities in Germany, moving aggressively into areas previously dominated by incumbent German banks with their more traditional and long-term approach. Most notable in this respect has been the move of Goldman Sachs to Frankfurt which culminated in a leading role as advisor on the path-breaking listing of Daimler–Benz on the New York Stock Exchange (NYSE), the first German company to make such a move. High-profile transactions involving Ruhr conglomerates have been Krupp’s acquisition of Hoesch in 1992 (led by CS First Boston) and Krupp-Hoesch’s recent hostile take-over bid for Thyssen (led by Morgan Grenfell and Goldman Sachs; see Chapter 5). All in all, access to international capital has been broadened considerably in the wake of these moves and the three conglomerates have made increasing use of this. A direct consequence of the changing financial environment has been a growing influence of international shareholders in the country’s largest companies. (see Table 4.4). At Veba, the company with the most detailed figures, there has been a significant increase in equity held by financial institutions, the share increasing from 31 per cent in 1986 to 70.6 per cent in 1997 (see Table 4.5). The 43.6 per cent of equity held by foreign investors in 1997 almost exclusively concerns institutional investors (foreign private investors accounted for 4.05 per cent). Strikingly, US investors increased their share from 1 to 12 per cent in the period 1987 to 1997 (sources: company information; SZ 9 October 1997). 7 And RWE saw during the period 1993–8 an increase of institutional investors from 40 to 53 per cent, the share of equity held by foreigners rising from 16.8 to 22.8 per cent (see Table 4.6). There are no comparable figures for Thyssen, the company displaying a more stable and traditional breakdown of shareholders (see Table 4.7). This


Shareholder structure of major German companies, 1996

Company

Percentage of shares outside Germany

Total shareholders

Percentage of shares ‘dispersed’

Percentage of equity held by employees

Mannesmann Bayer Hoechst VEBA Siemens Deutsche Bank Commerzbank Dresdner Bank BASF Preussag Volkswagen Daimler Thyssen RWE

50.0 46.6 45.0 43.5 43.0 43.0 43.0 30.0 26.8 25.0 24.0 24.0 23.0 16.3

195 000 295 000 330 000 405 000 607 000 256 000 190 000 200 000 292 000 70 000 728 000 400 000 240 000 211 000

100.00 29.00 70.00 21.90 46.00 41.50 50.00 46.50 35.00 50.00 80.00 33.00 60.00 32.90

7.80 ca 4.00 8.00 ca 2.50 > 5.00 2.50 < 3.00 1.90 2.30 1.60

3.20

Data source: Deutsches Aktieninstitut (1996) (unpublished).

Table 4.5

Veba AG, breakdown of shareholders, 1986–97*

Private individuals Investment companies Insurance, banks, investment Industry, trading, transport companies Public authorities Other Shares accounted for of which domestic of which foreign Not accounted for (e.g. self-custody)

1986

1990

1994

1997

26.9 20.3 10.7 6.1 36 0 n.a. 77.4 22.6 n.a.

28.5 11.8 39.5 4.7 3.4 5.6 93.4 57.4 42.6 6.6

21.5 16.0 52.3 6.2 0.4 1.9 98.4 56.5 43.5 1.6

22.9 17.9 52.7 3.3 2.8 0 99.6 56.4 43.6 0.4

Note: * Percentage share of equity. Sources: Company Information; FT 27.11.1992.

finding notwithstanding, foreign investors appear to have nevertheless increased their engagement at this company. Just as at RWE, Thyssen has issued American Depository Receipt (ADR) Programs which allow indirect trading of company shares on US stock markets. Moreover, Thyssen announced a threefold increase in the trading of its shares in London during the 1996–7 reporting period (Annual Report 1996–7). What is impor-


RWE AG, breakdown of shareholders, 1993–8*

Private individuals Employees Insurance, banks, investment Industry, trading, transport companies Public authorities Other Shares accounted for** of which domestic of which foreign

1993

1998

20 n.a. 39,9 8,5 30,3 1,4 100 n.a. 16,8

13,3 3,1 52,8 2,9 25,9 2 100 n.a. 22,8

Notes: * Percentage share of equity. ** Shares not accounted for have been treated as if distributed identically as the remaining equity. Data source: ; own calculations.

tant however is that with an estimated 17.5 per cent of its equity held abroad in 1996, Thyssen ‘trailed’ Veba just like RWE (see Table 4.7). The corollary of rising institutional and foreign involvement, however, has been increasing scrutiny of strategic decisions and attempts actively to intervene in the policies adopted by the companies’ executive in recent years. German companies in general had to come to terms with increasing volatility of stocks as a result of downgrading, and upgrading decisions on the part of foreign analysts and rating agencies. Thus in 1997, Deutsche Bank and Dresdner Bank, the two largest private banks, lost their triple A rating at Moody’s. Foreign financial capital has become more vocal in its criticism of the traditionally close and cosy relations between industrial and financial capital and of the two-tier system of corporate governance, a feature which additionally puts Anglo–American financial capital in conflict with the financial establishment in Germany (compare also Deeg, 1993). And there are signs that the large domestic banks are attempting to change the system in Germany (compare the discussion of the Krupp–Thyssen bid and the involvement of Deutsche Bank and Dresdner Bank in Chapter 5). Add to this the aggressive moves into the UK and US markets, notably by Deutsche Bank, and an interesting and complex pattern of power relations and conflict emerges. Cultural differences and institutional distance between the two financial communities have of course come into the open most clearly in the wake of the problems involving Morgan Grenfell and Kleinwort Benson. As with the whole country’s business establishment, the three case-study companies have also experienced pressures of this kind in recent years. Perhaps the most revealing incident involved RWE, when the company’s

76

Table 4.7

Thyssen AG, breakdown of shareholders, 1988–96*

Thyssen BVW; Fritz Thyssen Stiftung

1988

1994

1995

1996

> 25 % Thyssen BVW

25 % Thyssen BVW

18.6 %

20.1 %

of which: Thyssen VVW: 63.5% Allianz AG: 18.2% Commerzbank AG: 18.3% < 9 % Fritz Thyssen Stiftung

of which: Thyssen VVW: 63.5% Allianz AG: 18.2% Commerzbank AG: 18.3% < 9 % Fritz Thyssen Stiftung

plus: Commerzbank 15.4%

Banks, insurance Investment Industry, Trading, Transport Private individuals Not accounted for Others (%) of equity held by foreign shareholders Note: * Percentage share of equity. Sources: Annual Reports; ; Commerzbank (1988, 1994); SZ 17.12.96.

18.2 % 21.4 % 1.8 %

22.1 % 28.9 % 2.0 %

21.6 % 1.4 % 1.6 % 18.0 %

23.8 % 1.4 % 1.7 % 17.5 %


special voting rights came under attack from representatives of the California Public Employees’ Retirement System (Calpers), the largest public pension fund in the USA, at the 1992 annual general meeting. In this first case of shareholder activism by an important Anglo–American institution in Germany, the Calpers representative took issue with the Mehrfachstimmrechte (multiple voting rights) of a group of local authorities. This is an historical voting anomaly stemming from 1924 when local authorities were compensated for a devaluation of their shares. Throughout RWE’s history, local authorities, most of them located in the Ruhr Area, had wielded disproportionate power, being largely able to influence the course of developments at the company.8 This will be discussed further in Chapter 5. This attempt to change corporate governance at RWE, though failing at least initially, provides a good example of the shifting power balance in German industry and in particular of the growing power of Anglo–American players which make up the bulk of foreign institutional investors. The lack of a comparable pension fund system in Germany and the increasing demand for new sources of financial capital has forced companies to move to the international scale, a move which in turn makes companies dependent on these actors and finally, as we will see below, at least partly leads to a change in corporate governance and culture. At Veba a comparable incident occurred a year earlier, when increased attention by Anglo–American investment analysts culminated in a damning report from London-based SG Warburg. This accused the management of failing to extract full value from the group’s highly diversified portfolio and suggested that the shares were trading at a big discount to the group’s break-up value and that the company were therefore vulnerable to a take-over bid (FT, 27 November 1992). As regards the immediate effect on Veba’s boardroom the Financial Times article concluded: [The Veba CEO] Hartmann rejects this assessment, but the judgement has on the face of it unsettled the group’s management board. Since the report came out in May last year the company has taken a number of shareholder-friendly steps. It has become noticeably more willing to communicate with shareholders and the Anglo–American investment community. Board directors have made presentations to institutional investors outside Germany – a still rare move for German groups. Veba has also appointed its first director of investor relations. It has made an effort to disclose more financial information than is strictly required under Germany’s notoriously opaque accounting rules. (FT, 27 November 1992) Finally, Thyssen has been subject to similar criticisms concerning its portfolio and to recommendations for a demerger and reorganization similar to those carried out by such firms as General Electric, AT&T, ICI or Hanson.


Moreover, it has witnessed its last family shareholdings being transferred to institutional investors, after the remaining Thyssen heirs sold their shares to Commerzbank, which in turn passed them to German, Swiss and UK investors and pension funds. The question now is whether there is evidence of a change of corporate practices along Anglo–American lines, resulting in a convergence of the two systems, and whether there are counter-forces at the national or regional scale which mitigate against a process which by way of exaggeration could be termed ‘Americanization’. This question is of course nothing else than a variant of the neoliberal globalization rhetoric in the face of political–economic pressure, as the following quote of a former head of securities sales and trading at Deutsche Bank aptly illustrates: If you want equity capital, the biggest suppliers are English and American pension funds. If you want this equity, you have to adjust to their way of thinking. You have to swallow your pride and present yourself differently. (FT, 14 July 1993)

4.3 Putting Anglo–American business culture to work: shareholder value, return on capital and corporate organization A good way to start an investigation on whether there has been a shift in corporate governance is to look at recent changes in the boardroom of the conglomerates. At two of the firms there have been changes at the chief executive level which can be interpreted as a cultural sea-change. One incident involved the appointment of the head of the service and trading division Thyssen Handelsunion, Dieter Vogel, as CEO at Thyssen in March 1996. The long broken domination of the steel division notwithstanding, Thyssen’s tradition as Germany’s number one steel-maker had meant that the position as CEO was almost automatically granted to the respective head of Thyssen Stahl. Not surprisingly in the light of the role of foreign shareholders, at Veba the change once more took place earlier than in other companies. In 1989 the supervisory board appointed the finance director as chief executive. This procedure appears to have already become institutionalized, given that the current CEO, Ulrich Hartmann, held the same position before taking over in 1993. This is an indication of the increasing importance attributed to financial issues and investor relations at Veba. Only RWE, which until 1989 did not have a chief executive, has not joined this trend and has with Dietmar Kuhnt still a CEO closely linked with traditional electricity activities. This has to be seen in the context of a continuing importance of the electricity division RWE Energie within the conglomerate and the lower share of foreign equity, constituting an interesting difference from Veba.


The sea-change within the executive boards has been accompanied by organizational changes which can be associated with an ‘Americanization’ process. The remainder of this section provides a brief summary of the main trends. To start with, the shareholder value (SV) concept, associated with Rappaport (1986), has in recent years become a synonym both for the apparent change of corporate culture in Germany and – from a more critical stance – for the negative effects of globalization on the German political economy. In this discourse, an apparent overemphasis on shareholders is contrasted with a neglect of other stakeholders, above all labour. The underlying rationale of the concept is nothing new. It has for example been traditionally employed for the calculation of the adequate price in cases of sales of companies and is additionally used in Germany as a procedure to calculate the adequate value of properties (Ertragswertverfahren). What is new in Germany is the application of this procedure to assess the value of divisions, subsidiaries or business units and to use this assessment as a yardstick with which to regulate capital expenditure. Decision-makers of all three conglomerates have in the past at various points stressed their determination to follow a policy in line with the concept. Regionally and nationally, Veba once more made the running for others, speeches at the 1992 general annual meeting being credited with raising the topic for the first time in front of a wider audience (FT, 27 November 1992). This commitment was reinforced in the 1995 Annual Report (p. 15, my translation), where Veba additionally stressed its pioneering role: Veba is committed to the shareholder-value approach and is with its company-wide introduction of cash-flow oriented regulation systems amongst the pioneers of value-oriented corporate governance in Germany and Europe. At Thyssen, the appointment of the new chief executive has also led to a strategy oriented towards return on equity. The Assistant to the Thyssen CEO said: Q: ‘In Britain the main criticism voiced against German conglomerates concerns the breadth of activities and the extent of diversification. Some observers demand a change.’ A: ‘Sure! This is currently happening at Thyssen in the wake of the change in the position of the chief executive.’ Q: ‘The predecessor came from the steel division?’ A: ‘Exactly, and now from the service and trading division. Because of this there is a different corporate culture, as a result of this the shareholder value idea will come more to the fore, people now for the first time genuinely live this [concept]. (THY II)


Finally, in conjunction with the issuing of the ADR Program in the USA and a significant expansion of the share of equity capital held by US investors, RWE with some time-lag similarly stressed the need for an orientation towards the SV concept. Strikingly, however, until recently the concept was given far less prominence in RWE’s publications than in those of Veba. The more or less outspoken commitment to the SV concept was then followed by a number of organizational steps which can be interpreted as convergence with the Anglo–American model. The first is an ongoing shift towards Anglo–American accountancy standards, a change which can again with some justification be regarded as a sea-change. Along with Daimler–Benz in the wake of its NYSE listing, Veba was the first company to switch from German to US GAAP (generally accepted accounting principles). The decision was made in 1995 with a view to a future New York listing (finally made in October 1997) and can be seen as a concession to the Anglo–American financial community which for long has judged German GAAP with considerable mistrust. German GAAP are based on a prescriptive legal framework (for instance, HGB §§246ff; PublizitätsG), but in reflecting institutionalized routines of the German financial reporting system are as such codified representations of long-standing, traditional practices. It should be noted that only the most important rules are formally codified and that many reflect a common understanding and are thus continuously reproduced by their application. Because German companies have traditionally received most of their capital from sources other than equity markets, above all from banks, and because of the dominance of bearer (vs Anglo–American registered) shares held in trust by the banks, the GAAP are aimed more at the creditor than the investor. Creditor protection is traditionally given priority to investor interest and German GAAP therefore generally motivate companies to value their assets more conservatively and to minimize distributable earnings. ‘While U.S. managers are motivated to view financial reporting and operations from the shareholders’ perspective’, Harris (1993: 3) argued, ‘historical factors have induced German managers to view their role from an entity (capital) maintenance perspective.’ It does not come as a surprise that Veba opted first for US GAAP, given the company’s ambition to tap the US financial market and recalling the SG Warburg report in 1992 which explicitly criticized that Veba’s total market capitalization is considerably less than the sum of its parts. Similar criticisms have been directed at the Thyssen management. The imposition of what is termed ‘conglomerate discount’ by the stock markets reflects a built-in prejudice and dislike of diversification as opposed to the currently dominant stress on focus. Not surprisingly, the conglomerates therefore had to adopt measures to appease the international financial community. The decision of RWE to add financial figures calculated along IAS


(International Accounting Standards) lines reveals that pressure appears to have built up and a similar move at Thyssen can be expected in the near future.9 Although possible consequences must not be exaggerated, it should at least be noted that the traditional German GAAP have to be seen as both the result and the cause of a far lower share of equity capital of German companies as compared to their US or UK counterparts. In 1993, for instance, large German industrial companies on average had a ratio of 22.78 per cent, the figures for the UK and the USA were 36.78 and 36.2 per cent, respectively (IW 1995). The more conservative German GAAP therefore obviously provide an important protective shield.10 Secondly, and this holds in particular for Veba and RWE, the companies have considerably enhanced their information policies vis-à-vis institutional investors and analysts. Veba created the new position of ‘head of investor relations’ in the wake of the Warburg report and began to target two main groups of financial opinion leaders, namely bond and share analysts as ‘opinion leaders and multiplicators at the financial market’, and institutional investors as the ‘most important group of share buyers’ which ‘are able to significantly influence the share prices with their investment decisions’ (Annual Report 1994: 18, my translation). Finally, Veba switched from half-year to quarterly interim reports. Similar decisions have been made by RWE, the company also strengthening its investor relations program and the chief executive announcing the shortening of reporting intervals in May 1996. The latter issue may appear trivial at first sight, but is in fact a development which puts firms under immense pressure, the shorter reporting intervals having the side-effect that the executive has to defend its targets and strategies and has to face possible shareholder and public criticism more often. In a sense, this could lead to a reinforcing cycle and to an incentive to ensure the reporting of profits in the shorter term. Having said this, there is however also the potentially positive effect of greater transparency in the firms’ policies. Thirdly, all three firms have taken steps to apply the SV concept more rigorously than just changing their information policy and investor relations. What is striking is that Thyssen, RWE and Veba have all adopted return on equity and/or capital targets, comparing them to the cost of capital and thus determining whether the company is creating or destroying value. The results are then used as yardsticks for investment and disinvestment decisions. While RWE had at the time of interviewing only hinted at setting return on capital targets between 12 and 16 per cent and applying these benchmarks for individual subsidiaries and units (Int. RWE I), Veba has again gone furthest, working out risk-adjusted targets for all of its business units and measuring its managers on whether they beat them or not (FT, 3 September 1996). Overall return on equity increased steadily from 8.7 per cent in 1994 to 11.4 per cent in 1995, and the conglomerate aimed at a rate of 15 per cent until the end of the millennium. Thyssen, setting an


overall capital target of 12.5 per cent, which also includes a return on equity of 15 per cent, has used the performance of its units to allocate them to one of three groups: (i) core activities already meeting the criteria, (ii) a group of hopefuls believed to have the potential to do so in the long run and (iii) disinvestment candidates. In this vein, the steel division was reorganized into smaller units with the aim of boosting profits. Although it remains to be seen whether the goals can be achieved, this nevertheless is an indicator of the extent to which corporate strategies have started to become interwoven with concepts and practices having their origin in Anglo–American capitalism. From a more abstract perspective, the fact that the 15 per cent target has acquired something of an article of faith at the international level can be interpreted as a further indicator for convergence. As large companies increasingly expose themselves to international financial markets, they have to make sure that international investors get adequate yields. The benchmarks for investment decisions are normally alternative investments and thus interest rates. As organizational space expands, national benchmarks lose importance and international benchmarks take over. And given that the global financial markets are dominated by New York and London, benchmarks such as the US prime rate or the LIBOR (London interbank offered rate) become the yardstick with which investment decisions are judged globally. Insofar as companies have to guarantee these Anglo–American standards one can therefore talk about a process of Americanization, a process which – to return to the case-study firms – is reflected in a common 15 per cent return on equity benchmark. Again, it is increasing global competition which explains the pressure on German companies. The main international players currently surpass the 15 per cent rate and German companies are again regarded as having to catch up. International expectations clearly are high, as forecasts by Goldman Sachs, which expected the average return on equity for German companies to rise from 10.2 per cent in 1995 to 15.7 per cent in 1998, illustrate (Economist 5 April 1997).11

4.4 The changing corporate power geometry: shareholder value, labour and the ‘ratchet effect’ The argument has so far focused on internationalization, on pressure from powerful actors on the case-study firms and finally on organizational responses and changing corporate cultures as a result of ‘political–economic turbulence’. As pointed out earlier, the Veba and Thyssen conglomerates have, with the exception of 1997 and 1996–7, respectively, during the past few years reduced their overall workforces. Strikingly, after steady overall employment growth during the second half of the 1980s, Veba, and RWE for the first time in their recent history reduced employment, the former


from 1993 onwards, the latter in 1995–6. Overall, Veba’s special position becomes visible once again, the company together with Thyssen increasing the absolute number of its foreign employees at the same time. Even at RWE, which has recently increased its total workforce again, employment abroad rose disproportionately. In the light of the findings of Section 4.3, these trends support the assumption that a significant shift of power has taken place within the ‘triangle’ of corporate stakeholders, that is, capital owners, management and labour. The power geometry appears to have shifted in favour of equity capital (that is, shareholders) and wider financial capital interests, a shift which in principle occurs at the expense of labour, to be more precise domestic labour. The interviewee at the Thyssen Steel works council, for instance, said: Q: ‘It is often argued that value oriented management is of benefit for the workforce, too. How do you judge the shareholder value concept?’ A: ‘Well, from our point of view this is precisely not the way it works. The Thyssen stock has recently risen enormously and at the same time they announced here [= Ruhr Area] that they aim at a labour force of 10 000 workers by the year 2000. At the moment the official aim is 13 600. We would really wish this permanent uncertainty to stop, to work with a bit more security. We don’t object that shareholders gain as well, but this should be balanced. Here, there has been a shift to the disadvantage of the employees.’ (THY III) Additional evidence for a change in the power geometry is provided by comparing dividend pay-outs with the development of profits/losses during the last 15 to 20 years (see Figure 4.2). Veba and RWE have both been able to report profits throughout the 1980s and 1990s and consequently raised their dividends accordingly. What is striking, however, is that even in years of considerable profit declines, dividends remained constant, a pattern which could by analogy with Duesenberry (1949) be termed a ‘ratchet effect’. At the end of 1993, Veba even raised its dividend while reporting stagnating and declining profits for the fourth consecutive year. This decision has to be seen in the context of an extensive group-wide rationalization programme which was set in motion in 1993, after 1992 pre-tax earnings declined by 20 per cent (net profits: –14.7 per cent) and aimed at saving DM 1.2bn (= 1000 million). Between 1994 and 1996 Veba consequently reduced its workforce by about 10 000 net employees (that is, excluding employment change owing to take-overs and sales of units). The company clearly felt obliged to justify its decision, given the following statement: ‘The current drop in earnings is not strong enough to lower our dividend. We are prepared to follow a smooth rather than strict correlation between earnings and the dividend’ (FT 25 March 1993). Finally, if one additionally takes into account that during the period 1994–6 Veba


The ratchet effect, RWE and Veba, 1981–98

60

25

Veba

50 20

40 30

15

20 10

10

0 –10

5

–20 0

% change of profits*

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

–30

RWE

Dividends

100

25

80

20

60

15

40 10

20

1998–9

1997–8

1996–7

1995–6

1994–5

1993–4

1992–3

1991–2

1990–1

1989–0

1988–9

1987–8

0 1986–7

–20 1985–6

5

1984–5

0

Notes: *Profit numbers refer to ‘Jahresüberschuß RWE AG’ in the case of RWE and ‘Jahresüberschuß nach Steuern’ in the case of Veba. Data source: Annual Reports; numbers taken from each respective Annual Report; own calculations.

invested DM 4.9 bn in its telecommunication activities (source: Annual Reports; own calculations) and if one links this with the reduction in employment, then the hypothesis of a power shift becomes plausible. This development, increasing dividends and employment abroad, is very likely


to continue in the future and has to be seen in connection with the increasing role of Anglo–American investors in the companies’ portfolios. The situation at Thyssen differs insofar as the company appears to follow a dividend policy which is more sensitive towards negative developments. This concerns above all the financial year 1992–3, when the conglomerate suffered heavy losses (net loss DM 994m) and felt obliged to waive dividend payments for that and the following year. This restraint may be linked to the far more traditional shareownership structure and a more ‘patient’ approach of the investors (see Table 4.7).

4.5 Concluding remarks: upscaling, institutional distance and power asymmetries This concluding section will now attempt to pull together the main findings so far. I have aimed at connecting changes in the systemic context at different spatial scale levels with organizational and strategic responses. Put simply, the chain of links may be summarized as a three-step cyclical process. First, political–economic turbulence leads to efforts to upscale and detraditionalize. What is striking in this context is the degree to which the conglomerates have adopted almost identical strategies. Second, the expansion of organizational space and detraditionalization then confronts the companies with institutional distance and, third, this in turn exacerbates the organizational problems with which the firms have to cope. Two processes stand out. On the one hand, the companies’ economic– competitive context is characterized by a deepening and expanding social division of labour, with inter-firm relations being increasingly stretched to ‘higher’ scale levels, be it a move from the regional to the national or from the regional and/or national to the international level. Embeddedness in a general environment of growing corporate internationalization was at the national level accompanied by a recessionary period and stagnation. In other words, in their economic environment, the firms were faced with pull and push factors which influenced their own strategic responses. In addition to this, the changing regulatory landscape, that is decisions and actions of state authorities at different spatial levels, also had a significant impact on the strategies chosen. Deregulation and liberalization measures by national and international bodies (such as EU, WTO) have clearly prepared the ground for diversification and upscaling. Thus, rather than being powerless in the face of ‘globalization’, government policies are actively influencing the course of developments, in principle being able both to accelerate and restrain the process. This is all happening across different spatial scales, in a complex interaction of processes at the regional, national and international level. Although organizational responses to coordinate and deal with uncertainty are contingent upon specific production requirements and character-


istics of different sectors and products, three common trends can be identified. The first is that upscaling and detraditionalization have led to increasing uncertainty and institutional distance. This is a consequence of a move into unknown territory, general institutional differences being due to different requirements and ‘ways of doing things’ in new markets (for example, telecommunications and environmental technology) or to political imponderability (for example, the misinterpretation of the future TC ‘deregulation’ path at the national level). One might label this uncertainty stemming from a change in the way the firms’ market environment is coordinated as ‘market distance’. Despite sufficient power resources, above all with regard to financial power, market distance made it necessary at least at the beginning of diversification to relinquish control and opt for more decentralized forms of organization in order to acquire external know-how. That is, there has been – both within ET and TC – a proliferation of horizontal alliances and cooperations, and of acquisitions of young small and innovative firms. Another organizational response at all firms has been to recruit experts from firms which have already acquired know-how in the areas in question. It should be pointed out that these moves, which cannot in detail be included in this book, constitute a break with ‘traditional’ practices (see Berndt, 1998). However, rather than a smooth and unproblematic process, there is a constant conflict between the demands and characteristics of new activities (for instance, decentralization, cooperation amongst ‘equals’) and traditional institutionalized routines (for instance, in traditional fields inter-firm relations are dominated and controlled by the likes of Veba, RWE, Thyssen and also Ruhrkohle; see Chapters 6 and 7). A further observation, and this is the second common trend, is that the conglomerates have in their environment been increasingly exposed to quite different and very powerful institutional frameworks. In their effort to upscale production activities the companies have got dependent on global financial actors and as such entered Anglo–American worlds of ideas, norms and values. Sceptics might point to the fact that this claim of financial dependence does not square with the fact that the companies in question, at least Veba and RWE, have always been renowned for their financial muscles. This can be countered if one considers the following two aspects. The first is that even for cash-rich firms such as the utilities the sums at stake cannot be easily funded out of cash flow, above all if one adopts an outspoken internationalization strategy as Veba has done in TC and other areas in recent years. A comparison of overall cash flow to capital expenditure ratios for the periods 1985–90 and 1991–7 supports this assumption (Figure 4.3). Second, and here state regulation enters the picture again, RWE and Veba are only too aware of the fact that their quasinatural domestic monopolies are bound to come to an end once European energy markets have become fully liberalized. Both mechanisms mean that

The Changing Corporate Power Geometry 87 Figure 4.3

Cash-flow/capital-expenditure ratios, 1985–97

200 1985–90 1991–7 139.25 117.35

133.79 100

97.66

107.92 88.81

0 Veba

RWE

Thyssen

Sources: Annual Reports; own calculations.

the conglomerates increasingly have to be competitive in international financial markets in addition to their product markets. In sum, in addition to (selective) corporate internationalization there is financial globalization, or as the Economist (6 April 1996) put it: ‘Now it suddenly seems to have dawned on German managers that capital markets are as global as the markets for their goods.’ International investors, analysts and other actors therefore increasingly scrutinize the strategic development of international players, with those firms which internationalized activities most and which seek international capital obviously being more dependent on their image with these actors than others. And leading members of the companies have repeatedly pointed to the importance of having the right image with the financial markets. Thus, as companies internationalize they are confronted with different norms and values. These values are in conflict with traditional corporate practices, leading to governance dilemmas and possibly culminating in what may be called ‘Americanization’ of German corporate governance. There is a conflict between different attitudes and ‘ways of doing things’ which manifests itself in institutional distance. In an ideal world this is a conflict between an aggressive and short-term corporate culture and a national system which is based on institutionalized ‘checks-and-balances’. Hostile take-overs are still regarded as profoundly anti-social in Germany and this has until now protected the political economy from some of the excesses besetting Anglo–American economies, particularly in the 1980s, just as it has of course provided the breeding ground for the country’s


diversified conglomerates and ‘notoriously’ inflexible economy. Image and informal cultural factors are extremely important in this regard and judging from the comments by the international financial community, Veba has certainly been successful in portraying itself as a pioneer in terms of taking on board Anglo–American practices. Insofar as the domestic financial community, such as the large German banks, change their attitudes, firms like RWE or possibly even Ruhrkohle, which until now have had less direct contact with such trends, are under a similar pressure and may have to follow suit (see Deeg, 1993). Overall, the adoption of Anglo–American standards can be interpreted as a move to overcome and coordinate institutional distance resulting from an upscaling strategy on the part of German capital. The popularity of ‘Shareholder Value’ (SV), ‘Lean Production’ or ‘Just-in-time’ (JIT) concepts in recent years and the ‘Americanization’ process more generally reveals a ‘globalization of ideas and concepts’ which to some extent has resulted in a convergence with the Anglo–American model, a convergence, to be sure, which is rather one-sided and reflects the current dominance of aggressive market attitudes and their main actors, Anglo–American financial institutions. Finally, there is a shifting power geometry within the firms. Apparently powerful large firms are to a certain extent locked into a circle, with political– economic pressures forcing them to choose a particular diversification and upscaling strategy, a move which in turn leads to new sources of pressure and increasing institutional distance, bringing about new necessities to adjust and so on. This is a case where organizational space (that is, power and control over relations in space) cannot be expanded in line with what I term ‘relevant space’ (that is, the economic space defined by the new market conditions). Yet, the conglomerates and actors within the firms should by no means be portrayed as having no agency whatsoever. For the firms overall have weathered a difficult period of increasing globalization and domestic stagnation with reasonable profit margins, above all Veba and RWE. One reason for this is that they have financed diversification by cost-cutting and restructuring measures in more traditional activities. In other words, devaluation measures (for example, reduction of employment or putting pressure on suppliers), predominantly at traditional scale levels, and upscaling are two sides of the same coin. Upscaling is accompanied by cost cutting measures in-situ. At least from the argument so far, labour at the regional and national level in general appears to bear the brunt of the costs of restructuring and internationalization. The performance of the Veba stock since 1993, for instance, illustrates that the financial markets reward this strategy. While the stocks of all three companies have generally outperformed the German benchmark indices (DAX, FAZ) since the mid-1980s, Veba has started to overtake its rival RWE. Veba’s stock price in absolute

The Changing Corporate Power Geometry 89 Figure 4.4

Stock prices and employment 1985–97

160 000

1200

140 000

1000

120 000 800

100 000

DM 600

80 000 60 000

400 RWE stock prices Veba stock prices RWE employment Veba employment

200

40 000 20 000 0

0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Sources: Share prices as on 31 December; Annual Reports.

DM terms in 1994 surpassed that of RWE for the first time since 1988. With regard to employment, Veba has seen a marked inverse relation between share price increase and workforce reduction. What is particularly striking is that the recent levelling out of stock price increases coincided with rising overall employment. And to this one has to add that the recent employment increase has predominantly occurred abroad (see Figure 4.4). Notwithstanding the differences between the conglomerates, similar restructuring measures to Veba’s have been adopted by RWE and indeed Thyssen. Thus, RWE’s cuts in employment in 1995–6 constitute a significant change in policy, given that RWE did not reduce employment significantly during the early 1980s recession, in contrast to Veba. What is crucial is that RWE has also recently shifted away from domestic to international labour. To conclude, global integration appears to disadvantage domestic labour at the expense of actors and groups of actors which operate at a wider scale level. There are signs of a shift in corporate governance, from the traditional ‘insider’ to an ‘outsider system’ dominated by shareholders. But, and this is an important point, at the same time as companies change their organizational strategy and the key actors alter the way in which they perceive the economic world, this inevitably leads to conflicts with ‘traditional’ ways of doing things. This holds in particular for the old core


activities, such as steel, electricity as well as coal mining, to allow Ruhrkohle to enter the picture again. Not surprisingly, there have been internal conflicts between different groups of actors, as briefly illustrated by the example of the different views on the situation from the perspective of the labour representative at Thyssen. The question now is, what exactly happens within the regional production system? How are traditional stakeholders, both within and outside the conglomerates, affected by these changes? And how do they act and react? Is the picture of a somewhat linear detraditionalization and also deterritorialization process a correct one? Answers to these questions are provided in the following chapters.

5 The Territorialization of Ruhr Conglomerates: Regional Engagement and Place Dependence

5.1

Introduction

The main question now concerns how embeddedness in traditional interaction contexts and socio–cultural structures influences restructuring strategies. This will be examined by focusing on the Ruhr Area and the immediate vicinity, linking the historical evolution of the regional production system with more recent developments. Conceptualizing the region as space(s) of interdependencies, I will examine three dimensions of regional embeddedness in Section 5.2: material interdependencies, control and ownership relations, and personal ties and institutional proximity. Sections 5.3 and 5.4 take up the globalization and deterritorialization theses and, while not denying that changes are under way, point to counterforces of structural persistence and regional place dependence. This is done by conceptually distinguishing two different effects of regional embeddedness, namely regional collective action to protect and to expand organizational spaces. The final section draws together the findings, assessing the positive and negative consequences of cooperation and engagement for the region.

5.2

Dimensions of regional interdependence

To begin with, a note of caution is appropriate. The need to conceptualize the region as a ‘nexus of untraded interdependencies’ or ‘relational asset’ (Storper 1995a, 1997a; compare Chapter 3) notwithstanding, this does not mean that we can discard traditional agglomeration effects. In the case of the Ruhr Area urbanization and localization externalities without any doubt are important factors accounting for the regional embeddedness of the conglomerates. Take the following statement of the interviewee at Ruhrkohle Umwelt, the ET division: Nordrhein-Westfalen continues to be the Land with the highest industrial production, with powerful competitors, no question, and … one 91


has to consider how many people are living here, the amount of recyclable resources, of domestic rubbish. One only has to look at other countries, you can talk about the Irish market or the Portuguese market, but this is only a quarter of [the NRW market] and even the Netherlands are just as large as Nordrhein-Westfalen. (RAG III) This has to be kept in mind when reading the remainder of this section which looks at the ownership and control linkages of the large firms studied, at evidence for regional networking on the part of the decisionmaking elite, and – more generally – at institutional proximity, that is collectively shared ‘points of reference’, ‘ways of doing things’ and action frameworks. 5.2.1

Relations of control and capital stakes

The conglomerates and their divisions have over time cultivated a system of regional interdependence characterized by varying degrees of cooperation, of interlocking supervisory boards, and cross-capital stakes. The composition of the supervisory boards and the capital links of both the four case-study conglomerates and other major regional ‘centres of decisionmaking’ at the time of interviewing reveal the extent to which the main corporate players in the region are interwoven and dependent on each other (see Figure 5.1).1 A second remarkable feature concerns the involvement of the state. At the regional level, various state agencies and organizations, ranging from local authorities to the Land government Nordrhein-Westfalen and the Land-controlled Westdeutsche Landesbank, own stakes in the companies and occupy control positions. Strikingly, however, despite their almost identical sectoral focus, RWE and Veba exhibit crucial differences with respect to state involvement. In 1996, Veba’s supervisory board contained not even a single state representative, whereas in contrast, four senior local authority representatives and the CEO of Westdeutsche Landesbank were amongst the 20 supervisory board members of RWE. This reflects the considerable importance of local authorities as a result of the company’s multiple voting rights and the absence of this peculiarity at Veba. Moreover, the finance minister of Nordrhein-Westfalen is a member of the board of Thyssen, just as Land and Federal representatives are of Ruhrkohle’s. Finally, as already touched upon in Chapter 4, there is an important regional–national dimension with regard to capital and control relations. On the one hand, this concerns the one-sided involvement of Germany’s largest banks which have considerable influence on the daily affairs of most Ruhr conglomerates. This influence has been most obvious in the case of the managed reorganization and restructuring of the Ruhr steel industry.

Figure 5.1

Interlocking supervisory boards and capital linkages

Ruhrgas

Dresdner Bank

Deutsche Bank

BfG Hypothekenbank

Position on holding supervisory board Position on board of subsidiary Supraregional state and financial capital

Federal Government

NATIONAL

Ruhrkohle

Thyssen

VEBA

Babcock

Commerzbank RWE Allianz Krupp-Hoesch REGIONAL

VEW

West LB

Local Authorities

Land NRW Government 93

Sources: Annual Reports; capital involvement at the time of interviewing (1996).


5.2.2

Institutional proximity, tacit knowledge and personal ties

The coal mining industry exhibits particularly strong affinity, the solidarity amongst miners being legendary and stretching to the higher echelons of corporate hierarchies as well as to inter-firm and capital–labour relations more generally (for treatments of the experience of other coal regions, see Hudson, 1989; Swyngedouw, 1996). The interviewee at the Ruhrkohle Bergbau (mining) purchasing department: Q: ‘People normally say that there is a certain ethos and way of thinking [within coal mining].’ A: ‘Well, here one has to look further into the past. From the early days onwards, the miner has been because of his work extremely dependent on his colleagues, on those who work side-by-side with him, and this continues until today. It’s no accident that the term Kumpel2 has been transferred [into the German language], there simply is a totally different relationship amongst [miners]. And this is also evident at the universities … for every mining engineer has already grafted underground, really lugging coal, extremely dirty work, and he has been able to do this in relative safety and calm, because he knew that his man, his colleague beside him was always there, that they could rely on themselves blindly and still can. Insofar the solidarity amongst miners is of course much stronger than amongst bricklayers or steelworkers … And there are of course these traditions to a greater extent … and connections to the university, to other firms, quite close connections … such ties play an important role in the economy as a whole, [but] this has always been particularly marked within mining.’ (RAG II) More generally, solidarity in the region has to be seen in the light of a traditional scepticism as to the extent to which market competition constitutes the solution to economic problems. Rather, there is a traditional consensus in the Ruhr Area which puts faith in the capacity of state policies and managed adjustment. Close inter-relation between state, capital and labour was the result of the belief ‘that the anachronisms of the market and the uncertainty of a state of disorganization in economy and society were the real evil’, as Läpple (1994: 46, my translation) put it. This description of the way of thinking in the Ruhr Area comes very close to the definition of German corporatism more generally (compare the definition by Giersch in Chapter 1, p. 3). Traditional corporatism is the more advanced and pervasive the closer one gets to the coal, steel and iron core of the regional economy. These structures have been criticized in the literature for causing the types of lock-in mentioned earlier (see Grabher, 1993a). Yet, at the same time as these persistent cultural structures and institutional proximity continue to territorialize economic processes and are reproduced in interac-

Regional Engagement and Place Dependence 95

tion, they have also undergone a process of transformation and restructuring in the wake of political–economic turbulence. Interdependent firms A good example of dynamic change is the relations between Ruhrkohle and the regional steel conglomerates. In the wake of severe international and national competition the regional steel-makers Thyssen, Krupp–Hoesch and Mannesmann, and Preussag in Salzgitter (Niedersachsen) demanded a partial lifting of a contract dating from 1991 which committed German steel producers to buy all their coking coal from high-price domestic producers. Ruhrkohle clearly preferred the traditional ‘non-market’ way of solving problems, an official arguing ‘[We] are all in the red. We have to find a common solution to get out of the crisis’ (FT, 5 August 1993). However, recent decisions to acquire stakes and establish joint ventures in countries with cheap coal supplies (for instance, Venezuela) confirm the extent to which pressure from major clients and/or shareholders has had effects on the company. To this one has to add the Federal Government’s decision to significantly cut back on coal subsidies mentioned earlier. Leaving the traditional industrial core and turning to more recent developments and ‘younger’ activities, the tension between both forces is just as visible. To start with, the territorializing effects of durable and stable ties, of accumulated trust and know-how stemming from intense business contacts, can be illustrated by the following excerpt from the interview with a senior representative of Thyssen Industrie. Referring to Thyssen’s problems in meeting the demands from car producers to relocate parts of its automotive supply production from Nordrhein-Westfalen to Great Britain, he argued: [If] we have production sites here which produce axle systems and we have sites in England, one cannot say, as if pushing a button … this order is given to England, this order is given to Bielefeld, this order is given to Remscheid. Rather, this of course directly affects old and historically evolved relations … Take Bielefeld, for instance, [Bielefeld] belongs to [Thyssen] Umformtechnik, they produce axle systems for commercial vehicles, they have been doing this for ages with their clients, not necessarily globally, one focus was Germany. So, if we have now additionally acquired [suppliers] in England, they have similar relations in England. Within the family, we approach the whole situation very cautiously … This is a process which can certainly not happen overnight in a conglomerate, rather one has to work hard and convince. (THY I) In other words, the companies obviously find themselves dependent on relations with other firms in younger sectors as well, just as with their


workforce and with public and semi-public agencies and organizations. Two qualifications are important in this context. First, what is at stake here are skills, knowledge and ‘ways of doing things’ accumulated over time. All else being equal, this means that one should expect firms to be the more place-bound the longer they have been interacting with other organizations and individuals. Second, rather than material assets, the crucial aspects are tacit in nature, that is they are personalized and therefore extremely difficult and costly to replace. All this renders even the most powerful of the conglomerates studied dependent on place and territory across the sub-divisions and activities. To be sure, this does not necessarily imply a dependence on any particular region alone, such as the Ruhr Area in our study. Place dependence is also clearly influenced by the nature of the activities, more complex and knowledge-intensive businesses being more likely to find themselves dependent than standardized ones. What is more, the time spans during which firms get ‘trapped in space’ will also differ according to the material nature of activities. In the Ruhr case, evidence for regional place dependence and institutional proximity is still most obvious in the Montankomplex, where the sheer duration of interaction has created a peculiar pattern of interdependence. The regional executive elite: inter-linked career paths and recruitment decisions An important expression of the regional interwovenness of the firms and their main actors concerns the recruitment decisions of the major conglomerates and the career paths of their executive elites. Strikingly, the chief executives of all four case-study conglomerates exhibit career paths which either took place completely via the internal labour ‘market’ or – at least in terms of their most important career steps – within the higher echelons of Rhine–Ruhr companies. It is evident that after decades of continuous coevolution and coexistence, all main companies have developed a culture which prefers internal promotion to external recruitment, the internal labour ‘market’ being used as a way to train and develop executives who by the time they reach the top of the firm have become familiar with the whole company from the bottom upwards. Whenever external recruitment does become necessary, the conglomerates often appear to look at their regional neighbours for potential candidates rather than the wider national or international level. That the four case-study conglomerates are involved directly with each other can be illustrated by the replacement of the head of Thyssen Handelsunion. After joining Thyssen in 1967 straight after his studies and never leaving the company, the new chief executive had as recently as 1992 moved to the top of Veba’s transport division, when the offer to rejoin Thyssen was made (FT, 30 January 1996). It should be added that the return would not have been as smooth without Veba’s cooperation. Intra-regional rotation of managers and senior personnel is normally agreed upon between the companies involved (Int. VEBA II).


Historically, poaching has always been considered an inadequate way to recruit senior personnel, the dominant Ruhr capitalists usually having made arrangements in advance in cases where external know-how was required (see Weber, 1990). Hence, just as the likes of August Thyssen or Friedrich Krupp favoured negotiated agreements in the past, their ‘heirs’ today similarly appear to prefer negotiated solutions to poaching and continue a practice which in effect serves to bind the regional companies further together. Chapter 4 has hinted at major changes in corporate cultural practices. There, an apparently clear distinction was drawn between Veba as the most Americanized conglomerate on the one side, and Thyssen, RWE and Ruhrkohle, on the other, which although ‘following’ Veba at least in part were found to rely more on traditional activities and scale levels. In terms of recent appointments of chief executives, the choice of a former director of finance at Veba was duly contrasted with the more stable and continuous successions at RWE and Ruhrkohle. Indeed, recent recruitment decisions clearly confirm RWE, Ruhrkohle and Thyssen’s reliance on internal and/or regional skills and know-how. RWE’s philosophy, for instance, is illustrated by the following quote in a 1995 company publication: ‘Systematic development of senior personnel … has top priority. It is [our] aim to meet our needs with regard to senior personnel internally.’ For instance, positions at the very top of the conglomerate hierarchy of RWE are still predominantly occupied by managers with a RWE Energie background (Int. RWE V). In accordance with the Americanization and cultural convergence thesis, one would expect the situation at Veba to deviate, reflecting its different development path in recent years. Yet a closer look at the career paths of its executives at least qualifies this assumption, hinting at persistence of past practices instead. Strikingly, at the time of interviewing the four top executives of the holding company Veba AG have all spent most of their career at Veba, only gradually moving to the top of the conglomerate hierarchy. The chief executive Ulrich Hartmann, for instance, has spent almost his entire working life within the company, after joining Veba Kraftwerke Ruhr in 1973 at the age of 35. Among other tasks he held the position of assistant to the powerful former CEO Bennigsen-Foerder before taking over responsibility for the company’s finance and tax portfolio. Furthermore, in an interesting parallel to the family connections of the early Rhine–Ruhr conglomerates, Hartmann’s father similarly headed Veba in the 1960s. The remaining holding executives Hans Michael Gaul (finance), Hermann Krämer (strategy, telecommunications) and Manfred Krüper (personnel) have all spent a considerable time at the holding company and various operating subsidiaries before taking up their portfolios. A look at the operative level and the heads of the divisions which belong to the extended conglomerate executive further supports these findings. Veba Oel’s Wilhelm


Bonse-Geuking and Helmut Mamsch at Stinnes have been promoted internally. The careers of the remaining executives only at first sight deviate from the general picture. Before joining Veba (VKR) in November 1987, Preußen-Elektra’s Hans-Dieter Harig had worked for RWE and for Ruhrkohle (Steag). Similarly, Erhard Meyer-Galow, who headed Hüls at the time of interviewing and who joined Veba–Stinnes in 1991, had occupied leading positions at two further Ruhr companies from 1983 onwards (Th.Goldschmidt AG, Brenntag AG). And Georg Kuhlenkampff, who headed the division Raab Karcher and joined Veba in 1991 as well, had been a senior manager at Thyssen before moving – for a short period of time – to a Dutch company, the position he held when Veba recruited him (Int. VEBA II; WAZ 13/14 April 1995). Overall, regional ties and interrelations loom large. Veba’s top managers have almost exclusively been promoted internally or have held similar positions at other regional conglomerates, a pattern which sits uneasily with claims of a cultural seachange along Anglo–American lines, which would imply more open recruitment channels. To be sure, this is not to say that the changes which have been portrayed in Chapter 4 have no deeper implications. Veba’s corporate culture, and to a lesser extent the practices at the other case-study firms, have changed during the recent past. As we have seen earlier, this is most evident in new strategic fields, such as telecommunications. It is striking that the only truly ‘external’ top manager at Veba is Ulrich Bohla, a former senior manager at IBM Deutschland managing Vebacom at the time of interviewing. Moreover, Veba expects to increase its proportion of ‘external’ and ‘foreign’ executives in the future.3 Internationalization and market distance are the main reasons for this (Int. VEBA II). What these findings show, however, is the extent to which forces of persistence and regional place dependence conflict with a full conversion to Anglo–American corporate practices. What is more, recent recruitment decisions in environmental technology and waste management, where all the companies involved recruited predominantly external but regional know-how,4 are once again a reminder that regional affiliation and inter-relation is by no means the preserve of old industries. In other words, historically evolved and established relations, common practices and interdependencies stretch beyond the old industrial core of the region. The conglomerates which have in recent years significantly moved away from traditional activities and in part loosened ties to the region are in many respects still territorially bound and place dependent. It is the contrast, or rather duality, of dynamic change and structural persistence, of deterritorializing and territorializing factors which will occupy the remainder of this and the following chapters. In what follows, an attempt is made to distinguish between defensive utilization of territorialized relations (that is, engagement in order to protect traditional organiza-


tional space) and active use of traditional interaction structures (that is, engagement in order to scale up).

5.3 Spaces of protective engagement: inter-firm relations and the state–capital nexus The decisive role of regional protective cooperation between the Ruhr conglomerates, between capital and state and between finance and industry, both cutting through the scale hierarchy, can again be illustrated by the examples of older industries and newer activities alike. 5.3.1

Case study I: the Montankomplex

The recent history of the coal and steel industries has continued to be one of managed adjustment in the face of external threats, of resistance against new developments, and of resultant adjustment and power conflicts. Since the early 1980s declining demand and fierce international competition have forced the major steel producers continuously to reorganize, concentrate and pool their activities. By the mid-1990s, this had resulted in a distinct regional division of labour, Mannesmann focusing on the tube business, Thyssen on flat steel and Krupp–Hoesch on specialty steel. Specialization was accompanied by profound reorganization, including the swapping of subsidiaries, the setting-up of joint ventures and – in the case of Hoesch and Krupp – the merger of two leading Ruhr conglomerates. During the whole period the large German banks played a decisive role. This holds above all for Deutsche Bank and its former leading executive Alfred Herrhausen.5 Together with the chief finance executive of Mannesmann at that time and the long-standing head of the Thyssen supervisory board, Günter Vogelsang, Herrhausen was part of the team of so-called ‘steel moderators’ who in 1983 were given the task by the Federal Government in Bonn of developing restructuring recommendations. Much of the subsequent reorganization has been based on this work, including the quasi-hostile merger between Krupp and Hoesch in 1992. In spring 1997 Krupp–Hoesch shocked the German public by announcing a hostile takeover bid for the larger and healthier competitor Thyssen. Again, traditional relations of conflict and alliance are crucial in understanding and explaining the formulation of this plan and its eventual failure. To start with, Deutsche Bank and to a lesser extent Dresdner Bank both played a crucial role. First, because of the limited financial muscle of the ‘perpetrator’, they pledged the capital (DM 15bn) needed for the purchase of the shares required to gain a controlling majority. Second, their City of London offshoots already mentioned, Morgan Grenfell and Kleinwort Benson together with Goldman Sachs, had worked out the plan down to the last detail, thus providing the knowhow for the planned coup. Not surprisingly, the bid was therefore seen by


the German public as a final step towards Anglo–American capitalism and as the death knell for the German Model based on consensus and managed restructuring. That this should happen in the Ruhr Area, in many ways the epitome of the German system, was regarded as the ultimate proof of the extent to which the German social economy is changing. After much hype, however, the plan failed and the foes settled for a negotiated compromise, ultimately resulting in a ‘friendly’ merger, and thus in cooperation where competition and power conflicts had previously dominated the scene. Even if Deutsche Bank might feel vindicated, it almost certainly had greater plans. The whole deal should have afforded final proof that German banks are just as able as their Anglo–American counterparts to plan and manage such complex financial deals. So why did this plan fail? The answer is that evidence for cultural change notwithstanding, Rhineland capitalism is still very much alive, structural persistence based on traditional lines of association being crucial in understanding the failure of the takeover attempt. 6 From a scale perspective, a strategy of national and international engagement foundered on a predominantly regional coalition built around institutional proximity and traditional affiliation. The coalition pursuing change, with national and international financial capital playing a crucial role, met a diverse group of actors and organizations which joined forces in order to defend the independence of Thyssen, their various connections with the conglomerate and thus traditional organizational space. Overall, the defence was organized around two lines of resistance. Although Thyssen’s decision-makers had already started to pull together a coalition of banks and investment institutions which in their scale of activities clearly matched the Krupp coalition (among them international players, such as CS First Boston and Morgan Stanley, and Commerzbank, which is a traditional financial partner and in connection with Allianz AG the biggest single shareholder of Thyssen), engagement of national and international actors did not go beyond the early, preparatory stages, given that the second, more traditional line of defence showed early success. Here, regional networks of association turned out to be crucial. Arguably most important was the successful mobilization of the workforce of both Krupp–Hoesch and Thyssen. The hostile bid was portrayed by the representatives of Thyssen in terms of local job losses and unemployment as a result of aggressive globalization and Americanization. 7 That this rhetoric was successful is illustrated by the following quote by a member of the works council at Krupp–Hoesch: ‘I can’t globalize myself, I’ve got a flat here. Let’s therefore march, in order to make sure that Deutsche Bank is no longer able to dominate the country’ (Spiegel, 24 March 1997: 103). What was ironic, of course, was that the Thyssen executive, led by Dieter Vogel, who is very much linked with the new cultural ethos at Thyssen, managed to mobilize labour to defend the company against Krupp.


A further important element of the traditional corporatist defence was its success in influencing Berthold Beitz, the caretaker of the Krupp family heritage at Krupp–Hoesch, who leads the Krupp foundation which holds over 50 per cent of the equity. Having initially given his support to the plan, Beitz changed his mind in the wake of the protests by the workforces and the regional and national public. Finally, a decisive influence was exerted by regional and national politicians. Here, the NRW Land government continued a tradition of involvement and interference which only five years earlier gave it a similar decisive role in the management of the merger between Hoesch and Krupp. In the same vein, regional and Federal Government representatives, in the persons of Chancellor Kohl, the NRW governor Rau and the NRW minister of economic affairs Clement, exerted pressure and eventually forced the two CEOs to negotiate the compromise outlined above, a compromise in line with traditional, consensual conflictsolution. As the NRW Minister of economic affairs put it: The companies’ responsibility does not end at the factory gates. After all, they profit from a society which seeks to balance different interests instead of wearing itself out in unproductive conflicts. (Spiegel, 24 March 1997: 100) The joining of forces and cooperation in the face of external threats should not however be misinterpreted as being driven by identical interests and as being void of power asymmetries. Each party pursued its own agenda and was thus drawn into the coalition on different grounds. The contradictory power position of labour in such instances, wielding considerable influence when forces were joined, but being coerced into action by the threat of job losses and instrumentalized by the Thyssen executive, will be taken up in Chapter 8. To sum up, the failed hostile takeover attempt reveals the existence of powerful forces of resistance against Americanization, engagement in order to protect regional spaces of dependence countering engagement to change traditional ‘ways of doing things’. In the case of the Krupp–Thyssen bid these forces were territorialized regionally, the CEO of Commerzbank explaining the failure with specific regional structures: This … has a special political background. The steel question was [always a] question of the Ruhr Area, after the steel workers took the streets and structural change hasn’t been made systematically [before]. (SZ, 2 September 1997) Diverging interests notwithstanding, the various actors all shared a common worldview as to the need to protect the status quo and thus displayed institutional proximity. The fact that the outcome nevertheless


constituted a change in the regional economic landscape should serve as a reminder that conflicts between dynamic change and structural persistence always lead to changes of some sort. Krupp and its supporters used an expanded space of engagement to exert pressure in situ, and given that Krupp effectively forced Thyssen to agree to merge and pool activities, and that a considerable number of jobs will be lost as a result of ‘synergies’, Krupp’s policy of seeking to achieve scale economies has to some extent been successful. 5.3.2 Case study II: regional place dependence and new propulsive industries That long-standing traditional ties are not only utilized to protect old industries and to manage the restructuring of the industrial core of the region can be shown by reference to recent developments in telecommunications. The location of the TC activities of RWE, Thyssen and Veba is closely intertwined with the overall evolution of the conglomerates. Path and place dependence are particularly evident in the case of the utilities, the location of the various subsidiaries and the TC grid infrastructure being closely linked to traditional electricity generation and distribution. The Rhine–Ruhr agglomeration plays a decisive role in all this. As the concentration of the TC headquarters of four of the five main challengers to Deutsche Telekom (RWE, Thyssen, Veba, Mannesmann) and the considerable number of operating subsidiaries testifies, the Rhine–Ruhr agglomeration emerged as a leading national ‘player’ in TC. In their effort to gain a foothold in the market, the conglomerates often built on ties which stem from cooperation in more traditional activities, such as energy or steel. The relations between the firms themselves are interesting in this context. On the one hand, Veba, RWE and Thyssen are competitors. As Thyssen has considerably scaled down its ambitious TC plans, it is the utilities in particular which compete against each other. This competitive impulse, however, was severely dampened and to some extent even offset by the demarcation of traditional activities which has more or less been reproduced in TC. A member of corporate planning at RWE: Where we have got a sort of regional focus is [in the Ruhr Area], there is a pilot project in Gelsenkirchen, this is linked to a wider project. There are many [partners] involved … There is above all Veba … Even if there are areas where we also are in competition with them. (RWE I) For less powerful outsiders it is extremely difficult to penetrate these close and inter-connected webs of relations and the space they encompass and define. Here, the rationales of engagement must be distinguished. On the one hand there is regional cooperation aiming at opening up new markets nationally and internationally. This rationale will be dealt with later. On


the other hand, there is also evidence that the conglomerates use their locational advantages in order to prevent any unwelcome outsider from setting foot in the regional market. 8 A crucial role in the protective use of regional engagement is played by the state, in the shape of local and regional authorities. There is a whole range of interconnected activities, involving local and city authorities in the Ruhr, support by the Land Government, and the conglomerates, aimed at creating a counter-weight to the dominant Deutsche Telekom at least in segments of the market. The niche which has been selected for this purpose involves local and regional multimedia links, connecting the main cities and involving services such as telebanking and teleshopping. Thyssen, Veba and RWE are all involved in these regional projects. An interesting example in this regard concerns Multimedia Gelsenkirchen, involving RWE. RWE’s partners are all public or semi-public organizations with ties to the city authorities of Gelsenkirchen. In addition to the City Council itself, there are the local utility (Stadtwerke Gelsenkirchen) and the Stadtsparkasse Gelsenkirchen, one of Germany’s local savings and loans banks which are closely inter-related with local authorities. It is this proactive involvement of local state authorities which is a decisive feature of all these projects. The major cities in the Ruhr Area and in NRW more generally have all taken active steps aimed at appropriating their share of the TC market. The cities and local authorities are allying themselves with the regional conglomerates in a field which is generally seen as promising for the future. The question is, why have local authorities in the Ruhr cooperated so closely with Veba, RWE and Thyssen? The answer lies in the structures of regional interdependence outlined earlier and this becomes especially obvious if one analyzes the project in Gelsenkirchen. First, there are close ownership and financial interdependencies. One has only to recall the considerable financial stake cities like Gelsenkirchen and neighbouring Essen hold in RWE. On the other hand, RWE is deeply involved in the Stadtwerke Gelsenkirchen, the local provider of electricity and gas. Second, the traditionally close ties between the utilities and the local authorities have in addition to financial engagement and interdependence led to close personal involvement and a culture of mutual preferential treatment. Nowhere is this more obvious than in the case of RWE. The extent to which RWE is especially inter-related with the City of Gelsenkirchen is illustrated by the following quote from the interview with an official of the City Council’s economic development agency: Well, one has to keep in mind that RWE is a company where the local authorities have multiple voting rights … these things always happen via our Stadtwerke, there are always connections. We have got an extremely active director there … this man is up to the job. (CITY GE I)


The role of the *Oberstadtdirektor, Klaus Bussfeld, who was mentioned only in passing by the interviewee, must be regarded as even more crucial. For shortly before the interview, Bussfeld had left the position of Oberstadtdirektor of the City of Gelsenkirchen to become executive member at RWE Energie. The quote above and the generally close cooperation between Gelsenkirchen and RWE in TC activities has to be seen in the light of this recruitment decision. That this has become conventional practice and routine at RWE can be seen if one recalls that over the more recent history of RWE, local authorities have occupied 60 seats on the so-called Wirtschaftsbeirat (economic advisory council), 12 posts on the supervisory board and have appointed four members of the RWE executive board itself (SZ, 23 October 1996).9 It can therefore reasonably be argued that because of these multiple interdependencies both parties have a mutual interest in regional cooperation and engagement, an engagement which can be interpreted as being motivated by a desire to protect traditional organizational space against outside competitors. The interviewee at RWE Telliance commenting on the selection of Gelsenkirchen: In these decisions local embeddedness certainly plays an important role, too, where you do and establish something, this is no question. And it is certainly no secret, one can talk about this openly, where the ‘roped parties’ are. The ‘Oberstadtdirektor’ of Gelsenkirchen will soon be executive at RWE Energie AG. (RWE II) From the point of view of the local authorities cooperation with RWE, Veba and also Thyssen makes sense because this helps safeguard much needed new economic impulses for the region, above all the creation of employment and additional value in periods of economic turbulence and financial stress. In addition, given that public authorities normally have little knowhow and skills in these activities, there is a need for competent partners to bridge market distance. In the light of these factors, the choice to engage with regional actors rather than Deutsche Telekom makes sense. From the point of view of the conglomerates there are similarly good arguments. These have to do with issues of path dependence and the utilization of advantageous power positions, above all by the utilities. As pointed out earlier, the German electricity generation and distribution system is extremely protected, sheltered and regionally segmented, allowing the big three (RWE, Veba, Viag) to appropriate monopoly rents and to control the developments. By exploiting this monopoly position and building on preexisting ties and interaction structures the utilities gain twofold. On the one hand, this reproduces existing power relations and interdependencies, allowing the continuation of monopoly rents in new, promising fields. 10 On the other hand, the companies again succeed in effectively locking out ‘outsiders’ and external competition. In other words, RWE and Veba are


able once more to shelter and protect their traditional organizational space. And traditional organizational space in the case of both companies – albeit not exclusively – means the Ruhr Area and the surrounding agglomeration. Overall, what this case study shows is that the regional conglomerates, as in their traditional activities, seek to exploit and utilize power positions and interdependencies in situ and in forming public–private alliances protect their organizational space against possible challengers. In addition to a cooperative impulse stemming from common interests (that is, protecting traditional organizational space against outsiders) and from a traditional demarcation of activities, the NRW government has also played an active role in facilitating the pooling of regional resources. In 1995 the Land initiated the so-called Landesinitiative (= Land initiative) Media NRW, coordinating and in part subsidizing the various telecommunication and multimedia projects in Nordrhein-Westfalen. By the end of the first year of operation the Landesinitiative included more than 120 single projects, including the project outlined above. Regarding TC as a key technology and propulsive industry of the future, the responsible Minister Clement adopted a particular active role. He explicitly aimed at concentrating as many activities as possible in NRW, encouraged networking and cooperation by the Land’s main corporate and local state players and thus attempted to territorialize business transactions and interaction regionally. The proactive, moderating role played by the state is part of a policy paradigm shift since the late 1980s from direct involvement towards a mediating and brokering role (see Danielzyk, 1998; Danielzyk and Wood, 1993; Fürst, 1994; Kilper and Rehfeld, 1994). State influence on industrial capital and the territorialization effect resulting from this is, however, only one side of the ‘regional place dependence coin’. I have already pointed at the local and Land authorities’ dependence on the conglomerates and thus demonstrated that regional industrial capital is itself able significantly to influence decisions. What is at the heart of the state–capital nexus is thus once again the notion of interdependence. Here, one has to come back to an obvious consideration in relation to the regionalized nature of so many of the TC activities. This has to do with the notion of urbanization and localization economies and the sheer size of the Rhine–Ruhr agglomeration as a market. Put simply, the regional conglomerates have a direct commercial interest in the well-being of the regional economy and the consumers there, be they private individuals or other firms. Notwithstanding counter-forces, there are strong ties binding the conglomerates to the region. And the more facilities and infrastructure the firms have sunk in the region, the more powerful these become. That this is particularly true for utilities is by no means a special characteristic of the Ruhr Area, as Cox’s research on the economic development function of utilities in the Columbus region illustrates (Cox and Wood, 1997). From


the utilities’ point of view there is a simple equation: the greater the volume of economic activity in the region, the more electricity, gas and water will be demanded. Yet, there is a counter-trend with respect to the territorializing role of state organizations. This concerns the increasing tendency towards privatization and marketization of activities previously run by city and local authorities. While this has resulted in a growing inter-connection with private capital, the very forces behind this trend, namely the dire financial situation of many local authorities, at the same time militates against closer cooperation. For instance, many cities have been forced to sell their shares in RWE.11 A similar analysis could be made for the second new propulsive industry, ET and waste management. However, given that it has already been shown that ET is more regionalized than TC it should suffice to point out that all these interdependencies are at least as pronounced there. The last words should go to the senior official interviewed at Ruhrkohle Umwelt who – when asked about the regional market – commented: The market is in other countries … as contested as here. Perhaps we have a higher degree of rootedness in place here … and, secondly, the relations to the clients are more inter-related than elsewhere, causing problems for foreigners unless they do present themselves as a local firm. (RAG III)

5.4 Spaces of assertive engagement: regional ties and upscaling In addition to protective use of regional ties the case-study firms also engage with each other regionally in order to ‘jump’ scales. The firms pool regional resources, thereby enhancing their position within the national and international inter-firm division of labour. Insofar as the conglomerates often finance diversification with capital accumulated in the region, this supports the regional ‘disinvestment thesis’. By emphasizing the crucial role of regional cooperation in this, I will however argue that a simple distinction between the strengthening or reproduction of regional interaction contexts, as portrayed above, and the loosening of regional ties as a result of upscaling will not do. Rather, there is an additional mechanism, namely the use of horizontal inter-firm relations for upscaling. While in principle involving capital outflows, restructuring does not necessarily mean a decline in the importance of regional ties. On the contrary, it will be shown that upscaling can be consistent with the assumption that organizations fall back on institutionally close interaction structures in periods of political–economic change and upheaval.


5.4.1 Case study: general contracting in energy supply and engineering industries An interesting example which supports this argument is the expansion of organizational space in the wake of unification, and the role of regional inter-firm relations and the changing social division of labour in upscaling. All the conglomerates have since unification taken steps to exploit the expanded German market and have invested in the New Länder. What is interesting is that this has predominantly involved their more traditional activities. To start with, RWE and Veba acquired local and regional electricity supply undertakings in East Germany and are involved in the construction of new power stations. These projects have very often been undertaken collectively, involving close cooperation between the two and/or VEW, another important Ruhr utility. To be sure, the remaining German utilities, for instance Viag’s Bayernwerk, also joined in, but Rhine–Ruhr involvement is nevertheless considerable. Overall, in carving up the East German energy market, the utilities more or less reproduced the power geometry and spatial demarcation which has for a long time secured their quasi-monopoly positions in the regionally fragmented markets of West Germany. The extent to which cooperative upscaling is simultaneously accompanied by protective engagement to exclude outsiders can be illustrated by the bid for East Germany’s largest brown coal mining company, Mibrag, by a UK–US consortium involving PowerGen and NRG Energy in 1993. Although the consortium was ultimately successful in its negotiations with the *Treuhand privatization agency, the incumbent utilities engaged in attempts to keep the foreign firms out of their domestic market. Friedhelm Gieske, the then CEO of RWE was quoted as saying that foreigners trying to buy Mibrag were wasting their time (FT 10 June 1993). This is an incident where an attempt was made to protect newly appropriated organizational space against outsiders. As an aside, the (limited) involvement of foreign capital in East German privatization and investment projects has often been a result of political pressure, mostly by the Federal Government (compare, for instance Elf Aquitaine’s activities in Leuna) and German companies in most cases managed to obtain a majority holding in international consortia, thus taking the strategic lead. The conglomerates, on the other hand, also actively attempted to influence privatization decisions in their own interest. Thus, for example, in the wake of the establishment of the Treuhand privatization agency, the Ruhr conglomerates, like other leading West German companies, were quick to position themselves strategically by obtaining positions within the Treuhand hierarchy. Accordingly, the Veba CEO joined the Treuhand supervisory board in 1990 and a former Ruhrkohle spokesman was appointed to the Treuhand executive in 1991 (FT, 19 April 1991, 6 July 1990).


A further example of regional engagement in order to jump scales was the acquisition and modernization of an oil refinery in Schwedt by a consortium led by Veba Oel and RWE–DEA, the former holding a stake of 18.75 per cent, the latter of 38 per cent. In doing so, Veba and RWE added capacities in the East at the same time as they reduced employment owing to overcapacities in the Ruhr. At its two refineries in Gelsenkirchen, for instance, Veba Oel reduced the workforce from 4500 at the beginning of the 1990s to 2700 in 1995 (WAZ, 29 November 1995). Although there may be a marketing rationale behind this move, the fact that the German refinery industry has for a long time complained about severe overcapacity justifies the assumption that the acquisition of Schwedt was at least partly motivated by the desire to stake a claim before other competitors moved in, and that government subsidies almost certainly played an important role. Overall, this illustrates the connection between regional inter-firm cooperation to expand organizational space and restructuring in situ. One could extend this list of examples almost infinitely, not least in environmental technology and plant engineering, where Rhine–Ruhr companies and conglomerates are involved in almost every large project in East Germany. It should suffice, however, to mention one further example, namely the restructuring of the huge combines in the so-called chemicals triangle of Leipzig, Halle and Bitterfeld. Here, a joint venture led by Thyssen and Lurgi, involving Elf Aquitaine, secured the contract for yet another turn-key oil refinery in Leuna, Ruhrkohle–Steag is building a gas and steam turbine co-generation plant in the same town, and Babcock has even established a subsidiary in Bitterfeld. In these and many other projects, Rhine–Ruhr companies profited from their traditional ties, consortia leader or general contractors from the region making sure that their traditional partners received the most sensitive contracts (Int. THY I). Since these projects are extremely complex, involving a finely grained division of labour between the numerous participants, it is not surprising that the firms rely on those companies with which they have established relations of mutual trust and dependence. Know-how and skills acquired through regional interaction are then applied to new clients at the international or national level. Ruhrkohle Umwelt, for instance, profited from the hiving off of environmental and resource management activities at Thyssen, acquired valuable know-how and skills and in a next step successfully offered this expertise to Daimler–Benz in Baden-Württemberg (Int. RAG III). In doing so, Ruhrkohle Umwelt achieved a foothold in the German automotive industry and expanded its organizational space nationally. What is the glue holding the large regional players together in addition to exchange considerations? The crucial bonding agent is the dense network of interlocking supervisory boards and directorates, of one-sided and mutual stockholdings and of long-term, institutionalized organizational and personal interaction analyzed earlier. To be more precise, it is


not the mere existence of these patterns of interaction which matters but the mutual obligations and common interests arising from long-term interaction. In this context, the presence of executive board members of RWE, Veba and Ruhrkohle–Steag on the supervisory board of the plant engineer Babcock, for instance, assumes a different dimension. An incident involving RWE and Babcock is illuminating here. In February 1996 there were rumors that Babcock was interested in acquiring a majority stake in Philipp Holzmann, Germany’s leading building contractor. It was explicitly stated that Babcock ultimately refrained from carrying out this plan out of consideration for RWE and its building and construction division Hochtief (SZ, 14 February 1996). Hochtief is a fierce competitor of Holzmann and was involved in a hostile attempt to gain control over the firm itself. If one adds to this that Hochtief has awarded major contracts to a Babcock subsidiary in conjunction with the lucrative Athens Airport project, Babcock’s cooperative and defensive attitude possibly makes sense (SZ, 1–2 June 1996). This is not to say that the processes examined do not involve outflows of accumulated capital to other regions, nor that reproduction and restructuring of inter-firm relations always occur consensually. The relations between Ruhrkohle and other regional conglomerates are a case in point. Ruhrkohle’s major shareholders Veba, Krupp, Thyssen and VEW obviously used their influence to further individual organizational interests at the expense of Ruhrkohle’s long-term competitiveness. The head of macroeconomy and energy at Ruhrkohle blamed pressure from the main shareholders as one of the reasons of what is internally referred to as ‘delayed diversification’: [B]ut one has to say quite frankly that there have also been reservations [against diversification] … There have been times when our shareholders, Veba, VEW, Thyssen and Krupp were not at all happy with us venturing into business activities which competed directly with their own ones … At that time there was this saying, ‘Ruhrkohle should scratch coal, nothing else’ (RAG Ib) Finally, one needs only to recall the diversification paths and strategies followed by the case-study firms in TC and ET in order to recognize that there are parallels with the developments described in more traditional fields. Diversification in both fields similarly displays significant regional cooperation and inter-firm engagement in order to expand organizational space. Hence, engagement between the major corporate players to learn and scale up is an established practice in the region, a practice which is continuously reproduced through time. Before moving on, it should be noted that the central finding so far, namely of the reliance on traditional regional ties and interaction structures in the wake of economic–political turbulence and the mobilization of


these resources both for territorial protection and upscaling, may help to explain certain macroeconomic inconsistencies with regard to the currently hegemonic neoliberal paradigm. In the light of the preceding analysis, it is not surprising that rather than increasing competition in the industries in question, be they electricity generation and distribution, or telecommunications, deregulation very likely leads to new rounds of concentration and to continuous territorial fragmentation as large firms pool their assets and engage in managed adjustment. The investigation into different dimensions of regional engagement at least provides support for this assumption. With regard to the electricity utilities, the following quote by the former RWE chief executive Gieske is very apposite: Competition within the energy sectors, bound by cable or pipeline transmission, will inevitably lead to concentration so that the large companies will become ever bigger. (FT, 16 September 1993)

5.5 What is there for the Ruhr Area? The thin line between the enabling and constraining effects of regional place dependence In this final section I now turn to the regional effects of restructuring by the region’s conglomerates. I will do this by distinguishing between positive, enabling and negative, constraining effects of embeddedness in traditional, institutionally close relations. 5.5.1 The enabling effects of close regional ties: indigenous industrial players, learning and economic development To start with, close regional ties clearly exert positive, enabling impacts. One important area here is research and development, (R&D) and the stimulation of innovation in the region. Given that because of the extremely diversified nature of the companies, R&D at all four firms largely remains the domain of individual divisions and subsidiaries, the distribution of inhouse R&D activities generally mirrors the locational pattern of the main operating units. Quite apart from problems of gathering reliable data, it therefore makes little sense to investigate the nature of activities and precise amount of money spent in the Ruhr Area. It should be noted only that overall the majority of newer developments occur outside the region (see Krings and Kunzmann, 1995; Nordhause-Janz, 1991). This does not, however, mean that Thyssen and the other companies are abandoning the region. Although there are varying degrees of involvement across the sample, research in the three localities (the cities of Essen and Gelsenkirchen and the county of Recklinghausen) revealed a considerable degree of involvement in various innovation-related projects. In particular, engagement in technology and innovation centres, and science parks


stands out. This can be illustrated by the Gelsenkirchen science park and two case studies in Essen and Herten (county Recklinghausen).12 The Gelsenkirchen science park was initiated and financed by the Gelsenkirchen City Council and NRW Government and houses firms involved in energy regeneration and environmental technology. 13 Closer investigation revealed various ties to Ruhr utilities and large-firm involvement. Without the provision of capital by large conglomerates many of the new start-ups would have had enormous problems in surviving the first few years of operation. When ZEUS (= centre for innovative energy transformation and storage) was founded in 1994 by a scientist from the University of Dortmund, the new company received public start-up grants for the first five years. The requirement that any founder has to cover the remaining 20 per cent of the total costs (in the case of ZEUS DM 9.6 m) out of his or her own sources was met with the help of a major order made jointly by the three regional utilities RWE Energie, Veba Kraftwerke Ruhr (VKR) and VEW (Int. ZEUS, Int. CITY GE I). A similar construction safeguarded a further start-up institute, namely INAP (= Institute for applied photovoltaics). Here, a consortium of large firms bought a patent for new solar cell technology, research on this technology constituting the main aim of the start-up. Among the actors taking part in the consortium were two indigenous large firms – Thomas Goldschmidt and, once more, RWE Energie – Flachglas, a traditional Gelsenkirchen glass manufacturer now in the hands of Pilkington UK, and a north German regional utility. Interestingly, in both these cases the Land authorities used the power stemming from the founders’ dependence on public financial assistance to make their approval contingent on location in the Gelsenkirchen science park (Int. CITY GE I). Finally, with the decision of the managers of the already mentioned TC project Multimedia Gelsenkirchen, led by RWE Telliance, to move with a coordinatory team into the science park in April 1996, RWE yet again figures prominently. It goes without saying that close organizational and personal ties between the Gelsenkirchen city authorities and RWE play an important role in the noticeable local engagement of RWE. The second illustrative case study is the Zukunftszentrum (= centre for the future) Herten (ZZH) which at the time of interviewing was still in its infant stages. Focusing on ET and waste management and combining already established firms with new start-ups, ZZH is located in the EmscherLippe Region, the northern part of the Ruhr. Herten still boasts the dubious reputation of being Europe’s largest mining town in terms of employment. Out of the four conglomerates it has therefore been Ruhrkohle which has always been closely linked to the locality. Again, ZZH is financed and organized as a public–private partnership, the Land NRW subsidizing the institution and private capital providing the remaining funding. Private large firm involvement is confined to Ruhrkohle, the remaining stakeholders


being either semi-public (that is, savings and loans banks, communal institutions) or Mittelstand firms. Ruhrkohle’s role is however more than that as a silent investor, particular divisions, such as Ruhrkohle Umwelt, being actively involved in various projects (Int. HEG). 14 A different situation obtains in Essen, which by and large is not designated as an Objective II area by the EU, and where there is little comparable to those projects. However, Essen does possess a successful privately run technology centre, ETEC. Here, RWE is represented on the supervisory council (Int. CITY E). However, the large scale of this project and the sectoral diversity of its inhabitants rule out more detailed discussion here. A second indicator of regional embeddedness concerns conglomerate involvement with new intermediary organizations promoting regional economic regeneration and innovation. In the wake of the already mentioned decentralization and regionalization–localization of structural policy in NRW, a number of public–private intermediaries, almost always including inter-communal cooperation, have been established in recent years (see also Berndt, 1995). In what follows, corporate involvement in two of these new organizational actors is investigated, one public–private partnership and one purely private capital initiative. The first example concerns Emscher-Lippe-Agentur (ELA), an economic development agency covering the structurally weak northern part of the Ruhr Area (including the cities of Bottrop and Gelsenkirchen and the county of Recklinghausen; see Map A.1 in the Appendix, p. 207). The main motivation for ELA stemmed from the recognition that after years of local competition and fragmentation a pooling of resources and regional coordination was indispensable, if the sub-region were to survive in competition with other localities within and outwith the Ruhr. All the divisions of the case-study conglomerates which operate in the Emscher-Lippe Region are among the 28 companies holding stakes in ELA. The list of shareholders therefore reads like a ‘who’s who’ of the regional economy, including Veba Kraftwerke Ruhr (VKR), Veba Oel and Veba-Hüls, RWE Energie, and Ruhrkohle Bergbau and Ruhrkohle–Steag. These companies are not merely stakeholders but are directly involved in ELA’s decision-making processes. In addition to this, executives of Veba Oel, VKR and RWE Entsorgung are members of ELA’s supervisory and advisory boards. As in previous examples, the Land Government and persistent traditional relations played a crucial role in the establishment of ELA, the Land providing financial assistance and applying considerable pressure on the various actors to join forces. The proactive role of the Land Government in the decentralization and regionalization of policy instruments is a crucial feature of the policy turn towards the mobilization of ‘endogenous’ potential. Intra-regional networking and regeneration initiatives have rarely developed through self-organization from below, but under the guidance and control of the government in Düsseldorf. And, as many interviewees in


the regions confirmed, the glue binding the various localities and their organizational actors together often has little to do with a genuine conviction of the need for cooperation. Rather, one has to look at what is referred to in the region as ‘golden rein’, that is, the dependence of the various projects and initiatives on grants and subsidies administered by Düsseldorf and the use of this by state authorities to influence and ‘steer’ developments. Accordingly, the interviewee at ELA justified the 51 per cent majority stake held by public authorities by reference to the conditions set by the Land government: ‘[This] has to do with the fact that we are able to call for public financial assistance only in this constellation’ (ELA). Two further points about ELA deserve to be stressed. First, it is very doubtful whether the painful regeneration process could have been initiated without state involvement and without utilizing traditional channels of interaction and policy-making: even if this, on the other hand, implies that the very actors who have been responsible for lock-in would be charged with bringing about change. Second, many relatively successful projects (for instance, IBA Emscher Park) in addition to old lines of communication involved setting up parallel, ‘by-pass’ structures, the real decisions often being made there (see Wood, 1997). This can be illustrated if one moves to a more macropolitical level and looks closer at the policy changes in NRW. For as a ‘by-product’ of the paradigm change there has been a parallel softening of how regeneration and economic development is governed in the region. The interviewee at the Ministry of Economics in charge of regional structural policy and of economic development of the regions in NRW confirmed this point from a Land Government perspective: The more I think about this, the more I realize that I myself think and work more and more in specific personal networks … everything increasingly happens within new networks and the special feature is that I don’t fall back to tried and tested cooperation and communication structures which are institutionalized … constructing new [networks] for each problem every time, getting new ones together and leading them to a solution of the problem. (LAND I) Compared to ELA, the Initiativkreis Ruhrgebiet (IR), the second example, leans further to the Anglo–American ‘entrepreneurial’ side. Founded in 1989 as a result of a joint initiative of the Deutsche Bank executive Herrhausen, Veba CEO Bennigsen-Foerder and the Catholic Bishop of Essen, Hengsbach, the IR is a loose alliance of large companies, including practically all major firms in the Ruhr and national players such as Deutsche Bank, Daimler–Benz or Allianz, in total more than 60 firms. The founders envisaged three aims for the Initiativkreis: first, provision of help and assistance with a view to the acquisition of inward investment;


second, promotion of business start-ups; third, promotion of a positive image of the Ruhr Area by organizing major cultural, sport and scientific events (Int. IR). Including as it does members from outside the region, IR is a rare example of national inter-firm cooperation aimed at the promotion of a single region, the scale of engagement being larger than the area in question. Membership is restricted to larger companies and conglomerates, the requirement of a minimum contribution of DM 100 000 per year constituting a major entry barrier for smaller firms. Importantly, there are no binding contracts, the members simply agreeing upon a loose framework for cooperation. The whole initiative is held together by common interests and trust between the major decision-makers. As to what these interests are, the interviewee at the IR headquarters in Essen made this rather frank point: That one could not have let the region die becomes clear if one considers that this is an agglomeration of 5.5 million people, this simply is a giant market and if this region goes to the dogs, then Daimler–Benz will no longer be able to sell any Mercedes and Tengelmann 15 will no longer report any profit. (IR) The companies are ultimately motivated by profit considerations, a selfinterest stemming from dependence on the people and firms in the region as consumers and clients, in other words regional place dependence. As an aside, in line with the dominant networking paradigm, IR considers itself more a moderator and broker rather than an actor directly involved in the region. After almost nine years of operation, a stock-taking provides mixed results. On the one hand, IR has arguably been successful in its aim of improving the external image of the Ruhr and its various ‘soft’ measures (that is, events, spectacles, ‘festivalization’) are cultural highlights well known outside the region. On the ‘hard’ side of the cooperation aims, namely the promotion of inward investment and economic development, the Initiativkreis has however been far less successful. Indeed, one could argue that its impact in this regard has almost been negligible. This failure has occasioned considerable criticism, the President of the semi-public research think-tank IAT, Franz Lehner, putting his finger on the problem: ‘The firms have during the last few years cut-back more jobs [in the region] than they have created’ (WAZ, 13 May 1995). A further target of criticism is over spatial imbalance, namely an apparent bias towards the economically healthier southern Ruhr Area and a neglect of the Emscher-Lippe region in the north. This bias can easily be explained, however. First, both the incumbent Ruhr companies and the Ruhr subsidiaries of external firms are almost exclusively located in the southern Hellweg part of the region.


Second, the regional corporate elite never had a reduction of intra-regional disparities on its agenda: We engage in those investments which yield profits, we do not want to simply give money away … Rather, we want to show that this region is fertile, is economically competitive and an interesting location for others. And [for instance] there are only two localities in the region which play a role in media, these are Dortmund and Essen. This holds for many other investments, for this you need a big city, because there have to be, for instance, small suppliers, a milieu. (IR) This is a classic example of a deepening of regional disparities as a result of cumulative agglomeration effects and it is therefore little wonder that the north has gained little from the regional projects and investments the member firms have pledged themselves to undertake. In a sense, the traditional intra-regional division of labour, the south as the power centre to a large extent dominating the northern hinterland, has if not strengthened at least been reproduced. All in all, there are three lessons to be drawn from both examples. First, this further supports the hypothesis that industrial capital is involved in a restructuring of regional ties rather than a mere abandonment of the region. Second, they illustrate that with a view to the development of the whole region as opposed to the promotion of individual corporate interests, state influence still is indispensable. Third, while there may in part be a qualitative change in the way regional restructuring is managed politically, traditional power relations and spatial disparities are being reproduced at the same time. Forces of dynamic change are checked by forces of structural persistence, new ‘flexible’ and personalized network relations nevertheless embedded in ‘tried and tested relations’, to use the words of one interviewee. Overall, then, traditional regional ties and communication channels continue to fix the confines of and impose form upon the activities of decision-makers, to take up Hamilton’s (1932) definition of institutions. Finally, there is a third positive effect of regional embeddedness. This has to do with a peculiarity of the Ruhr Area vis-à-vis other regions both at the national and international level. In contrast to many other regions the Ruhr has the advantage of ‘containing’ a considerable number of indigenous large companies, whose headquarters and central functions are still located within the region or the immediate vicinity. One consequence of this is a certain in-built locational bias to the region, even if on the whole the companies are involved in an expansion of organizational space, a move which inevitably implies locational decisions away from the regional home base. Albeit limited, there have been incidents in the recent past where the headquarters of subsidiaries previously located outside the Ruhr have been relo-


cated closer to the parent companies. Once more, this is particularly evident in the case of RWE and Ruhrkohle, the former, for example, having after the acquisition of a sizeable stake in Hochtief relocated the divisional headquarters from Frankfurt to Essen, while the latter has made the same locational decision (that is, from Frankfurt to Essen) with regard to its chemicals division Rütgers. Even more important than the limited evidence for relocation of divisional headquarters (and jobs) is the fact that because of the disproportionate number of indigenous firms the regional economy is to a far lesser extent dependent on external decisions than other older industrial areas. In this respect, the Ruhr contrasts with branch-plant regions or with regions where indigenous firms have one by one been acquired by external capital. The recent experience with Grundig (previously owned by Philips), AEG (bought by Daimler–Benz), Adtranz (Daimler–Benz), Cebal (Pechiney), Alstrom and ABB in the Nürnberg region, for instance, illustrates the danger of overdependence on non-regional players. To sum up, what should have become clear from these examples is that regional conglomerates are actively engaged in local R&D and innovationrelated projects, take part in intermediaries involved in the restructuring of the regional economy and by their presence in the region serve as an important economic stabilizer. Motives for involvement of course include economic and financial interests, such as the degree to which R&D cooperation with innovative start-ups is preferable to in-house activities. But on the other hand there are also interdependencies which go beyond mere market considerations. Judged from this angle, the degree of embeddedness of RWE and Ruhrkohle clearly stands out. Although one should be cautious in generalizing from these examples, this is further confirmation of the assumption that RWE and Ruhrkohle exhibit particularly strong regional ties and are more deeply rooted in the region than a company like Veba. In the light of the close inter-connection of both conglomerates with local and regional authorities, this is an example of territorialization and place dependence which can be traced back to political influence.16 5.5.2 Negative aspects of close regional ties: ‘synergies’, relational obstruction and cognitive lock-in Discussion of constraining and negative effects can be framed in terms of the classic dilemma that private individual–organizational interests are not necessarily the same as wider societal interests. Accordingly, negative consequences for the region often result from capital’s desire to appropriate privately as many of the benefits of cooperation as possible while at the same time socializing the risks involved. As with enabling effects, this dilemma will be approached and analyzed using three examples. The first concerns so-called synergies of regional inter-firm cooperation, the reduction of employment and the socialization of the costs involved. For in


the majority of cases regional re-organization in the form of subsidiary swaps or the bundling together of units into joint ventures has been accompanied by significant reductions in employment. This can be illustrated by the merger of the steel activities of Krupp–Hoesch and Thyssen. The new joint steel company, Thyssen Krupp Stahl AG (TKS), will have about 8000 fewer employees than the sum of the two current workforces, constituting a reduction of about a third. As usual, representatives of both conglomerates emphasized that there will be no betriebsbedingte Kündigungen that is, there will be no ‘real’ redundancies in the wake of the merger. Rather, Krupp and Thyssen appear to count on regulatory mechanisms which in the past enabled a smooth transition for the workers involved, above all by the use of early retirement schemes. Accordingly, it has largely been this option to socialize the costs to the wider (national) society that so far made the significant reduction of employment within coal mining possible without a single ‘real’ redundancy (Int. RAG IV). Judged from their public statements, the decision-makers at the conglomerates give the impression that what is referred to as ‘socially cushioned’ restructuring will continue as before. There are, however, signs that this may not be as easy in the future. On the one hand, there has been a significant rejuvenation of the workforces in affected divisions as a result of the excessive use of the early retirement instrument in the past, an instrument which, for instance, allowed Thyssen Stahl to send steel-makers as ‘young’ as 53 into early retirement (Int. THY III). Furthermore, in Ruhrkohle’s mining division the average age of the workforce is now only 33 (source: Int. RAG IV). However, in the wake of the shake-up of much of Germany’s social benefit and welfare system, and this links up to the wider regulatory environment, the early retirement option has significantly been cut back, a measure which became necessary because of its excessive use in declining industries in the first place. Coal and steel companies have – together with other industries – overstretched the social insurance system to such an extent that the state had to pull the emergency brake. This is an example of the extent to which action by individual firms, motivated by a desire to socialize the costs of restructuring, can bring about wider regulatory change. The main victims of all this are the workers and regions, such as the Ruhr Area, where those industries still have a disproportionate weight. In the light of German labour market regulations, however, Thyssen, Krupp–Hoesch and others could face considerable problems, too, given the formally codified requirement for compensation or at least minimization of all disadvantages for employees which occur in the wake of planned ‘major operational changes’. The relevant paragraph in the Betriebsverfassungsgesetz (code on the constitution of companies, §111) explicitly includes closure, downsizing and relocation of companies and crucial units, as well as merger with other firms, among these major operational changes. In the


absence of the relatively painless early retirement instrument, the companies may be forced to set up costly *Sozialpläne (social plans). It should therefore not come as a surprise that the firms are already taking steps to ensure that their expected individual costs are minimized – or, to put it differently, that as many of the expenses as possible can be socialized. The second type of constraining effect from a regional perspective may be termed ‘relational obstruction’ as opposed to the example of ‘relational socialization’ analyzed above. An example often referred to in this context is the active blocking of new direct investment coming into the region by incumbent industrial capital. Having throughout the region’s history accumulated vast stretches of land, the executive elites have in the past used this power of land ownership to prevent other, at the time more promising industries from getting a foothold in the region. This has been termed Grundstücksperre (property blockade) by observers. In 1960, for instance, various coal mining companies successfully blocked the location of a large Ford production plant in Herten in the northern, socio–economically weak Emscher-Lippe region, and in Essen.17 A similar fate regarding the establishment in 1959 of a GM–Opel plant in Bochum was averted only after the city authorities stepped in, buying the property from Gelsenkirchener Bergwerks-AG and then reselling it to Opel. By acting as intermediary and keeping their intentions secret, local authorities deceived the decisionmakers at the mining company. The conglomerates reported as the main reason for this blockade fears of having to compete for labour power with newcomers, perceived as paying higher wages and thus as a threat at times when skilled labour was in high demand. That this constituted a missed opportunity in the form of an ossification of existing economic structures and a lack of external innovation impulses goes without saying. In other words, through the utilization of power resources stemming from private utilization of territorialized productive powers, the conglomerates effectively delayed structural adjustment in the region.18 Although the fact that the NRW Government in 1980 set up a property funds, buying large swathes of land from the concerns and offering it to potential buyers, significantly alleviated the problem, the conglomerates in 1988 still owned the region’s most valuable property assets (Zeit, 11 March 1988). As recently as 1997, for instance, Krupp–Hoesch still owned valuable land at its closed Rheinhausen site in Duisburg, demanding at DM 150 per square metre such a high price for contaminated land that the City Council had to delay redevelopment plans (Zeit, 29 August 1997). This confirms a point made earlier, namely that large corporations are able to use allocative power resources to bend their environment, with a significant locational impact. In short, large indigenous industrial players can be a mixed blessing for a region. Finally, and this is the most difficult negative feature to substantiate, close and durable ties between firms may have a tendency to ‘go informal’ at


times of extreme political–economic pressure. This refers to weak modes of governance which, recalling what was said in Chapter 2, involve personalized relations between decision-makers. Such patterns of regional cooperation are of course not negative per se, but there is an inherent risk that these relations may come to include semi-legal or even illegal practices. An interesting example concerns a corruption case which involved Hans Jacob Zimmermann, the designated head of Thyssen Handelsunion, who had to resign because he accepted far too low a price for the construction of his private house by an important client.19 This client was Hochtief, the Essenbased construction company controlled by RWE, and the whole affair has to be seen in conjunction with lucrative orders to renovate the Thyssen Holding headquarters and to build the new Thyssen Handelsunion headquarters in Düsseldorf. The latter incident involved close personal links between the Thyssen Handelsunion executive personified by Zimmermann and the Hochtief executive, and symbolizes the downside of institutionally close ties, namely that the reversion to informal modes of governance in the face of external pressure may lead to de-marketization, protective cooperation and even illegal actions. This is possibly one of the weakest features of managed capitalism and the German Model more generally. Information on semi-legal or illegal transactions was of course not available from the interview partners, but examples like this are nevertheless perhaps illuminating. As we will see below, this is detrimental to outsiders, above all for Mittelstand firms attempting to profit from regional orders.

5.6

Conclusions

Closer investigation into the processes at the regional level qualified the findings of Chapter 4, which put emphasis on changing corporate practices, detraditionalization and deterritorialization as the companies attempt to expand their organizational space. In addition to dissolving regional ties in the wake of diversification and upscaling, the conglomerates actively utilize traditional interaction structures and institutional proximity. By reverting to ‘tried and tested relations’ actors in fact put their faith in relations of trust stemming from routine interaction in times of increasing uncertainty. An important finding in this context concerns the active use of regional relations in order to expand organizational space nationally and internationally in addition to defensive protection of traditional territory, providing a link between upscaling and embeddedness in traditional personal ties and institutional proximity. In general, we have seen that collective power is used in older and newer activities alike. However, there have been differences at the level of individual companies, most notably between the two utilities Veba and RWE. RWE has from its foundation in 1898 been located in the Ruhr Area, while Veba, founded as Vereinigte Elektrizitäts- und Bergwerks-Aktiengesellschaft by the


Prussian Parliament in 1929, moved its headquarters to Düsseldorf in the wake of the Second World War and the division of the country. The longer co-evolution with the region has in the case of RWE resulted in considerable influence from local and regional actors and deeply embedded the company in the Ruhr Area. The differences in international orientation and the different degree of ‘Americanization’ can to a large extent be explained by this. However, and this is a reminder that the picture is not clear-cut, we have seen that Veba has during the post-war period equally become rooted in institutionalized interaction structures and practices which serve to bind the conglomerate to the region. Yet this is not to say that the investigation into the strategies of the more traditional conglomerates did not bring about findings which hint at dynamic change. Even the ‘sleeping giants’ RWE and Ruhrkohle have taken steps in line with the currently hegemonic corporate governance paradigm. Local authority influence on RWE is bound to be severely weakened, allowing the executive to more aggressively pursue its internationalization strategy. Accordingly, in connection with the already mentioned plan to do away with the multiple voting rights CEO Kuhnt recently announced plans to double RWE’s international sales in the medium term, pushed for a more explicit shareholder value orientation and declared his intention to improve RWE’s standing in international financial markets (SZ, 10 September 1997).20 To conclude, this chapter illustrates that even if it is clear that dramatic changes have taken place, there are counter-forces of inertia and structural persistence. As we have seen in this chapter and Chapter 4, these ‘barriers’ have to do both with wider political–economic and more specific socio–cultural structures, the regional scale playing a particularly important role with regard to the latter. Regional place dependence and institutional proximity serve to ‘protect’ the company and whole production systems from the changes at work, just as they entrap them in situ. The outcome is therefore always a mixed one, forces of dynamic change and deterritorialization linked to forces of structural persistence and territorialization. It was hinted at the potentially enabling as well as constraining effects of all this for the region. In other words, whether processes of change and/or persistence have a positive or negative impact depends on the circumstances at hand, on the interests and the power resources of the persons involved. Strategic repositioning may be contested, resulting in power struggles between different actors, be they other firms or labour, just as long-term, traditional capital–labour and inter-firm relations may provide an opportunity to enforce part of the adjustment process in situ. By following the production chain downwards to regional Mittelstand and small companies and analyzing the situation and responses by spatially less mobile actors, the book will now turn to these aspects.

6 The Ruhr Mittelstand: The Institutional Limits to Restructuring in Space

6.1 Introduction: different pathways to adjustment and profitability The first of the two chapters which deal with the responses of Ruhr Mittelstand firms focus on restructuring in space, that is on strategies which involve efforts to expand organizational space nationally and internationally (‘upscaling’). Using an approach similar to earlier chapters, Section 6.2 assesses the political–economic problems confronting the Mittelstand firms during the period 1990–5, identifying two sources of pressure, and identifies the firms’ general strategic responses. Section 6.3 then examines in detail how strategic expansion of organizational space is influenced by ‘barriers’ defined by political–economic contexts and socio–cultural structures, and how sample firms attempt to cope with this organizationally. The central finding here concerns the fact that increasing institutional distance as a result of upscaling and diversification mitigates against national and international expansion of organizational space. Before turning to the empirical argument, a brief discussion of strategies of competition and adjustment is necessary. In the literature there has for a long time been a stylized distinction between ‘good’ and ‘bad’ competitive strategies, a dichotomy linked to the historization of paradigms of production which has dominated the discussions in the post-fordist, ‘after-fordist’ and the flexible specialization literature (see, for instance, Leborgne and Lipietz, 1988; Piore and Sabel, 1984). These ideal cases have also been referred to as ‘weak and strong competition’ (Sayer, 1995; Storper and Walker, 1989) or ‘autonomous and intentional adaptation’ (Williamson, 1994; see also Dosi, 1988b). Weak competition has been defined as merely involving measures to adjust to market signals and to cut production costs. Strong competition, on the other hand, is depicted as competition that ‘drives capitalists to revolutionize production in order to gain an edge on competitors’ (Storper and Walker, 1989: 48) and which generates ‘surplus profits for the fortunate and sagging profits for the laggards’ (Storper and Walker, 1989: 61). 121


From a neoclassical perfect competition perspective – by definition allowing weak competition only – the existence of strong competition and increasing returns would be explained with market imperfections and socalled ‘market failure’. Yet we all know that most technological novelties and major innovations are pursued only if the considerable investment involved can be recouped by at least initially enjoying a monopoly. Nonsubstitutability in space and time (that is, path and place dependence) plays a major role in this context (see Chapter 3). For the purpose of concrete analysis these theorizations constitute valuable starting points and will be used in the following chapters. However, recalling the fact that networks ‘are over, under, and around markets and firms’ (Sayer and Walker, 1992: 139), it should be expected that in a real world strategic action lies somewhere along a continuum between mere (neoclassical) price-taking and cost minimizing, and active (Schumpeterian) innovation in products, processes and organization. Indeed, as Storper and Salais (1997) have shown, strong and weak competition strategies can be expected to overlap, and may even be interdependent. What is more, in terms of theorizing business strategies one could point to a further differentiation. Arguing that under conditions of non-increasing returns, absence of externalities and a given rate of macroeconomic activity a short-term adjustment process is possible (allocative efficiency), Dosi (1988b: 130) has identified two longerterm adjustment processes, namely ‘Schumpeterian’ and ‘growth efficiency’, which relate to technological dynamism and long-term macroeconomic rates of activity. While Dosi discusses these processes in a macroeconomic context, one could also relate them to the firm level. Assuming profit maximization as the crucial goal, I distinguish between three different routes of strategic action in the face of environmental pressure. The first is a short-term oriented weak competition strategy (Taylorian adjustment), with reactive responses to market signals and a focus on cuts in production costs, concentration and defensive flexibility as ways to increase labour productivity and thus profitability. The second ideal-type strategy, Ricardian competition, is based on existing products and technology and aims at achieving growth by either expanding into new markets (market diversification) or deepening existing markets (market penetration) (see Penrose, 1980/1959). And finally, there is a long-term, innovation oriented Schumpeterian development path, involving the introduction of organizational, process and product innovations. Overall, and this is important for empirical work, the three development paths constitute a heuristic device against which to ground real world case studies. The question concerning the specific organization mix (that is, the choice of modes to coordinate the division of labour) and the choice between market–product diversification and concentration remains open. It is therefore that in order to initially position my firms I chose a representation as overlapping fields within which decision-makers operate (see Table 6.1 and also Figure 6.1 below).

Table 6.1

Ideal-type adjustment strategies, production policy and capital–labour relations Routes towards profitability

SCHUMPETERIAN

Strong Competition

● ● ●

Production policy

Innovation Product/market diversification Productivity

●

Innovation/ technology oriented

Expansion/growth Market diversification Market penetration Rationalization, mechanization Production costs Product/market concentration

●

Market/sales oriented

●

Cost oriented

Capital–labour relations ● ●

●

RICARDIAN

Strong Competition

● ● ●

TAYLORIAN

Weak Competition

● ● ●

● ●

●

Skilling Functional/ offensive flexibility Cooperation

De-skilling Numerical/ defensive flexibility Intensification, authoritarian

123


6.2 Political economic turbulence: Mittelstand firms between internationalization and state ‘overregulation’ The forces and problems with which the sample Mittelstand firms have been confronted during the study period can be summarized in two broad categories: first, changes in the firms’ economic environment, that is, ‘globalization’ and recessionary pressures, predominantly transmitted via the restructuring strategies of large businesses; second, problems associated with state ‘regulation’ or what one interviewee called staatliche Überreglementierung (‘state overregulation’). 6.2.1

The restructuring of large companies …

Interviewees reported two main sets of factors as being the reason for their immediate problems and the strategies followed. First, all firms witnessed a significant increase of competition both from domestic and foreign firms during the period studied. Second and inter-relatedly, almost all firms have been confronted with growing pressure from key customers to cut prices and a general trend towards a marketization and disembedding of userproducer or buyer-supplier relations (see Appendix C, p. 217 for a detailed firm-based list). Given that the sales of the firms still depend to a considerable degree on regional customers (see Appendix D, p. 221), it is above all traditional regional inter-firm relations which undergo profound change as a result of internationalization. Competitive pressure was further exacerbated during the deep post-unification recessionary shock which continues to affect German recovery. More specifically, owners and managers put much of the blame on large firms in their environment. Many reproached the negative effects of internationalization, criticizing ‘footloose capital’ for destroying and breaking up traditional relations by relocating production facilities abroad and by sourcing internationally. In addition to the relocation of clients, firms had to cope with declining demand from and the bankruptcy of key customers (see Appendix C). Firms put increasing competitive pressure down to aggressive moves by large multinational corporations in core markets, for instance concentration processes brought about by take-overs of independent small and mediumsized businesses, both horizontally (competitors) or vertically (suppliers, customers). Even if somewhat expected, the importance of and dependence on links with large regional firms, in particular the four conglomerates investigated in the preceding chapters, was nevertheless striking. In sum, the overall ‘problem mix’ resulted in increasing uncertainty concerning the future and strategies were often portrayed as responses to actions and decisions of larger firms, which were expanding their organizational space. As a consequence, respondents perceived internationalization as threat, jeopardizing their regional linkages. This hints at a first important finding, namely that

The Limits to Restructuring in Space 125

rather than being affected directly by processes of globalization, pressure is transmitted and mediated to Mittelstand firms via large companies in their organizational space. 6.2.2

… and state overregulation

A further important cause of the problems reported by Mittelstand firms was what is termed Standort Deutschland, that is Germany’s apparently accelerating loss of international competitiveness, linked with aspects as diverse as labour costs and regulation, the tax system, red tape and government regulation, the lack of venture and risk capital, and the continuous revaluation of the Deutschmark. 1 Labour market regulation and the costs associated with it have been among the most important single issues. This holds especially for the 16 firms which are covered by binding wage agreements (*Tarifverträge) and those five firms which regularly implement pay agreements without belonging to the employers’ association (see Chapter 7). Here, a number of managers and/or owners contrasted ‘overregulation’ in Germany with the situation in Anglo–American countries and portrayed the latter as positive role models with regard to capital–labour relations. The interviewee at Meck, for instance, argued: In relation to the organization rate the unions have an utterly unjustified extent of power. This is completely different in the US, there is no sick pay there and the worker therefore has the incentive to return to work as soon as his [sic]2 illness allows it, and this is accepted by every employee. (Meck, Gelsenkirchen) In this context, many interviewees threatened to relocate production, in whole or part, unless changes are made in the country’s political and economic system, a threat which at the same time involves upscaling (the international extension of organizational space) and downscaling (demanding wage bargaining at the plant level). Overall, these arguments and judgements are presented by Mittelstand managers in a discourse of international competitiveness, with internationalization requiring a change in the system. In this neoliberal ‘globalization rhetoric’ structural weaknesses are portrayed as obstacles, disadvantaging the case-study firms and having to be removed in order to help them to adapt to the changing economy. Spatially, this is framed as a scale problem, a mismatch between internationalization of capital and the jurisdiction of the state, with state regulation having no other choice than to give way. Roughly speaking, the German model is seen as obsolete and the interviewees portrayed deregulation measures as solutions for their problems. In doing so, respondents are fully in line with the dominant mood in the country (see Chapter 1). Overall, from the perspective of the Ruhr Mittelstand a rejection of internationalization (for example, owing to national and international


deregulation or the relocation of clients) contrasts with demands to facilitate those very processes (for example, for an alignment of labour market regulation, or the threat to expand organizational space internationally).3 6.2.3 General strategic trends: specialization, tertiarization and the changing division of labour Before attempting to tackle the consequences of these processes, a brief overview of the broad strategic trends and a preliminary classification of the firms is helpful. The firms have been grouped using performance indicators and the broad path of development taken between 1990 and 1995, in terms of the three ideal-type development paths with different rationales and routes to profitability (‘Schumpeterian’; ‘Ricardian’ and ‘Taylorian’) outlined above. In order to provide an initial classification of the sample firms, single coded parts of the interview transcripts were assigned to one of the three ideal-types. This classification according to ‘visible events’ will be used as a framework within which to ground more detailed analysis. The classification is based on actions and measures taken by the firms during the study period and is summarized in Figure 6.1. The overlapping circles have been chosen to illustrate the interrelatedness of the ideal-type adjustment paths and to take account of the fact that in practice one can expect to find different combinations at any point in a firm’s life-span. One expectation was that in a period of recession and political–economic turbulence, of cyclical volatility and structural change, firms can be expected to seek every opportunity to cut production costs. This assumption is born out by this analysis, with ‘Taylorian’ strategies having been implemented by almost all sample firms. Increasing uncertainty concerning the future was responsible for extensive measures to cut costs and to increase productivity. Thus, a number of rationalization measures were adopted, ranging from the introduction of new technology, the intensification of the labour process and organizational change to numerical reductions of the workforce (Table 6.2). Efforts to increase productivity also translated into vertical disintegration strategies and the sourcing out of activities hitherto managed in-house. Finally, two firms, the metal processing firm Mair and the mining machinery supplier Morgott, could not overcome external pressures, the recession exacerbating underlying structural problems and forcing the firms into bankruptcy. A third firm, Papke, went into receivership in December 1997. What distinguishes the firms in the four groups defined by the overlapping circles is the ability successfully to pursue ‘Schumpeterian’ and ‘Ricardian’ paths in addition to cost-cutting. In other words, the question of the extent to which firms are able to translate all or part of their productivity gains into innovation and market growth.4 All this led to contrasting trajectories ultimately resulting in the four sub-classes of firms as set out in the key to Figure 6.1. Firms in sector IV showed very little sign of either

127 Figure 6.1

Classification of Mittelstand firmsa Group I Traditional core firms, founded 1970 and earlier

RICARDIAN SCHUMPETERIAN

S. Kuhn Roβmann Pfeifer Parsunke Reinhold Gagsteiger Schraml Kundmüller Meck Biberkopf Papke† Mair†

Fähmel

Morgott† TAYLORIAN

Group II ‘Young’ firms (post-1980)

I Bauer III

Nettlinger Kleefeld Scholsdorff Schlömer Trischler Schrella Stiller Krokowski Castorp Kroner

II

Böckler

Behrens Jäger IV

Notes: a The classification is the result of two procedural steps: (1) An analysis of employment change, turnover change and profitability during the study period as provided by respondents, backed by published material (Hoppenstedt, 1991, 1992, 1994, 1995). (2) A qualitative interpretation of innovations, and diversification and rationalization measures, as reported by the firms. † Firm went bankrupt.


Employment changes, 1990–51 Growth

Group I Traditional Group II ‘Young’ firms Total

2

Firms

Empl. change

4 7 11

+ 147 + 86 + 229

Stagnation firms

2 3 5

Decline Firms

Empl. change

8 4 12

–416 –792 –495

Notes: 1 1990 or starting from date of establishment/foundation. 2 Scholsdorff employment for Essen only.

‘Ricardian’ expansion or ‘Schumpeterian’ innovation and had to focus on cost minimization in their response to environmental pressure. Sector III firms have been able to achieve some expansion into new markets in addition to rationalizing and streamlining their production activities, while firms in sector II showed elements of all three adjustment types. The engineering specialists S. Kuhn and Bauer, and plant engineer Roßmann, are the only firms in sector I having a strong record of market and product diversification in addition to limited rationalization. Within the groups variations in location did not have any significant impact. For the sake of simplification the remainder of this book, unless explicitly specified, distinguishes between successful, Schumpeterian firms (that is, sectors I and II) and less successful, Taylorian firms (that is, sectors III and IV). Because of the fluid boundaries between the sectors and strategies, this distinction will be used flexibly, providing a framework for orientation rather than a fixed and static tool. Overall, two closely linked trends can be observed across the sample. The first is the widespread tendency to seek product and market niches and to pursue specialization strategies. Specialization and concentration have had significant organizational consequences. Firms have stepped up measures to reduce the share of production made in-house, disintegrating both backwards and forwards and abandoning particular products and product ranges. ‘Tertiarization’ of ‘non-service’ firms, the second trend, is closely linked with the first one in that it is to a large extent a result of the abandonment of in-house commodity production and the concentration on certain core control functions. A further manifestation of the tertiarization of firms hitherto rooted in traditional manufacturing is the increasing trade component in the firm’s turnover. Indeed, the growing orientation away from production and towards mere buying and selling of products made elsewhere was the most frequent of the identified trends.


6.3

Organizational space: upscaling and institutional distance

The great majority of the firms made or continued steps during the first half of the 1990s which constitute a movement up the scale hierarchy, either internationalizing or ‘jumping’ from the regional to the national level (Table 6.3).5 The latter process was closely linked to unification and what can be seen as a politically induced expansion of the national room for manoeuver. To start with, almost all firms have in response to the high production costs in Germany attempted to profit and appropriate surplus from cheaper production locations abroad and have expanded organizational space accordingly, the main beneficiaries being Eastern European countries and the New Länder. The second and at least equally important strategy has been ‘Ricardian’ upscaling, that is an increase in organizational space aiming at winning new clients by either market diversification or ‘penetration’. On the one hand, upscaling is a logical result of specialization and niche strategies in the wake of competitive pressure. On the other hand, ‘Ricardian’ upscaling steps can be interpreted as a response to stagnating and sluggish demand at the traditional scale level. Since this is a national rather than regional phenomenon, this has mainly led to attempts to internationalize. Finally and most limited in extent, there is ‘Schumpeterian’ upscaling, where the changing spatial focus reflects a need to extend the ‘catchment area’ of possible partners with which to interact in order to learn and innovate. A minority of firms showed little change in their scale orientation. Not surprisingly, service oriented firms, including both older firms such as Kundmüller and ‘newer’ ones such as Schlömer or Nettlinger, made up the bulk of the nine firms involved. Firm size plays a crucial role here, as the disproportionate share of small, younger firms testifies. 6.3.1

The institutional limits to upscaling

As regards the underlying reasons for upscaling failures and successes, most firms had considerable difficulties in coordinating a spatial expansion of their activities. This holds especially for measures aimed at market diversification and product innovation which require considerably greater organizational efforts than ‘mere’ exploitation of cost advantages. Asked about cooperation failures and possible reasons for them, owners and managers pointed to different factors which appear to have obstructed restructuring in space. By way of simplification, the problems can be grouped into two categories. The first concerns problems associated with different legal and political systems, general business practices and a lack of market transparency (the systemic context). The second refers to ‘different ways of doing things’ and issues of trust in specific organizational and individual interaction (the interaction context).

Mittelstand firms, upscaling trends and definition of in situ spatial scale

GROUP I

TRADITIONAL CORE

130

Table 6.3

Firm

Traditional organizational space (in situ scale)

Successful upscaling

Indicators

Biberkopf

Regional/national

National/international

● ●

Fähmel

Regional

National

●

Gagsteiger

National

International

● ● ● ●

Kundmüller Mair Meck

Regional Regional Regional

– – National

● ●

Morgott

Regional

National

●

Papke

Regional/national


●

● ● ●

Increasing export share National business group New activities in measurement technology Subsidiary in the New Länder International sourcing Increasing export share R&D cooperation with European competitor

International sourcing National business group New activities in tunnel construction and civil engineering Joint patent with large national automotive supplier (R&D, production) Subsidiary in the New Länder National business group Sub-contractor in Czech Republic

Table 6.3

Mittelstand firms, upscaling trends and definition of in situ spatial scale (continued)

GROUP I

TRADITIONAL CORE

Firm



Indicators

Parsunke

Regional/national


●

Pfeifer

Regional/national


●

Reinhold

Regional


● ● ● ●

Roßmann

National

International

S. Kuhn

National

International

● ● ● ●

Schraml

National

International

● ● ●

131

●

Sourcing in Eastern Europe and the New Länder Subsidiary in the New Länder Increasing export share Cross-licensing with international partners International sourcing in Eastern Europe Increasing export share Joint venture in Poland (production, marketing) Increasing exports Increasing export share Sub-contractors in Eastern Europe (Czech Republic, Poland) Increasing international inputs Trade with products from Asia Subsidiary in Czech Republic (production) Joint venture in France (marketing)

GROUP II

132

Table 6.3

Mittelstand firms, upscaling trends and definition of in situ spatial scale (continued) YOUNG FIRMS

Firm



Indicators

Bauer

National

International

● ● ●

Increasing export share R&D cooperation with European steel company R&D cooperation with Japanese multinational

Behrens Böckler

Regional Regional/national

– National/international

Castorp

National

International

Jäger Kleefeld

Regional National

– International

●

Marketing subsidiaries in France, Switzerland and Sweden

Krokowski Kroner

Regional/national Regional/national

– National/international

●

Subsidiaries in the New Länder, Austria and Hungary (production, marketing)

●

● ● ●

Cooperation in the Czech Republic (production) and the Netherlands (R&D) International sourcing R&D cooperation in Switzerland Increasing export share

Table 6.3 GROUP II Firm

Mittelstand firms, upscaling trends and definition of in situ spatial scale (continued) YOUNG FIRMS Traditional organizational space (in situ scale)


Indicators

● ● ●

Nettlinger Schlömer Scholsdorff

Regional Regional/national National

– – International

● ● ●

Schrella Stiller

Regional Regional/national

– National

Trischler

Regional

–

● ●

Cooperation in Poland (marketing) International sourcing Cooperation in Switzerland (R&D)

Subsidiaries in the New Länder (production) R&D joint venture in Belgium Increasing export share Subsidiary in the New Länder (production) International sourcing

133


Embeddedness in systemic institutions: market distance Albeit not exclusively, as we will see shortly, the firms experienced these systemic differences predominantly in relation to their efforts to broaden the reach of their products and activities internationally. Spatially distant countries clearly figured prominently, for instance, China, where a planned cooperation between Reinhold and five other Ruhr mining suppliers faltered because of the uncertain legal situation. However, even in cases where spatial distance appears to be surmountable, legal and cultural barriers obstructed expansion across national borders. The owners and managers often referred to different cultural practices and ‘mentalities’ as major reasons for a lack of market transparency and for entry barriers. Overall, as the firms move up the scale hierarchy, they are confronted by a gap between the systemic context in which they are embedded and that of the ‘market’ they aim to diversify into. Note that these general differences are always interpreted and realized through organizational interaction. This leads to a lack of market transparency and to market entry barriers as a result of institutional distance and can therefore be included under the heading ‘market distance’, assuming a wider definition of what constitutes a market. Attempts to surmount entry barriers are additionally frustrated by what can be called ‘protective networking’ by market actors in the respective country. The owner-manager of the manufacturer of annealing machinery Kroner explicitly pointed to these networking barriers: Q: ‘How would you describe your competitive situation internationally?’ A: ‘We certainly are affected by foreign competition. However, less so domestically, for instance, [there are] two English annealing technology firms which gain no ground at all in Germany. But we would similarly not make any direct attempts in England … for instance … these offshore platforms, this would be an interesting field, but to gain ground there, this would be too difficult in England.’ Q: ‘Why?’ A: ‘Because just as everything is closely linked together here, the same holds for England.’ (Kroner, Essen) As an aside, this quote of course illustrates that British firms are confronted with similar problems in their attempts to make inroads into the German annealing machinery market. While internationalization can be seen as a process resulting in increasing institutional (market) distance in its own right, institutional distance is also closely linked to diversification into new fields and products. Institutional distance is the greater the less experienced firms are in the activities in question. Moves across national borders were enough in themselves to confront firms with considerable organizational problems, given


that aspects such as language, and legal and political systems are closely linked with the national scale and the nation-state. Problems in the wake of a national expansion of organizational space, on the other hand, were predominantly due to diversification into new industries and products. In the case of traditional regionally-based firms moving into new products and activities, this could to some extent be expected. Most notable in this regard are the four machinery and engineering firms closely linked to the coal mining industry. In a striking example of a path-dependent diversification trajectory, three of the firms have attempted to reduce their dependence on mining by diversifying into building machinery for tunnel construction and civil engineering. All three firms have subsequently expanded their organizational space nationally, a process which had already begun in the 1980s. What the interviewees at Biberkopf, Morgott and Reinhold have in common is considerable uncertainty and lack of knowledge of routines and business practices in the German construction industry, a sector which is notorious for regular payments of kickbacks and – to put it euphemistically – ‘demarketized’ or personalized channels for awarding orders. It has already been pointed out that national upscaling has been closely linked to the sudden spatial expansion of the German nationstate in the wake of unification. Most of the firms have in one way or another increased the number and intensity of contacts in the New Länder. With a view to successful organizational decisions this will be dealt with in the following section. As regards upscaling failures, Mair was confronted with unexpected difficulties in the New Länder and subsequently had to withdraw its local market presence. Mair’s decision to scale back operations thus reflects a failure successfully to expand organizational space. Accordingly, the firm was lured to Eastern Germany by state subsidies and a faulty assessment of the regional market and competitive situation – another case of market distance. The move overstretched Mair’s resources and when artificially inflated demand broke down the firm was faced with little choice but to abandon its capital expenditure in Dresden. Ultimately, the trend towards general contracting where a small number of large companies coordinate increasingly complex production systems, and thus the changing social division of labour, appears to have been disadvantageous for the firm: There are certain changes with regard to acquisition. In the past we had more [projects], but it was also easier in the past. The people had time, you could go eating out with somebody, you could also talk about things … Today, this is totally different, and therefore you have to do far more. If you look at the success rates of our offers this clearly has changed massively. (Mair, Essen)


As much as Mittelstand firms may generally be able to profit from this trend, this holds only for ‘insiders’. Since smaller orders are often at the discretion of the main players, firms which lack contacts and ties are often effectively locked-out. In other words, embedding and demarketization within general contracting consortia means marketization and increasing competition outside. Different power resources owing to different positions in the social division of labour play a crucial role in all this. An additional factor worth mentioning is a failure to adjust organizational space fully in line with relevant space. A number of firms have not expanded organizational control in line with product diversification and geographical expansion. This is illustrated by the fact that even after upscaling, nationally and internationally, and entering new industries, Reinhold and Morgott are not members of supraregional business associations which normally play an important role in coordinating the interests of industrial Mittelstand firms. This may be a manifestation of an overreliance on traditional channels of information and thus of cognitive regional lock-in, and – at least with regard to Morgott – may partly explain the failure to ‘upscale’ internationally and nationally. Traditional routines and habits, binding the firms to the region, are thus also responsible for upscaling failures, institutional proximity preventing actors to seek new products and markets.6 Organizational interaction, different worldviews and cultural stereotypes: interaction distance The spatial extension of activities also confronted the firms with more specific organizational and coordination problems in terms of their links with firms and partners in other locations. Here, distance can be traced back to specific conflicts of opinion and different worldviews between interactants. More specific ‘interaction distance’ cannot of course be isolated from more general ‘market distance’. Rather, relational and interaction problems have to be seen as part and parcel of wider market distance – or, to put it differently, specific interaction contexts are embedded in systemic ones. This is particularly evident in the case of internationalization. Here, rootedness in different institutional contexts and different interpretations of a situation result in different worldviews and give rise to mistrust and uncertainty, leading to interaction friction between sample firms and their international business partners, and to problems in cases where regional or national firms pool resources with a view to international upscaling. Accordingly, the respondents attributed cooperation failures to unresolvable differences with and a lack of trust in international partners. To start with, failures included ‘Taylorian’ cooperation with producers in Eastern Europe, where a number of attempts faltered because of ‘quality’ problems. Thus, six firms either abandoned or significantly scaled down activities in


Eastern Europe because of problems for which the interviewees unanimously blamed their respective partners. The owner-manager of Behrens mentioned problems with a partner in the Czech Republic: [W]ell they simply produced rubbish, and this company is chaotic, the typical mentality of the East, ‘always put off until tomorrow what you can do today’, to put it like this, but this is really true. Not with every firm though, for instance we cooperate with East German machine tool producers, these [firms] are ‘tip-top’. (Behrens, Recklinghausen) Apart from problems in appropriating cheap labour power by exploiting the changing international division of labour, the interviewees equally reported problems in their efforts to establish cooperative relations with a view to product innovation or market development. Again, this was predominantly worded in a discourse which laid the blame for differences in opinion and institutional distance at the door of the international partner, referring to mentality differences or cultural barriers. The following comment by the owner-manager of S. Kuhn is revealing in this context: Well, our contacts are either directly in London or in the Midlands … but it’s all a bit complicated, they really want to do business and they often have similar products, but perhaps I cannot find the right sources or they do everything a bit more awkwardly, we are somewhat more direct … I mean, if I enter such a company in Birmingham, old leather armchairs, wooden paneling, a posh firm, they may even have loads of money, I don’t know, a huge ISO-certificate, royal seal – you name it! And then you are going down to the shopfloor and almost fall down the stairs because of all the oil … ‘all highly qualified and tested certified’ [sic]. (S. Kuhn, Essen) However, while satisfactory at first sight, the explanations given by the respondents turn out to be less convincing after probing deeper into the interview material. The apparently clear-cut discourse which focuses solely on the ‘cultural’ shortcomings of ‘the other’ neglects the extent to which the sample firms’ embeddedness in traditionally evolved contexts plays a crucial part in all this. Here, one has to look at the inter-relation between wider institutional structures and more specific interaction contexts. The relevance of this point can be illustrated particularly well with respect to failures in stretching the organization of industrial production to Eastern Europe. For the failure of many of the ‘cooperations’ appears to have as much to do with cultural stereotypes on the part of sample firm representatives as with ‘unsuitable mentality’ on the part of ‘the other’. In this vein, interview partners appear to have disguised organizational failure in a discourse of cultural stereotypes.


With regard to Eastern European countries, internationalization is portrayed in Germany in a rhetoric of cheap competition, where Eastern Europe is predominantly seen as a threat, undermining the competitiveness and thus the economic livelihood of the German economy. This assessment of the processes at work filters directly through to the attitudes and actions of the sample firms. One result of this is that firms have been very reluctant to give away any more know-how and information than they deemed necessary. The owner-manager of Kroner: We currently have contacts in Poland and Russia, with firms which I have checked personally, which have the skills to produce transformers … There is, depending on the power of the transformer, … a price difference to German producers of up to 60 per cent … Here we will certainly involve ourselves. However, in such countries one has always to consider that they are greedy, above all Russia, extremely cheap, but Dollar-signs in their eyes. (Kroner, Essen) A climate of mistrust and competition obviously constitutes an inadequate base from which to establish close working and long-term cooperative relations. Even if, as the respondents stressed, most relations concerned the production of standardized inputs, cooperation is unlikely to be successful without some mutual exchange of know-how, ideas or solutions to problems. And as the following extract of the interview with the ownermanager of Behrens reveals, an established collaboration did not prevent the owner from speculating about displacing and driving out a potential competitor in Eastern Germany: This is an idea of mine, we will involve ourselves there, knowing that there is a large client there … and if [our partner] should suddenly go bust, or we simply oust him even if he currently works for us, at the end it’s every man [sic] for himself. (Behrens, Recklinghausen) All in all, this demonstrates that cooperation failure can be as much a result of mistrust and stereotypes on the part of sample firms, as of the shortcomings of partner companies. Cut-throat competition and exploitation sit uneasily with complaints about cooperation problems. As we will see in Chapter 7, there is also a direct link between a disadvantageous power position at the regional and national level and the development of such practices. Just as in the case of ‘Taylorian’ upscaling problems and failures, a similar gap between the explanations given by respondents and possible underlying reasons can be detected concerning ‘strong’ adjustment strategies. Again, institutional (interaction) distance to a large extent reflects a routinized way of thinking on the part of the sample firms. More so than in the case of the sourcing and purchasing of cheap inputs, interviewees


reported reservations about entering into relations where they were required to share knowledge and control with their partners. The sample firms displayed an attitude often associated with the traditional German Mittelstand, namely one of a high sense of independence and autonomy, resulting in a reluctance to collaborate. Creation of trust in order to solve conflicts of interest appeared to be the central problem, above all in cases where competitors had to cooperate horizontally. Controversies revolved mostly around the aim of the partnership and the fair division of the costs and (potential) profits associated with cooperation. Generally, the picture does not differ greatly whether partnerships are with national or regional competitors. A striking example in this regard are the mining suppliers, whose culture of autonomy and independence in their traditional activities has made it extremely difficult for them to switch to a more open policy in new fields. The experience of the mining suppliers and also of other traditional Mittelstand firms clearly contrasts with younger firms in the sample. While this is also due to sectoral differences, time is therefore an important factor. The longer firms produce and trade, following a particular development path, the more they are likely to acquire a certain self-sufficiency and sense of autonomy in their traditional business. This path-dependent process may not cause immediate problems in those activities, but may prevent firms reacting in time to changes in their wider environment, thus disadvantaging the firms in their moves into new industries. Accordingly, together with material, sectoral specificity, time and path dependence play an important role in explaining processes of increasing institutional distance and measures to coordinate institutional differences. The examples of cooperation problems are all illustrative of a failure to coordinate distance as a result of political–economic turbulence and of upscaling, the firms being unable to supplement market coordination with other modes of coordination. Yet this finding notwithstanding, it also became clear in the course of analyzing the interviews that inter-firm cooperation is not possible without sufficient market exchange motivation. Given that there is no cooperation without some form of market exchange motivation, that is, no networking without markets, what evidence is there for successful inter-firm cooperation either internationally or nationally in the current climate of change? Since cooperation as defined in this book necessarily involves the supplementing of the market mechanism with non-economic modes of coordination, how did the successful firms solve the problems identified in this section? It is with these questions that the remainder of this chapter deals. 6.3.2

Upscaling successes: coordinating institutional distance

From what has been said so far, successful cooperation in the context of upscaling can be conceptualized as resolving the various institutional dif-


ferences identified above, thereby coordinating market and interaction distance. Since the solutions adopted vary depending on whether international or national expansion of organizational space is involved, both issues are discussed separately. Internationalization: formal networking, internalization and ‘quasi-integration’ As noted already, international upscaling confronted the firms with considerable coordination problems. It is therefore not surprising that successful international cooperation was reported to only a limited extent by the sample firms. Overall, sample firms overwhelmingly opted for formalized modes of such cooperation, a feature which is certainly a result of the extent of the institutional differences with which the firms were confronted. The preference for formal modes of organization in order to govern inter-firm relations in principle holds for weak and strong forms of adjustment alike. The specific organizational structures implemented, however, differed between the two types of adjustment strategies. With respect to ‘Taylorian’ exploitation of the international division of labour, sample firms chose strategies which all in one way or another involved the take-over of control and command via the utilization of financial (allocative) power resources. This is most evident in those instances where firms took over companies abroad (the wire manufacturer Schraml in 1994 and the ET plant engineer Scholsdorff in the early 1990s), but also includes financial involvement in the form of the acquisition of stakes in suppliers (S. Kuhn) or the establishment of joint ventures. Even where financial involvement was limited to minority positions the firms wield considerable power, in particular if one takes into account the dependence of Eastern European firms on orders from their Western partners. Financial take-over is certainly the strongest form of involvement. Other firms opted for contractual safeguards, specifying in detail the extent and aim of the partnership (codified rules) and including clauses with regard to breach of contract (sanctions) in order to increase exit barriers. All these examples have in common the fact that they can be interpreted as responses to increasing institutional distance. The institutional gap between sample firms and international partners, and between the different institutional contexts more generally, has apparently been coordinated by way of demarketization and by formal coordination modes. In the case of direct financial involvement this resulted either in internalization within a firm hierarchy (take-overs, majority stakes) or in formal networking, that is, ‘quasi-integration’ of the inter-firm division of labour (the acquisition of minority stakes, detailed contracts). In doing so, the firms appeared to have been guided predominantly by profit and production cost considerations. In other words, in their contacts with firms from so-called ‘cheap-labour countries’, the sample firms displayed little inclination for mutually cooperative relations (a stress on the prevention of exit rather than on ‘voice’).


The firms are apparently confident that the supplementing of market authority by hierarchical authority or contractual clauses is enough to prevent the type of problems discussed earlier. Insofar as the types of inputs and commodities in question are still predominantly standardized this may make sense. By way of speculation, however, one might not be surprised if these arrangements were resisted and if authority structures were only superficially able to substitute for cooperation. Even if there is little direct evidence from the interview transcripts on this, the quality problems mentioned frequently by the interviewees and incidents where former ‘partners’ – after a learning process – suddenly turned into competitors may well be a manifestation of this. With respect to strong international adjustment the picture looks both different and similar at the same time. Organizationally, international interfirm cooperation aiming at market diversification has definitely outweighed contacts for R&D and product innovation. Rather than direct financial involvement, it was contractual formalization which dominated the picture, with inter-firm collaboration being specified in cooperation treaties and in licensing agreements (Table 6.4). Another major difference concerns the spatial focus of these activities. Strong adjustment was almost without exception directed to advanced industrialized countries, not Eastern Europe, with neighboring West European economies playing an important role. If there are parallels to Taylorian upscaling, these concern a reliance on formal regularizing structures in order to coordinate institutional distance and compensate for a lack of trust and uncertainty. When cooperation involves product R&D between unequal, spatially and presumably also institutionally distant partners formal written specification of the partnerships appears to be indispensable. These similarities must not however be overstated. For despite the indisputable importance of contractual formalization, informal modes of governance or regularization were additionally reported by firms engaging in strong adjustment initiatives as having significant weight. Here, the firms aimed at the establishment of personal ties and embeddedness in non-market forms of coordination. Take the example of cooperation with two Swiss companies given by the ownermanager of the process technology computer specialist Castorp: We had a Swiss client who drew our attention to these two companies, he said ‘why are you not doing this and that application for us together’. And then we have developed a little bit and in the course of this we became acquainted with each other. I admired their professional modesty, since I detest showy people. They listened carefully, made their point of view clear, very self-confident, we harmonized well together, the price-related things went together as well, in short, everything you can think of worked well.

The international expansion of organizational space: crucial contacts for innovation and diversification

Types of organiza-

Origin of contacts

tional interaction

International scale

National scale

VERTICAL INTERFIRM RELATIONS

User–producer/buyer–supplier interaction ● S. Kuhn, Papke, Biberkopf, Schraml: ‘normal’ exchange contacts with international clients ● Papke: contacts to Czech supplier

Large firms as gateways to international markets ● S. Kuhn, Papke, Kundmüller

HORIZONTAL INTERFIRM RELATIONS

NON-ECONOMIC ORGANIZATIONS AND STATE AGENCIES

Note: JV = Joint venture.

Joint ventures and alliances S. Kuhn: marketing JV with French SME ● Schraml: marketing JV with French SME ● Gagsteiger: R&D JV with Dutch SME Subsidiaries and capital stakes ● Schraml: production site in Czech Republic ●

e.g. Papke: diversification away from mining into automotive parts; cooperation with large automotive parts supplier; joint patent International contacts through the formation of business groups ● Meck: stake in Dutch SME; cooperation in production ● Biberkopf: stake in Dutch SME

Membership in business associations ● S. Kuhn, Biberkopf, Schraml, Gagsteiger, Parsunke: international harmonization of and influence on norms and technological standards through membership in VDMA, ZVEI, etc.

142

Table 6.4


But this nevertheless does not mean that there is no need for formalization: A: ‘We have a cooperation contract which specifies exactly what is their part and what is mine. For instance, we have agreed that I am not allowed to develop any hardware based on their know-how, this would be relatively easy for me.’ Q: ‘What about profits?’ A: ‘Well, this varies, that is, we often have to discuss this again in cases where we are under extreme price pressure. Normally, the Swiss partners get commission whenever they sell something in Switzerland and the same holds vice versa.’ (Castorp, Recklinghausen) Note the extent to which the market mechanism and monetary aspects remain important notwithstanding seemingly close personal ties. This illustrates the competitive forces inherent in any cooperation, and obviously is one of the main reasons for having to formalize organizational interaction in the first place. The downside of the establishment of close ties, involving considerable personal commitment and ‘investment’, is of course a dependence on the respective contact person at the partner organization, the cooperation standing and falling with this relationship. The ownermanager of S. Kuhn, for instance, had to relinquish a long-term cooperation with a Spanish firm after the death of his contact person, although the firm itself continued to exist. Successful embedding thus always involves the risk of dependence and lock-in because of the limited substitutability of relations in cases where knowledge and information are shared. In sum, if one looks at the processes underlying international cooperation failures and successes, firms have had to balance contradictory forces and impulses. On the one hand, the confrontation with different institutional contexts and market distance makes cooperation and the relinquishing of autonomy necessary, while on the other hand there is a competitive impulse stemming from the accumulation imperative and requiring the owner and/or manager to seek to appropriate profits. The competitive impulse increases interaction distance further and mitigates against demarketization and embedding. Albeit to varying degrees, both impulses and motivations are present at any time in any organizational interaction and have to be seen as containing each other rather than being mutually exclusive. What is interesting is how different circumstances and perceptions of the actors studied lead to different outcomes. In those cases where firms opted to collaborate with producers in cheap-labour countries, the decision-makers because of their better power position – whether real or perceived – and the comparably lower complexity of the activities involved mainly coordinated interaction through the take-over of control and domination. Where the main goal of the interaction was to develop new markets and new products, the power geometry between the participating


firms was more equal, the coordinating task being too complex to allow the ‘do-it-yourself’ attitude to dominate. In this sense institutional distance forces firms to cooperate. That spatial distance does not necessarily correlate with institutional distance, however, is illustrated by the internationally active mining suppliers in the sample which appeared to find it not too difficult to internationalize their traditional activities (for instance, in Australia, South Africa). On the other hand, the examples also illustrate that there are clear limits to the type of cooperation depicted in parts of the network literature. The first is the uncertainty of being faced with an unknown situation. Market and interaction distance caused the interactants to demand the formalization of the interaction, mostly in the form of contractual safeguards, a mode of coordination which may be called ‘formal networking’. Cooperation with direct competitors therefore was extremely rare. Secondly, the extent of the cooperation is limited by pure exchange considerations. For, as the examples have shown, there is no cooperation without competition and insofar as there is no such thing as ‘pure’ market exchange the same holds the other way round. This is what is meant by suggesting that both impulses are oppositions which contain each other. National upscaling: the formation of multilateral business groups For obvious reasons, a distinction between strong and weak adjustment is less meaningful with regard to upscaling processes at the national level. The national arena simply does not provide the cheap factors of production available, for instance, in neighbouring Eastern European countries. Only the conditions in the New Länder immediately after unification might be regarded as having possessed some resemblance to those in the Czech Republic or Poland today. Overall, eight firms across both groups have – in moves similar to those further east – set up subsidiaries in the New Länder, with internalization into firm hierarchies being much more important than contractually safeguarded cooperation (see Chapter 7). In contrast to firms like Mair the majority of moves to the east appear to have been successful. What is more, a number of respondents reported a better starting position with regard to business contacts to Eastern Europe because of their moves to the New Länder. Hence, national upscaling and the new contacts associated with it facilitated internationalization. In terms of bilateral relations and interaction aiming at innovation and marketing, the overall pattern at first sight displayed similarities with the international picture insofar as formalization of partnerships appears to be the rule. Thus, there is a similar tendency towards contractual specification of cooperative agreements. However, there are major differences with regard to the aim of and motivation for the partnerships. While the vast majority of strong adjustment strategies internationally aimed at marketing


and selling, upscaling and strengthening of positions nationally also involved considerable contacts with a view to product development and innovation. Overall, one issue clearly stands out, namely the importance of interaction with clients or potential clients. Almost all firms reported interaction with national clients as their main bilateral route towards innovation. ‘Learning by interaction’ frequently developed out of an already existing relationship, with clients, very often larger firms, asking the firms for the solution of specific problems. Given that the interactants normally already know each other, and have often done so for a considerable time, problems of institutional distance and trust-building obviously occur to a lesser extent. What sustains these cooperations in addition to close personal ties, however, is the incentive of having the specific aim of developing and producing marketable and saleable products and solutions. Thus, from an early stage market exchange considerations play an important role and serve to keep the relationship in check. Often interview partners would not even recognize or accept the word cooperation in this regard, more than once responding that this was ‘normal’ procedure in any relations with an important client. The latter qualification is important, given that as a result of close interaction many sample firms were bound to the client firms, often leading to considerable dependence. The fact that the client normally wields considerable power vis-à-vis the supplying firm notwithstanding, this does not necessarily mean a totally one-sided power relation, since the specialized know-how possessed by suppliers very often in turn binds the buyer to the supplier. Further investigation revealed that the sample firms in principle were able to find substitutes or alternative ways to cope with pressure. One of these strategies regards what could be referred to as the dampening of market forces and competition by cooperating multilaterally. The setting up of various forms of multilateral business groups was confined to the national and the regional level. Purely regional business groups will be dealt with later. The sample reveals that no less than 10 firms have in one way or another become involved in national organizational arrangements of this kind. The focus here lies predominantly on ‘horizontal’ interaction between Mittelstand firms. And, while not exclusively started post-1990, all the examples chosen have been significantly expanded during the study period. Using the mode of coordination, or the glue used to bind the firms together as a criterion, four ideal-types can be identified. The first may be termed ‘formal hierarchical networking’ and is characterized by one-sided capital holding and ownership structures, resulting in a clear pattern of asymmetric power relations. No sample firm falls exclusively into this category. Rather than via financial involvement, the second ideal-type, ‘formal, reciprocal networking’, is mainly governed by contracts and exhibits more symmetric power relations. Only a small number of firms fully fall into this


category. The main example is Papke which has in addition to bilateral involvement with a large customer sought to diversify nationally based on a small group formed with two partner firms in Baden-Württemberg. Each firm has specific strengths and capabilities and within the group information, R&D, orders and marketing expertise are pooled whenever useful. Overall, the interviewee at Papke stressed that the firms are only fringe competitors and that they supplement each other. A similar rationale lies behind a loose group formed by Böckler and two competitors. Formalization in this case concerns the fact that the group organized itself under the roof of the business association VDMA, the role of VDMA being one of a neutral mediator which is a pre-condition for the creation of trust and the building of social capital between competitors.7 More interesting, however, are those three firms (Scholsdorff, Meck and Biberkopf) which have formed business groups which display both hierarchical and reciprocal relations, a mixture very much reflected in a more complex and diverse organizational structure. Of special interest is the strategy of Meck, a metal processing firm which has started to diversify forward, significantly increasing its value-added. Deliberately modelled on the example of the Swedish group Ericsson, Meck has been one of the driving forces behind the establishment of a complex network of firms in Germany which consists of three regional sub-groups (Rhine–Ruhr, BadenWürttemberg and East Germany) with two leading firms. Relations between the companies are diverse, ranging from more symmetric cross-capital linkages to hierarchical parent–daughter relations. The two leading firms (one of them Meck) assume the roles of ‘planets’ around which smaller firms cluster regionally as ‘satellites’. Power relations between firms consequently vary considerably. If based on resources stemming from one-sided capital stakes and ownership (mostly vertically between planets and satellites) they are asymmetric and hierarchical, whereas without capital dominance (for instance, horizontally between planet firms) they are more symmetric and mutually cooperative. National R&D cooperation, for instance, was crucial in efforts to diversify forward from merely galvanizing metal to the development of own products. At the regional level more powerful firms like Meck coordinate vertical ‘networks’ to react ‘flexibly’ to increasingly volatile orders, with smaller firms being used as buffers. The interview partner explicitly pointed to increased relocation of production to Eastern Europe on the part of traditional regional customers as the source of demand uncertainty. Regional collaboration in particular involves the pooling of labour, and according to the respondent allowed Meck to avoid large-scale job losses (see Appendix D, p. 206). The commitment needed to organize these regional ‘networks’ requires the integration of formerly independent smaller firms within a corporate hierarchy. Asked about the advantages of the whole network, the interviewee pointed to the pooling of resources and information (labour regionally, R&D nationally) and protection against domestic and interna-


tional competitors; in other words, the socialization of risks associated with changes in its environment. The other two firms in this category are Biberkopf and Scholsdorff. At the former the move away from mining into broader industrial applications of hydraulic systems was accompanied organizationally by multifirm networking. In doing so, the turnover share of industrial clients has increased sixfold since 1988, general industrial customers accounting for approximately 70 per cent of total sales in 1995, with only 30 per cent still going to the mining sector. Constituting a major difference from the situation internationally ‘informal networking’, the third form of multifirm cooperation, is ideally defined as long-standing relations which go beyond ‘normal’ business contacts and involve neither contractual nor financial formalization. All in all, four sample firms have become involved in these forms of cooperation. The computing consultant Kleefeld has in the midst of the recession begun to abandon its previous reliance on independence and autonomy and to develop informal contacts with firms which according to the ownermanager supplement the firm’s own products and allow limited exchange of personnel, ideas and marketing activities. The battery and power technology firms Schrella and Nettlinger, and the mould developer Krokowski all reported increasing cooperation with competitors with a view to the exchange of information, prices and further details in cases where the firms are involved in bids for tenders offered by large firms. At first sight the four examples appear to have very little in common, given the sectoral differences and the often distinct aims of cooperative activity. However, after closer investigation one can identify general and common trends which serve to explain these strategic moves. The first concerns the fact that the establishment of informal ties again cannot be separated from the general economic environment. In other words, these informal networks can in part be attributed to the political–economic pressures identified earlier. This is most clearly visible in those incidents where Mittelstand firms formed cartel-like cooperations in response to increasing pressure from key clients. This holds for Schrella and Nettlinger, where interviewees pointed to the need to unite against large battery companies, such as Varta or Hagen, which appear to have increasingly adopted a policy of transmitting pressure from the automotive industries to smaller suppliers, and for Krokowski, which is more directly involved with car manufacturers. Informal cooperation in the face of external pressure also appears to be one of the main reasons for the networking arrangements made by Kleefeld. The owner of Kleefeld summarized the rationale of cooperation, linking the step with political–economic turbulence: One can see this at other firms, too. Not only what we do with whom, but who talks to whom again and again. One sees a lot of things, you know. This whole recession, these economically difficult years have


forced us to think, how far can I go, should I employ more personnel and then have a huge millstone of costs around my neck? This led us to get considerably more open. (Kleefeld, Essen) What these examples of horizontal networking have in common is a greater degree of reciprocity as compared to the examples given earlier. The pattern of interaction observed thus comes close to the ideal definition given in Chapter 2. However, coming close to it implies neither the absence of power asymmetries nor the substitution of networking for markets or hierarchies. First, even the final examples of seemingly informal modes of governing interaction displayed the need for some kind of formalization and sanctioning. Second, the participants of the various business groups always remain competitors regardless the extent of the cooperation. Networks therefore have the cooperation–competition dualism inherent in themselves. And, finally, one has to recognize that the mobilization of power resources through cooperation and networking with other firms is very likely to increase competition with ‘outsiders’, that is, it is perfectly possible to have both trends, increasing cooperation between some firms and increasing competition vis-à-vis other alliances or groups. Finally, with regard to regularizing inter-firm collaboration, the strong role of national business associations should be mentioned. Overall, 11 firms across the sample reported formal membership in sectoral associations. National business associations actively support members with regard to internationalization, for instance, by planning and setting up international cooperation projects mostly with respect to marketing. Another important function of business associations, which has been actively used by the firms, is international harmonization of standards and norms. Various ownermanagers are members of commissions and working groups at the European and wider international level. The respondent at S. Kuhn said: This is … the reason for me being a member of the … so-called technological committees, ISO [International Standards Organization] or DIN [Deutsches Institut für Normung 8]. To know which way the wind blows, with this I am able to influence standardization or I know where the new things come from. And later in the interview: We increasingly do the following, we supply Polish and Czech firms which then build machines from our parts, and because we have special safety standards we have an advantage vis-à-vis these countries, but where you don’t need this safety standard aspect we are hopelessly disadvantaged. (S. Kuhn, Essen)


Such influence is therefore used to create better starting positions as compared to competitors within EU member states. Of at least equal importance, however, is the defence of market positions against low-price competitors from Eastern Europe by imposing technological ‘minimum standards’. In sum, power and influence on the national scale is used to defend the firm’s competitive position via the exclusion of other companies. Influence at the national level and cooperation with other firms is used to prevent foreign firms from extending their markets and to limit competition, thus cushioning the firm from international competition and effectively blocking international integration.

6.4

Conclusions

During the study period the sample firms have been confronted with increasing competition and pressure in their environment. Internationalization processes, the changing social division of labour, recession and government regulation were the main reasons for the turbulence in the firms’ institutional contexts and resulted in uncertainty with regard to strategic responses. It is crucial that internationalization and globalization in principle affect Mittelstand firms indirectly, pressure being transmitted through the strategic responses of large, often regional companies in the firms’ organizational space (see Chapters 4 and 5). The strategic responses by the Mittelstand firms at the heart of this chapter concerned efforts to actively expand organizational space. Supporting a proposition made in Chapter 2, upscaling was generally accompanied by increasing institutional distance, embeddedness in distinct national institutional contexts manifested in different worldviews and judgement between interactants. Put differently, individual and organizational interaction is constrained by the context in which it is situated, both related via what Layder called ‘the mediation of constraint’. However, the extent to which upscaling brought about institutional differences was found to be contingent on various factors. To start with, the coordination problem is obviously the larger the further apart ‘social systems of production’ appear to be culturally. Secondly, the impact of institutional distance is strongly linked to the nature of activities, the precise outcome obviously depending to a large extent on sectoral and industrial particularities or whether firms are involved in ‘weak’ or ‘strong’ adjustment strategies. Hence, the more complex the coordination task, the higher the potentially constraining influence of institutional distance. Thirdly, firm age and time can by no means be neglected in this context. Simply put, the longer decision-makers have been involved in a given activity, the more likely are relations of trust and mutual understanding. Moreover, upscaling in traditional activities faces fewer institutional constraints than in newer ones. And,


finally, we have seen that institutional distance owes much to cultural stereotypes on the part of sample firms.9 The sample firms have therefore predominantly responded to political–economic turbulence by utilizing favourable power positions and contacts at the national level, in part broadening their organizational space nationally. In that interviewees explicitly stressed that they actively seek strong personal bonds with their business partners in order to cushion their firm against competitive pressures, restructuring in space has to be seen as an adjustment to the changing competitive environment; and given that this environment is largely dominated by large firms, the various measures can be interpreted as resistance against those more powerful actors. In a sense, sample firms resisted larger firms by emulating them, that is they attempted to enhance their power resources by cooperation. This included exchanges of information between competitors to provide a level playing field in contract bids as well as the establishment of business groups in order to profit from economies of scale where necessary, while at the same time allowing for sufficient flexibility to preserve a key advantage of Mittelstand firms. At the national level interactants seemingly are ‘close’ enough for the firms to be able to implement informal modes of coordination in addition to market exchange. The more symmetric inter-firm power relations are, the more likely are firms to opt for reciprocal arrangements in networks and associations. Put differently, powerful actors appear to prefer internalization into hierarchies or one-sided network arrangements to reduce institutional distance. What is important is that incidents of informal cooperation can generally be explained by the pre-existence of personal bonds and ties at the national level, being able to hold the partnership together. In other words, where there is sufficient affinity of interests and trust (that is, institutional proximity), formalization of interactions are not necessary to the same extent. This is most obvious in those cases where firms got involved in ‘voluntary’ protective sharing of prices and information in the wake of increasing pressure from large clients. As an aside, defensive networks of this kind may over time result in cartelization and rigid structures which may insulate the firms from new ideas and external influence. This links up with Chapter 7, which investigates Mittelstand strategies in situ, that is the evolution of ‘regional’ inter- and intra-firm ties, and gives account of the connection between in space and in situ restructuring.

7 The Regional Responses by Mittelstand Firms: Falling Back on ‘Tried and Tested Relations’, Transmission of Pressure and Systemic Change

7.1

Introduction

This final empirical chapter analyzes regionally focused responses to wider political–economic pressures from Mittelstand firms. Grounding analysis on selected case studies, I argue in the first section that sample firms revert to traditional and institutionally close ties at times of environmental turbulence, regional inter-firm relations partially assuming a different quality. Following the chain of events down the production system, Sections 7.2 and 7.3 investigate evidence for a transmission of pressure externally to other firms and internally to labour. Finally, after having reached the ‘lowest’ scale of investigation with the individual business firm, Section 7.4 returns to higher-scale levels, linking firm-level findings to trends in the regional labour market(s) and to the changing spatial division of labour between the Ruhr and East Germany and Eastern Europe, respectively. The main finding concerns the fact that although falling back on ‘tried and tested’ relations and building social capital, forces of competition and ‘economic imperatives’ are always present, leading to a conflictual juxtaposition of competitive and cooperative impulses in inter-firm and capital–labour relations.

7.2 The regional production system: traditional interaction structures, successful learning and the new quality of inter-firm relations 7.2.1 Profiting from large regional firms: ‘piggy-back rides’, upscaling and learning Before discussing the mechanisms and processes structuring large firmsmall firm interaction in detail, two ideal-type strategic responses are 151


identified which can be illustrated by two typical case studies from the sample.1 Case study I: overcoming cognitive lock-in and interaction distance – Bauer The plant engineer Bauer was founded in 1983 and specializes in the automation of steel and iron production. The introduction of digital computer technology has revolutionized steel-making and put traditional largescale producers under immense pressure. Having developed its own innovations, Bauer was an early beneficiary of this technological revolution. However, the changing technological environment notwithstanding, a major obstacle has been the hostility and resistance to new ‘ways of doing things’ on the part of the region’s large producers: [It] was of course extremely difficult to make inroads with digital technology. Why? Because the whole industry is extremely conservative, everything was switched on with the hammer, everything had to work … 24 hours a day, should never break down, should be easy to handle … Well, and now somebody turns up … with microchips, with circuit boards and so on. There was no real faith in this, no trust, fear that the computer might suddenly break down. Hence, one had to start and introduce trust building measures. (Bauer, Gelsenkirchen) It was only because of favourable external circumstances that Bauer finally gained a foothold in the industry. Because of the slump in demand in the wake of the severe steel crisis of the late 1970s, many major electrical engineering firms specializing in steel production significantly scaled down their activities in the Ruhr Area during the 1980s. Major national players, such as Siemens and AEG which had almost exclusively worked for companies such as Thyssen and Krupp, relocated and closed their subsidiaries in the Ruhr Area. The few remaining orders were subsequently supplied from outside the region. Traditional close ties thus became more fragile and this provided the gap into which Bauer could step: A: Thus, our hour had come. I was asked, couldn’t you make an offer in line with traditional technology. My offer was to introduce new technology here and there, more personal computers, freely programmable controls and so on. Well, and then I have shown them that equipment, which had cost about DM 1m in analogue technology before, was suddenly available for 300 000 to 400 000 marks … We made two offers, one in line with traditional, one in line with new technology, old about 1m marks, new about 350 000 marks. Now the gentlemen in the firm executive had to make a decision, expensive repair in the traditional way or new technology? Then, one of them for once said: ‘New technology.’ We introduced it, it worked and this was when our triumphal march started.

The Regional Responses by Mittelstand Firms 153

Q: Was this with Thyssen? A: No, with Krupp. But this went automatically, if it works once, then it also works elsewhere. They exchange information, and since Krupp had its own plant engineering division at that time, today it belongs to Mannesmann, they have sold [the technology] abroad. We have then also supplied [these plants], and we have gradually expanded. (Bauer, Gelsenkirchen) Accordingly, Bauer has grown rapidly, starting with an order of about DM 1.5m in 1983 and at the time of interviewing reporting an annual turnover of DM 80m and a workforce of 105. Overall, the firm has found a niche in which it has increasingly become an important partner for regional conglomerates. Successful market entry was due not only to technological innovation, but also to political–economic (the steel crisis and the subsequent restructuring of larger electrical engineering companies) and socio–cultural factors, namely the company’s success in overcoming cognitive barriers among traditional steel-makers in the region and convincing decision-makers of the advantage of new ‘ways of doing things’. Case study II: servicing the conglomerates – Pfeifer In contrast to Bauer, Pfeifer is a traditional engineering consultant, focusing on planning and project management and having no in-house production. Founded in 1969 in Gelsenkirchen by two brothers, who still headed the firm at the time of interviewing, the company has evolved in close conjunction with the local chemicals industry. Pfeifer works for the Veba divisions Hüls2 and VKR, for other major players in the chemicals industry and for plant engineers, such as Babcock, which manage and organize the building of large chemical plants as general contractors. Throughout the firm’s history relations to these regional conglomerates were crucial, the two founders developing close personal ties with decision-makers at companies such as Hüls. As in the case of Bauer, political–economic turbulence resulted in a profound qualitative change in the way Pfeifer and its clients interact. Asked about the development of the firm during the first half of the 1990s, one of the two owner-managers replied: A: For five years there has been a new way [of dealing with clients]. You know, the chemicals industry in Germany and in part also world-wide, suffered a slump from 1989/90 onwards. The result of this slump was that the large firms started to reduce their technical departments … be it Bayer or Hüls … VKR here in Gelsenkirchen also. … Now, they scale down and say ‘why should we have a construction department with 30 architects and engineers? Whenever we build something we put out the problem to architects or to construction consultants’.


Q: Did you profit from this? A: This development was good for us, pushing us into areas we hadn’t thought of before, at the time of our start. Now we have to make turnkey projects … Now we have to do the whole setting up and, this is important, we have to buy the hardware, we have to take care … we also have to get sub-contractors ourselves. (Pfeifer, Gelsenkirchen) Overall, the new, expanded scope of activities resulted in an almost explosive growth of turnover and employment during the study period 1990–5, the former almost doubling from DM 8m to DM 15m, the latter rising at the same rate from 59 to 119.3 As the experience of Bauer and Pfeifer clearly illustrates, the sample firms appear to have taken steps actively to build up and/or deepen their ties to large regional firms. Overall, some sample firms have managed successfully to achieve a position as preferential supplier, thus binding the corporations to themselves and the region. S. Kuhn and Reinhold, for instance, improved their positions after reorganization by important clients such as Mannesmann-Demag or Ruhrkohle. The favourable position of S. Kuhn is illustrated by frequent visits from sales managers together with potential international clients as part of acquisition efforts. The owner-manager even mentioned a double visit to the firm as special supplier by the same foreign delegation together with different large regional clients. This particular incident provides evidence of the dependence of regional conglomerates on S. Kuhn and thus of the extent to which large capital itself may be bound regionally. S. Kuhn and other firms, such as Scholsdorff,4 appear to be in such a strong position because of their specialized know-how that it is difficult for large producers to substitute the firms. This explains the double visit with the same client in such a short time. In other words, these SMEs have to some extent made themselves indispensable and as a result wield considerable power. In all cases, this was achieved through the development and deepening of personal relations. In principle this can happen in two ways. First, there is the deepening of already existing personal ties in those cases where the firms have been in business for a long time. This is what appeared to have contributed to S. Kuhn’s success, the owner-manager frequently boasting of his excellent personal contacts to senior managers of his large clients. But this process of ‘demarketization’ is spread across the sample. An ownermanager at Meck commented: We always try to be better. But also by binding our clients personally to us, by establishing personal relations, by committing ourselves personally. In doing so, we try to protect ourselves against low price competition. (Meck, Gelsenkirchen)


With regard to young sample firms the expectation was that if there were any of these crucial contacts, they must have existed prior to foundation. On this assumption interviewees at young firms (group II) were always asked about the career path and previous employment of the founder(s) (see Table 7.1). A striking pattern across the young-firm sample is that many founders have worked for large regional firms prior to setting up their own business and have used the expertise and know-how acquired during this period when they took the step into self-employment. In addition to the skills acquired during their time at these firms, all interviewees reported that personal contacts to clients and business partners stemming from previous employment were crucial during their firms’ early stages. The owner-manager of Kleefeld, for instance, argued: Without these contacts I would never have made it. If you sit in the head office of such a conglomerate, then you are communicating with your colleagues in other conglomerates to such an extent, and then you are always approached by smaller firms, which want to retrieve information. Because they know, somebody from such a conglomerate should know what is going on, what happened to [this firm] and so on. I have built the whole network, insofar it wasn’t that difficult to start my own business. (Kleefeld, Essen) These firms are thus involved in a dense network of personal ties, which in addition to the horizontal interaction structures between large firms analyzed in Chapter 5, has a vertical dimension, too. Young metal and engineering firms appear to depend on these ties, ties which are profoundly regionalized. However, it is the ability to utilize these ties which separates the wheat from chaff in the sample. The more successful firms have managed to make themselves to some extent indispensable and to use these ties for innovation/diversification and upscaling. In addition to ‘normal’ sub-contracting relations, these firms profited from the increasing trend towards general contracting in the plant engineering industry. Firms profit regularly from their position as important suppliers to Rhine–Ruhr multinationals, such as Thyssen, RWE, Ruhrkohle, Babcock or Mannesmann (see Table 7.2). This illustrates that firms can benefit from the changing inter-firm DOL as a result of the reorganization measures adopted by large regional firms. The interviewees stressed long-term, personal ties as facilitating what could be called ‘piggy-back’ rides to national and international markets through involvement in general contracting systems. In most cases the route into these formal networks was via large regional firms. The respondent at Pfeifer gave a detailed description of this, which speaks for itself: Q: You are involved in consortia and general contracting systems. How do you get access to the main players?

Firm

Foundation

Group I Traditional core firms 1955/88 Reinhold

Group II Bauer

156

Career background of young firm-founders

Table 7.1

‘Young’ firms 1983

Trischler

1980

Stiller

1977

Nettlinger

1991

Jäger

1984

Scholsdorff Kroner

1982 1985

Employment prior to self-employment

Age at foundation1

The current owner-manager joined the firm as leading manager in 1982 and took the firm over in 1988. Prior to joining Reinhold he had worked for the R&D department of a Klöckner subsidiary (Duisburg)

50

The owner was a member of the executive of an Italian steel company in which a regional conglomerate owned a share. The owner worked for a regional steel trading subsidiary of Hoesch (Duisburg). In 1995 Krupp–Hoesch is the largest client. The owner worked for a large regional chemical company. One founder worked for Deutsche Montantechnik (DMT), a company focusing on R&D in coal mining. DMT and its main shareholder CUBIS AG (Essen) have close ties to Ruhrkohle AG. The second founder worked for Hagen Batterie AG (Soest, NRW) prior to foundation. The owner was employed at a local engineering consultant specializing on the iron and steel industry. Before studying engineering, he had worked as a miner at a local pit. n.a. The current owners have taken over the firm in an MBO, after the previous owner declared bankruptcy.

41

30

32 38/32

35

n.a. 52

Table 7.1

Career background of young firm-founders (continued)

Firm

Foundation

Schrella

1977

Behrens

1987

Krokowski

1987

Kleefeld

1986

Böckler

1958/1993

Castorp

1980

Schlömer

1991

Traditional ties stemming from work at the predecessor firm were important during the early stages of the firm‘ The owner had worked for the regional battery firm Hagen AG. The owner worked as an engineer for the regional battery specialist Stewing (Dorsten) prior to foundation. Firm started as a supplier of forms to the foundry industry. One of the current owners has held various positions at regional foundry firms before. The owner-manager was employed at the computing department of Mannesmann–Demag (Duisburg). All three owners had studied at regional universities before joining the firm. One owner-manager was employed by another regional engineering firm after finishing his degree. The owner worked for a computing consultant subsidiary of Hoesch AG (Dortmund). Before this he studied at the University of Dortmund. The main shareholder split from a similar company in 1991. Before working as an engineering/computing consultant, he has been with a regional Siemens subsidiary.

Age at foundation1

n.a. 30

31

41 34

34

45

157

Notes: 1 Age of the interviewee. n.a. = Not available.

Employment prior to self-employment

158 Corporate Germany Table 7.2 Firm

General contracting systems and ‘piggy-back’ rides1 Regional ties to large conglomerates

Location of projects Regional

Group I S. Kuhn

National

International

X

X

X

X

X

–

X X

X X

X X

X

X

–

X

X

X

X

X

X

X

X

–

X

X

–

–

X

X

X

X

X

X

X

X

Traditional core firms, founded 1970 and earlier

RWE Thyssen Mannesmann Parsunke RWE VEW Veba Roßmann RWE Biberkopf Regional steel companies (presumably Thyssen and/or Krupp) Kundmüller Veba–Hüls VKR Pfeifer Veba Babcock Group II ‘Young’ firms (post-1980) Bauer Mannesmann Thyssen Krupp Klöckner Kroner RWE Babcock Mannesmann Lentjes Stiller Krupp–Hoesch Thyssen Scholsdorff Mannesmann RWE Böckler Thyssen Ruhrkohle Mannesmann Schlömer Krupp–Hoesch

Note: 1 As specified by interview partners. Note that some firms were unwilling to specify clients by name. Compare also Table A.2 in Appendix A (p. 210).

A: Well, this works as follows. For example, we have a sub-contracting order from Babcock. This is a little bit complicated, Babcock is building the power station in Schkopau [East Germany] and they have in turn got this order from VKR [Veba Kraftwerke Ruhr]. So, Babcock has contracted the installation to IBO Merseburg [an East German firm] … And because


they have no planning department they have asked us to do the planning. Thus, we come full circle, Gelsenkirchen [VKR] contracts Oberhausen [Babcock], Oberhausen contracts Merseburg, Merseburg contracts Gelsenkirchen [Pfeifer] again. Q: How did you get the contact to IBO Merseburg? A: I don’t know exactly, this was an indirect recommendation on the part of Babcock, they said, ‘there is [a firm] here in Gelsenkirchen’, they said, because of the short distance to Oberhausen, ‘this is shorter’. Q: So, there is a real Ruhr connection? A: That I don’t know. I would simply claim that, I am a born Ruhr man, I was born here in Gelsenkirchen, you know, firms in the Ruhr Area traditionally hold together, this is no exaggeration. And if you see the restructuring from steel and coal to services … The Ruhr Area more and more grows into a service company. (Pfeifer, Gelsenkirchen) This is an example where regional ties are utilized for a national expansion of organizational space. But international ‘piggy-back rides’ are at least as common. Albeit not exclusively, this has been particularly important for the successful plant engineers in the sample, such as Bauer and Roßmann.5 Finally, close interaction with ‘regional champions’ was also considered by several firms as crucial for product innovation and diversification. Telling examples of this were provided by Nettlinger and Schrella, which both – among other activities – specialize on battery technology and energy storage, and are closely linked to the NRW battery industry (for instance, Hagen Batterie AG) and the regional electricity utilities. Nettlinger, for instance, is involved in an R&D project on solar energy and photovoltaics which includes RWE and VEW. There is also considerable government involvement in this project. Schrella reported cooperating in an R&D project with the British firm Silent Power, and asked about how this contact was established, the interviewee responded: A: This happened via RWE, since Silent Power is a subsidiary of RWE. That is, German taxes are dished out over there in England and therefore the English have to give things back to [the region]. For I have the feeling that the English are not really interested in this. English firms prefer to cooperate with English firms, this must have to do with the mentality. Q: This happened because of the involvement of RWE? A: I think so. We have always had contacts to RWE and thus they thought about us, as it is common practice, you know. A lot of ‘mouthto-mouth-propaganda. (Schrella, Recklinghausen) In sum, the more successful sample firms have been able to profit from the presence of large corporate players in the region. Expansion of organiza-


tional space was to a large extent based on ties to large regional firms and thus embeddedness in and dependence on traditional (hierarchical!) networks, regional place dependence also allowing large firm–small firm interactive learning and innovation. 7.2.2 The duality of cooperation and competition: the thin line between enabling and constraining effects of large-firm involvement Efforts to deepen and utilize traditional relations to large regional clients, and to cushion firms against market pressures have to be seen in the light of turbulence in political–economic space. Businesses have reacted to the changing and apparently extended social division of labour by relying on traditionally evolved ‘secure’ relations. In periods of economic uncertainty firms have therefore focused on routinized regional interaction and on institutional close relations. This further confirms one of the main findings so far, namely that at times of political–economic change actors frequently fall back on ‘tried and tested relations’, reproducing traditional interaction structures and even strengthening their ties regionally. This is not however to say that all sample firms have profited from their embeddedness in regional inter-firm networks. For the (limited) evidence of successful resistance on the part of firms such as Bauer or S. Kuhn cannot be generalized across the sample. The firms clearly differ in their ability to ‘make their own history’, being in a more or less vulnerable position. Depending on the extent of their own know-how and skills, the firms find themselves in a complex pattern of relations, being dependent and indispensable at the same time. Here, even the experience of the more successful sample firms gives evidence of a prisoner’s dilemma situation. In order to acquire the desired position with large firms, sample firms are often forced to outcompete each other, resulting in considerable cost reductions for the client and in extremely tight margins on the part of the Mittelstand suppliers. This is a first hint that the whole picture is less than clear-cut. Much of the success with regional conglomerates, including the opening of routes to national and international markets by embedding and demarketization, is simultaneously accompanied by a forced acceptance of the exchange logic, price freezes and the playing off of suppliers against each other. In short, competition and cooperation are different sides of the same coin, the price which has to be paid in order to become an ‘insider’ being that Mittelstand firms have to enter into cooperative agreements on terms dictated by their large clients. This is an example of the process of forced cooperation and unequal appropriation of the benefits associated with it. Recalling the case studies presented at the beginning, the experience of Pfeifer is a striking example of this: If the large [firms] restructure, this is good for us. I see considerable potential within the planning and service sector. What lacks a bit is the


price, this could be better. Indeed, this is quite peculiar. [If] Hüls awards a planning order to a firm with 400 employees, then they readily pay 135 marks per hour, and with such a small engineering consultant [as our’s] they pay 90 marks. I have already raised this [issue] with a technician [at Hüls], ‘well, he says, that’s simply the way things are’. (Pfeifer, Gelsenkirchen). In sum, although Hüls is to a certain extent dependent on Pfeifer, the power relation between the two firms is generally one-sided. So, even if Pfeifer has profited from the changing division of labour and from restructuring, it is Hüls which has gained most from it, Pfeifer – like other sample firms – being forced to operate on paper-thin margins. ‘Cooperation’ with large firms is a similarly two-edged sword in relation to the capacity for innovation and learning. While firms like S. Kuhn and Bauer have undoubtedly improved their skills and know-how as a result of interaction and have subsequently been able to use these skills for their own diversification and upscaling, the picture for the majority of the firms is less clear. While Reinhold, Pfeifer, Kleefeld and others have profited from contacts with their large clients, close contacts and the pressure exerted from large industrial capital have at the same time been detrimental, particularly from a long-term perspective. While close interaction with Thyssen and other large companies has helped the firms to weather the storms of recession and political–economic turbulence, many firms appear to have been so occupied with adjusting to the pressure and financial demands of their clients that they have actually been forced to scale down or abandon their own independent R&D efforts (compare Appendix E, p. 225). Overall, while learning-by-interaction with large regional clients has resulted in some positive developments, it may possibly have a stifling effect in the long term. This illustrates the ambivalent nature of close regional ties, providing both opportunities and constraints at the same time. This raises the question of how firms with a less advantageous position in the division of labour handle the pressure stemming from the political–economic context. Or, to put it differently, are there other safety valves with which pressure can be relieved? Investigating this issue may provide hints as to a possible structural transformation of traditional relations. The remainder of the chapter is thus devoted to examining this question, first concerning inter-firm relations (Sub-sections 7.2.3, 7.2.4) and, second, capital–labour relations (Sections 7.3, 7.4). 7.2.3 Building social capital in the region: horizontal networking, level playing fields and cartelization As regards horizontal inter-firm relations one response to external pressure, and also another example of reliance on ‘tried and tested relations’, has


been regional horizontal protective networking and cooperation. 6 Faced with a disadvantageous market position because of extremely low demand, particularly during the deep recession, and having little scope for individual ‘resistance’ against large firms, many SMEs reported that they were more or less forced to close ranks and to take steps to counter asymmetric power relations. The first strategy here is to provide a more level playing field by exchanging information given by large clients in tender bids. The reason for this appears to be unfair practice on the part of general contractors which often play candidates off against each other. Firms frequently reported arrangements which effectively resulted in price-setting agreements and ‘informal cartelization’ (that is, demarketization). Sample firms cooperating with companies at the regional and national level have already been dealt with in Chapter 6. The focus here is on regional price arrangements, such as that reported by battery specialist Nettlinger: A: We always have to pay attention … it makes no sense, if we undercut each other’s prices … ummh … therefore we talk to each other whenever something is on the agenda. Q: You engage with other battery firms? A: Yes, yes. [The large firms] go as far as calling every firm individually … and they try to get the best price of course. Q: And you engage in arrangements? A: We enter arrangements in those cases. Because it happened twice in the past that the client played the firms off against each other. (Nettlinger, Recklinghausen) An interesting example of regional informal networking was reported by the interviewee at Castorp. In the face of sluggish demand and competitive pressures the company has joined a regional network of friendly firms and has thus become involved in the building of a regional business group. This comprises a total of 12 firms, all located in the eastern part of the Ruhr Area. The glue holding the network together is common interest and the pooling of resources. Given that all firms involved are at least fringe competitors, the members have entered into an informal agreement not to compete directly against each other. That this arrangement works in practice was subsequently illustrated by the interviewee in terms of an incident involving Castorp and another firm from this business group. When both owner-managers realized that they had applied for the same order, they immediately contacted each other and – implementing unwritten rules – withdrew their single bids and applied together instead. Given that both firms were able to share their knowledge of the conditions of the job on offer, they strengthened their position vis-à-vis the client, which in this case was a much larger regional firm. After receiving the order, the task was duly fulfilled jointly. This informal mode of coordination necessarily


depends on mutual trust and on common interests. This has been possible only because of close personal ties between the actors involved, the partners knowing each other from their time at the University of Dortmund.7 This confirms that embeddedness in institutionally regional close relations is crucial for the success of this particular strategy of resistance. Overall, the strengthening and utilization of regional ties for demarketization played a more prominent role than informal networking at the wider national scale. By regularly exchanging price and other information and by suspending market competition, firms have managed to improve their power position. Rather than relying on individual resilience to overcome difficult demand conditions, some of the firms have developed informally regulated regional networks to structure competition and exchange. 7.2.4 On the transformative effects of adjustment – inter-firm transmission of pressure Many of the less successful Mittelstand firms, provided their size and division of labour position allowed, used power asymmetries in their relations to smaller, regional suppliers to transmit and therefore deflect the pressure stemming from their key customers. Firms such as Biberkopf, Papke, Parsunke and Gagsteiger adopted these transmission strategies. Smaller regional suppliers are confronted with threats to relocate production and purchases to the New Länder and Eastern Europe. In doing so, sample firms disembed and marketize their close and traditionally evolved relations to those firms. Thus, a changing environment at the international and national level can result in a transformation and restructuring at the regional one, revealing the extent to which upscaling is connected with restructuring in situ. All this is a direct result of the pressure from large clients to deliver quality products at competitive prices. From this perspective, the price to be paid for the continuing presence of large multinationals in the region appears to be a process of upscaling and relocation by their Mittelstand suppliers. This puts firms which act as intermediaries in a delicate position. In performing a balancing act between quality–trust and price considerations, the firms sometimes have gone too far and disembedded the ties to their traditional regional partners at precisely the time when they have become more dependent on them. Demands for cost reduction notwithstanding, the region’s large firms increasingly require more specialized and complex inputs. When pressures to react flexibly and swiftly to shortterm demand changes are added, marketization of ties to regional ‘subcontractors’ becomes extremely risky. Problems such as meeting lead times and finding adequate additional supplies at times of increasing demand reported by interviewees are first hints of serious difficulties in this context. A corollary of delegating more responsibility to smaller suppliers is also an increasing dependence on these firms. Ties of Mittelstand sample firms


to regional suppliers still predominantly concern those inputs which are specialized, involve a considerable amount of know-how and skills and are needed at short notice. This in turn means that as a result of the changing organization of production ties become less easily substitutable and that sample firms in principle become more place-dependent. When some of the surveyed firms were unable to adapt to short-term competitive pressure other than by transmitting as many of the negative effects as possible, this resulted in strategic resistance by their affected suppliers once demand had improved again. This has led to complaints about strains in the system and problems of adapting swiftly when demand picked up. Accordingly, once revoked, traditional and cooperative relations are extremely difficult to revive. What is more, insofar as close producer–user and buyer–supplier interaction is an essential prerequisite of innovation the strains in the relations depicted above may be detrimental to the innovative capacities of the firms in question. Such firms thus appear to be locked-in to a vicious circle, their disadvantageous DOL position often stemming from a lack of capacity for innovation in the first place. Before moving on, it should be added that unfavourable positions in the social DOL have left some firms without the option of restructuring interfirm relations. These firms therefore have become even more dependent on traditional large clients and activities, and have been forced to rely on the devaluation of labour (that is, the reduction of the workforce, see below) or capital (that is, the bankruptcy of Mair, Morgott and Papke) as ‘strategic’ responses. Another ‘safety valve’ frequently used by these firms has been to ‘go informal’, that is, reverting to networks of friends and family members. For instance, the engineering consultant Jäger employs family members and often relies on his personal ties to friends at larger engineering consultant firms (such as Pfeifer!) to get orders at times of low demand. Interestingly, there is a direct link to the successful case of Pfeifer introduced earlier. The interviewee at Jäger made the following complaint about his large clients: I had to change my client base by 80 per cent in 1993 because Hüls and Thyssen did suddenly not give any orders any more, this can happen every day. I compensate this with conventional jobs, that is, I make a series of phonecalls to firms which know and value me … [telling them] ‘all right I am available … let’s do something until orders pick up again’. (Jäger, Gelsenkirchen) Accordingly, at the same time as Hüls partly strengthened relations to Pfeifer (see Sub-section 7.2.1) it disembedded relations to Jäger. And although the ultimate cause of the collapse in orders was certainly the recession, the story told by the interviewee at Pfeifer strongly suggests that inter-firm relations have been transformed irrevocably, qualifying the opti-


mism of the interviewee at Jäger. To complete the picture, other firms reporting ‘going informal’ were Behrens and Fähmel which, like Jäger, are amongst the least successful firms in the sample.

7.3 The fragmented firm: segmentation and coercion into cooperation The final part of this chapter examines changes in capital–labour relations and the effects of strategic responses on the firms’ workforce. After reviewing the various flexibilization strategies adopted by the firms, I seek to explain these labour strategies in terms of power asymmetries and a changing power geometry at the firm level. This provides the basis for the final section (7.4), linking labour strategies and intra-firm relations with the regional labour market. Intra-firm divisions of labour have been deeply affected by the changes and processes reported so far, the firms responding with the reorganization and restructuring of capital–labour relations. Notwithstanding individual differences, four related trends stand out: casualization, intensification, ‘Japanization’ and quantitative adjustment. Table 7.3 gives an overview of the main developments underlying these processes. The mechanical engineering firm S. Kuhn serves as an illustrative case study. In response to a difficult competitive situation domestically and abroad the owner-manager invested heavily in new machinery in recent years, improving labour productivity considerably. Productivity increases have been accompanied by two measures. First, in order to utilize capital investment better, S. Kuhn introduced an additional shift, employed addiTable 7.3

The labour strategies of the 28 sample firms, 1990–95

Strategy

Measures

Casualization/contingent labour (23 firms)

Temporary workers in production; contingent labour as buffers; increasing reliance on contract workers Temporaries in administration Using subsidized labour

Intensification (13 firms)

Acceleration of turnover time through mechanization

New production concepts (‘Japanization’) (13 firms)

Quality circles, teamwork, reorganization De-hierarchization

Quantitative adjustment/ numerical flexibility (13 firms)

‘Downsizing’; overall reduction of the workforce

Individualization (6 firms)

Bonuses, performance-related wages Individual contracts Innovative time concepts Profit participation


tional skilled labour (that is, engineers or so-called *Facharbeiter) and increased output through intensification of the labour process.8 This considerably improved the firm’s capacity to react quickly to demand fluctuations. Second, this in turn meant a numerical reduction of low-skilled tasks.9 During a tour of the production facilities immediately after the interview, the ownermanager demonstrated the new production line and pointed out that he needed only one worker to monitor the complex technology where five or six employees were required before. At the same time he increasingly switched to the employment of unskilled temporary workers (casualization) and introduced quality circles for the remaining labour force (‘Japanization’). In the same vein a majority of the interviewees reported a profound shake-up of workforces, pursuing a labour strategy which differentiated and segmented workforces alongside new lines and categories. For some workforce segments this translated into an erosion of established roles and positions within the firms and into a disembedding of traditional capital–labour relations. This casualization process had two manifestations. The first concerns the increasing use of temporary work and the creation of a ‘new’ labour force segment. Companies used contingent labour to reduce uncertainty and cushion problems associated with the rapidly changing political–economic environment. Work contracted out in particular affected routine and less skilled activities. The owner-manager of Gagsteiger summarized her strategic response as follows: Well, first of all we of course no longer evened out natural fluctuation. Then, we had a relatively high number of temporary labour contracts, that is 12 or 18 months, which we have not prolonged. In 1993 we also had to revert to compensations. We tried to cut down those [employees] which were the least useful for the firm. Across the firm hierarchy, from top to bottom. (Gagsteiger, Gelsenkirchen) The owner-manager of environmental engineer Böckler revealed a similar rationale: From our perspective, I would say … that we, to put it like this, don’t want this millstone personnel around our neck. We say, we rather have 100 temporary and contract workers earning good money, but if we have a slump in demand, this would to a large extent be their problem. (Böckler, Essen) Large-scale employment of temporary workers has been a relatively new phenomenon for the firms investigated (just as for the German economy as a whole, see below). The second manifestation of casualization is that firms rigorously reexamined the positions and the ‘value’ of their different workforce


segments. This involved changing positions in the firm hierarchy and a radical questioning of established practices ‘from top to bottom’ as the respondent above put it. In doing so, owners and managers unsettled traditional institutional frameworks which are widely regarded as underpinning the high-skill, high-productivity performance of the German production model. Crucially, the traditional institution of the industrial *Meister increasingly appears to be a thing of the past in the new production systems. Valuable insights in support of this view from the perspective of labour was provided by the head of the works council at Essen-based GKN–GWB. At tradition-conscious GWB, which was taken over by the British GKN group in the late 1960s, recent reorganization measures caused much upheaval. Talking about the introduction of new production concepts at the company and the impact this had on middle management, the interviewee commented: You have to understand that when they were told that there would be no Meister any more, a whole world broke down. I myself found it very unfortunate that they did this. I would have continued to call them Meister. They have then reverted to a trick and called them ‘Fachreferenten’ [= special expert], not Meister any longer. They had huge problems with this, they couldn’t quite see their future perspective … My view is that this is a long-term process. That workers learn to do things autonomously, this is a learning process, you can’t simply turn a switch … this has to be learnt.10 (GKN–GWB II, Essen) Overall, institutions long taken for granted are increasingly fragile within the firms. Personal identity and loyalty to the firm are becoming undermined as traditional material practices, social relations, knowledge and ways of thinking are challenged by corporate decision-makers. All this resulted in a loosening of the traditional stable ties to the firm and increasing volatility in employer–employee relations at the firm level. In addition to the relatively unskilled this particularly affected middle management. It appears however that the construction of two apparently neat labour segments (skilled/useful vs unskilled/useless) by the employers does not square with a complex reality. Workforces are increasingly becoming fragmented and differentiated, employers’ strategies giving rise to uncertainty and contradictions. Managers and/or owners were able to exploit the resulting fragmentation and pushed for productivity coalitions at the level of the business firm. These coalitions have become known under the term Bündnis für Arbeit (alliance for employment). In these alliances labour and capital enter into formal contracts at firm level (so-called Betriebsvereinbarungen), exchanging concessions over labour costs for job security. These contracts are often outside the respective sectoral and regional collective-bargaining contracts and constitute a marked decentralization of capital–labour relations. The head of the works council at the electrical engineering firm, Parsunke,


for instance, referred to such an alliance at plant level, workers proposing to reduce working hours without financial compensation in order to avoid further redundancies. The interviewee justified the move by the ‘economic realities’ confronting the firm (Int. Parsunke II). Similar pacts were reported by other firms. To further illustrate this point, when asked about the relationship with the firm executive, the head of the works council at Morgott conceded that labour at the mining machinery firm was in a catch-22 position, a situation characterized by a juxtaposition of cooperative and competitive elements. The interests of the employees had to be balanced with unpopular decisions in the face of an unfavourable market situation, making it necessary to ‘consent to a redundancy at times’ (Int. Morgott II). This has to be seen in the context of a dire competitive situation and mismanagement, a crisis which eventually resulted in the death of the firm. 7.3.1 Different interpretations: segmentation, cooperation, resistance and dependence It is necessary at this point to look at the different social dynamics underlying these developments. The first concerns the question of labour segmentation, that is the division of the workforce into those with valuable skills and those which apparently lack those assets. 11 In a first step, the workforce is segmented internally as labour relations become individualized (for instance, individual wage settlements, bonuses). This can be explained in terms of different positions in the firm hierarchy and the technical division of labour and the unequal power resources at the disposal of employees. Individualization of wage bargaining has different implications if the worker in question is at the top or at the bottom of the firm hierarchy. What for the former may lead to an improvement of conditions as a result of considerable bargaining power may lead to a deterioration of the latter’s position and to ‘commodification’ of unskilled labour. Labour at the lower end of the firm hierarchy has, however, much to gain from the introduction of other flexibilization measures, for instance the flattening of intrafirm hierarchies. In other words, there are different interests involved in any given situation, with potential winners and losers in different segments of the workforce. In a second step, the costs of labour flexibility are externalized as firms draw on temporary agencies or on pools of contract workers which serve as a buffer at times of demand volatility. Costs of numerical flexibility are socialized, the Mittelstand firms making use of instruments such as shorttime working or early retirement schemes which are subsidized by the social insurance system (that is, unemployment and pension insurance). Given that the bulk of funds is drawn from joint contributions of employers and workers, with additional subsidies provided by the state and ultimately the taxpayer, the costs of flexibility are transferred across the whole society.


The second process refers to what I term coercion into cooperation. Sample firms adopted an at first sight contradictory policy vis-à-vis the remaining workforce. On the one hand, managers and owners employed an all-inone-boat philosophy, a ‘call to arms’ in the face of economic competition and state ‘over-regulation’. This variant of the (neoliberal) globalization rhetoric involves the use of external pressure to induce labour to cooperate with the firm executive. The interviewee at Meck argued: One declares one’s solidarity with each other. One has enemies outside, this concerns direct competition and certainly also increasingly the state with all its regulations, and then competition from abroad. (Meck, Gelsenkirchen) We have seen that labour representatives confirmed this internal ‘moving together’ and a cooperative impulse in the wake of external pressure. Accordingly, at times of uncertainty and severe competitive pressure labour representatives appear to make the same judgements concerning the necessary counter-measures as and share a similar world view with the management. Overall, this hints at a changing power geometry, political–economic pressure in principle advantaging capital at the expense of labour. The firms made use of their relatively greater power and were able to secure concessions from their workforces. However, what ought to be spelled out in more detail is how employers used and mobilized their power resources. Here, outright force all but remained the exception. Rather, firms sought to persuade their workforce that they had no other choice but to cooperate with management. Persuasion is by no means, however, an unproblematic affair, given that because of the uneven distribution of information both about the market situation more generally and more specific firm performance, there is ample scope for manipulation. Ultimately, then, power asymmetries owing to the unequal ownership of the means of production still play a decisive role. The power relations and modes of power used to restructure capital–labour relations, however, are more complex and involve more than just domination and exploitation. Rather, what we have here is an example of coercion into cooperation. Third, there is labour resistance and institutional persistence. Experience at the firms proves that labour is able to resist reorganization and change, linking to a theoretical point concerning power and power asymmetries made earlier, namely that notwithstanding the unequal positions of the interactants, the weaker partner nevertheless has some scope to resist.12 In the case of Papke, for instance, authoritarian pressure to comply with the executive’s demands at a certain point became so high that, the firm’s competitive position and the risk of job losses notwithstanding, labour opted for open resistance (Int. IGM GE). This shows that too much emphasis on numerical flexibility and casualization of labour relations may be detrimen-


tal to long-term competitiveness. One important reason for this is that in practice it is often very difficult for the employer to decide which part of the workforce constitutes the ‘indispensable’ core. This is not to imply that relations of trust and mutual cooperation are always preferable to those characterized by competition and one-sided imposition of ideas and views. With this, we touch upon one of the crucial dilemmas with which corporate governance has to deal. This is a manifestation of the conflict between institutional persistence and the need for dynamic change, a conflict which cuts right through inter-firm and intra-firm relations. After years of stable and durable capital–labour relations, some sample firms were faced with lock-in. Not surprisingly, persistent ‘ways of doing things’ and action frameworks are closely correlated with firm age, with issues of lock-in and institutional persistence being most frequently reported by traditional firms. The interviewee at the mining machinery engineer Morgott was particularly outspoken in this context: Q: To what extent has your internal organization changed during the last five years? A: We try to get leaner internally, with regard to processes. We developed out of a craft business, you know. Here in our backyard, something like a metalworking shop, craft-like. These are our roots and we have taken on board a lot of old things with regard to administration, [organizational] structure, processes, things we struggle with. As the main capital owner got older, this was not sufficiently paid attention to. We try to deal with these problems ourselves, but this is also a problem of the workforce … The majority of our regular workforce has been here for a very long time and they certainly mean well, [thinking] ‘what has worked well in the past must also work in the future’. The mining industry always had the advantage of not having to calculate so exactly, ‘this will be all right like this’, and they have paid whatever price we charged, you know. Q: Do you mean Ruhrkohle? A: This is Ruhrkohle now, but we dealt with each pit individually before. This was of course far better for us, now Ruhrkohle dictates prices and these hold for all pits. (Morgott, Essen) Note the effect that the establishment of Ruhrkohle and the gradual incorporation of individual pits under one organizational roof had on the supplier industry, once more illustrating the importance of the changing regional political and economic context.13 The main interest of this excerpt here, however, is the way it reveals the apparent lock-in into established routines which have built up through time and thus become institutionalized.14 The following point made by the head of Parsunke’s works council


shows that this is by no means a biased interpretation of the situation through the lens of owners and/or managers. Criticizing the executive’s decision to introduce new production concepts, such as team work and the flattening of hierarchies, he said: ‘It simply does not make sense to additionally introduce these new things at times of such a dire order situation,’ (Int. Parsunke II). This provides yet further proof of the existence of the thin line between the enabling and constraining effects of traditional relations. The firms tried to surmount institutional barriers and cognitive lock-in by introducing various organizational measures, such as team work, quality cycles and ‘lean production’ more generally. At the more Taylorian firms these attempts appear to have had limited success at best. This is most evident in the case of Morgott, Mair and Papke which went into receivership. A major reason for failure has certainly been resistance on the part of labour. Leaving aside the fact that new production concepts have often been introduced in a truncated way, institutional lock-in could not be surmounted, traditional ‘ways of doing things’ being stronger than the will for change. Distance between the ‘traditional and old’ and the ‘new’ therefore was too large to be coordinated by organizational measures. However, solely blaming labour for reorganization failure will not do. Two further aspects need to be considered as well. The first is that owners and leading managers sometimes appear to have gone too far, paying insufficient attention to issues of professional pride and ethos. The example of GKN–GWB mentioned above provides support for this view. Second, it would be extremely short-sighted to depict managers and executives themselves only in terms of agents of dynamic change. In fact, interviews with the sample firms revealed ample evidence of owners and managers holding on to traditional action frameworks and world views. A case in point are the traditional mining suppliers in the sample. Strikingly, the interviewees at Morgott and Fähmel – grouped at the ‘Taylorian’ end of the sample – displayed a surprising naïveté concerning the future of coal mining in the Ruhr and thus the longevity of their traditional markets.15 Finally there is a fourth aspect: capital’s dependence on the workforce. Schumpeterian and Ricardian firms in particular reported incidents where skilled employees were poached by competitors, above all by larger firms. It is clear that service oriented and engineering firms depend greatly on the skills of their employees, skills which are personalized, tacit and thus difficult to substitute. This in turn means that relations between these employees and the client are extremely close and as trust is built up a point may be reached where the client firm comes to the conclusion that it could as well employ the person in question directly. These companies are therefore highly dependent on skilled labour, giving this segment of the workforce considerable bargaining power. The crucial underlying mechanism here is the degree of substitutability. It is no surprise therefore that the


reduction of employee turnover is one of the main aims of the countermeasures introduced by engineering consultants and plant engineers. It is reasonable to assume that labour at these firms is strong enough to have little need for collective representation of its interests. This illustrates the fact that absence of union representation does not necessarily mean that individual labour is without any means of expressing its views effectively. Overall, what these examples show is that skilled labour constitutes a valuable asset for most of the firms and an important precondition for economic success. Labour issues therefore play a crucial role when firms are developing strategies to cope with external pressure and uncertainty. 7.3.2 ‘Divide et impera’: utilizing conflicts of interest within the workforce We have seen that there is no such thing as homogeneous labour, qualifying one-sided interpretations which reduce all processes to conflicts between labour and capital. Rather, the situation within the firms is characterized by complex patterns of conflict and cooperation. However, there should be no doubt that this gives capital the opportunity to exploit friction and conflicts of interest within the workforce, making use of fragmented views and ruling accordingly. The situation at Kroner illustrates how unionization can play an important role in what could be called ‘divide et impera’ strategies. Originally, the firm combined both its major activities, the production of annealing machinery and the hiring out of skilled personnel for annealing work, under the same organizational roof. Faced with resistance to reorganization measures, the management decided to split the firm into two legally independent units. This meant that the old works council had to be dissolved and two new councils, for each unit, had to be elected. Conflicts of interest within the workforce played a crucial role, given that the old representatives were not re-elected. Asked for his opinion, one member of the new works councils confirmed tensions within the workforce before the reorganization. Talking about a learning process on the part of labour, he regarded the new situation as an improvement and as an important precondition enabling the firm to survive in the current competitive climate. Asked about the head of the old works council, he appeared to blame his colleague, whom he had known for about 15 years, for previous conflicts, describing him as a ‘little hothead’ (Int. Kroner II). This is further proof of affinity of interests between capital and segments of the workforce and, in view of the fact that the interviewee is not a member of IG Metall, illustrates that the power of the union has been significantly diminished. It goes without saying that by weakening the power of the union, firms face fewer barriers against restructuring and reorganization. Those Taylorian firms which did not have any institutionalized labour representa-


tion at the time of interviewing (compare Appendix E, p. 225), that is, Behrens, Fähmel, Krokowski, Schlömer and Castorp, all faced little resistance when they introduced painful measures, such as redundancies, the abolishment of additional wage entitlements (for instance, Christmas and holiday bonuses) or pay freezes. Overall then, the general pattern of capital–labour relations at firm level has been one of labour representatives increasingly appearing to make similar judgements concerning the necessary counter-measures in the wake of external pressure, sharing a similar world view with the management. The qualifications made above, however, serve as a reminder that there are many ways into cooperation, ranging from fear of negative sanctions (that is, cooperation brought about by outright force, coercion, authority, etc.) to interest affinity allowing positive sanctions to work (persuasion, inducement). Stressing the self-evident fact that labour may have a vested interest in cooperation and a collectivist, positive-sum view of power is of course neither to say that capital produced through cooperation (both economic and social) is always distributed evenly nor that we can neglect the question of how consensus is produced socially. Rather than the use of outright force the overall situation may therefore be better described as coercion versus persuasion into cooperation, depending on the degree of asymmetry in power relations. The fact that the majority of firms reported profits during this difficult period (see Appendix D, p. 221) shows that from a capital point of view these strategies appear to make sense, even if the price for short-term gains may of course be the loss of long-term competitiveness. From the point of view of fragmented labour, we have a potential mismatch between individual interests and collective ones, as weaker members of the workforces increasingly lack the resources of ‘voice’ and bear the brunt of the costs of restructuring. In sum, what we have here is a complex and gradual transformation of intra-firm relations, the rules of the game being redefined and altered.

7.4 The geography of labour re-regulation: redrawing of boundaries, downscaling and exclusive cooperation Notwithstanding the fact that the developments outlined above are the result of quite different social processes, they combine in having repercussions for the geography of labour regulation in the region with important implications for the German Model more generally. In what follows I argue (i) that these changes are about to ‘rework’ the wider ‘regulatory landscape’ (Hudson, 1996) in terms favourable to capital during a period in which the latter is in the ascendancy in the labour market, and (ii) that in order to understand the ongoing re-regulation of capital–labour relations in Germany one has to look at the peculiar spatial dimension of this process.


It is a further aim of this section to (re)connect processes at the firm and regional levels with those at wider scales. 7.4.1 Exclusive intra-firm alliances and the declining power of regional labour market intermediaries At the level of the individual business firm the production of consensus, be it by coercion into cooperation or resulting from more active interests of labour, aimed at a hostile outside world (compare the excerpt from the interview with the owner-manager of Meck in Section 7.3.1). Actors look for stability and certainty in the face of competitive pressure, resulting in efforts to distinguish themselves from outsiders and a contradictory pattern of intra-firm inclusion and extra-firm exclusion. Left behind by the various attempts to fend off ‘the enemy outside’ are those who are pushed from insider to outsider positions, that is into casual, insecure employment or into unemployment. By drawing increasingly on temporary agencies or on pools of contract workers as buffers at times of demand volatility, firms socialize the costs of labour flexibility. This view was supported by the interviewee at the Ruhr IGM headquarters (Int. IGM RUHR). Numbers for West Germany and for Nordrhein-Westfalen show that since 1976 temporary work has risen sharply, particularly in recent years (Figure 7.1). Figure 7.1

Temporary labour, West Germany and Nordrhein-Westfalen, 1976–96

1400 1200

Germany NRW

1000 800 600 400 200

19

76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96

0

Notes: Index 1976 = 100; numbers for December; temporary labor as defined in the Arbeitnehmerüberlassungsgesetz. Data source: ANBA, various volumes; own calculations.


What does this mean for collective wage bargaining in the region? Both sides of the collective bargaining partnership, the employers’ associations and the labour unions, have seen a continuous erosion of their power. To start with the employers side, regional capital representatives have come under increasing pressure from individual firms accusing them of being too lenient with the labour unions. An important catalyst in this context has in 1995 been a controversial wage deal struck in the Bavarian metals and electronics industry. The Bavarian pilot wage deal, which other regional Gesamtmetall affiliates adopted only after acrimonious discussions, was generally regarded as favouring larger companies. Hence, after the responsible wage bargaining commission (Tarifkommission) at the NRW employers’ association decided to accept the deal, there were major conflicts between small and large firm representatives, culminating in formal and informal forms of resistance. The former strategy involved resignations and defections by small and medium firms from the employers’ association, 16 a move which in principle means that wage negotiations have to be conducted at plant level. The latter, more frequently used strategy of resistance has been a conscious breach of the agreement, companies simply not implementing wage increases and other agreed measures (Int. EMPL NRW). The owner-manager of Reinhold, for instance, said regarding the employers’ performance: They were absolutely too soft. There have been many defections because of this, above all by the industrial small and medium-sized firms, which did not agree to these contracts, which would have rather been prepared to fight a strike. (Reinhold, Recklinghausen) Evidence from the 16 case-study firms which were members of the employers’ association at the time of interviewing 17 further supports the conclusion that industrial relations in Germany are becoming increasingly decentralized. While outright defection has not occurred in the sample, we have already seen that firms have struck special agreements with the workforce, owners and managers in part being able to coerce workers into cooperation in the face of ‘economic realities’. In other words, the growing number of firm-level alliances for employment mentioned earlier has to be seen as direct strategic response to the 1995 wage round. As major rifts surfaced amongst employers across the country, regional employers’ associations were put under pressure to adopt a more confrontational attitude. This also affected employers in traditionally more consensus oriented Nordrhein-Westfalen and the Ruhr Area, as the interviewee at the regional employers headquarters in Düsseldorf confirmed (Int. EMPL NRW). That this development would clearly not be in the interest of the regional IG Metall was illustrated by the respondent at the Ruhr Area IG Metall headquarters:


This is a very difficult situation for us because we are obviously not at all keen on having weak employers’ associations. This because we would of course lose our negotiation partner and because agreements which we strike in negotiations are [then] extremely difficult to implement. A horrible situation for us. Although we have said to ourselves, ‘if there is no other way we simply have to go from plant to plant’. (IGM RUHR) Strikingly, this shows how the traditional corporatist actors are locked together, each party’s power position being inextricably linked to the legitimization of the other. This results in a common interest to defend the traditional wage bargaining system and resistance to change. Overall, pressure from below, most notably from small and medium firms, played an important role in changing the attitude of employers’ representatives. Pressure stemming from the actions of the ‘represented’ also built up at the labour unions. Again, the firm-level alliances for employment played a crucial part, given that in these contracts individual works council members are increasingly in conflict with the official union line. The owner-manager at the metal goods producer Schraml, for instance, mentioned special agreements with the workforce and commented: This had to do with the flexibilization of working time. We think that there remains much to be done with regard to direct labour costs and you can’t find anything on this issue in [the collective wage agreements] for Nordrhein-Westfalen. We try to reach special agreements [with the workforce]. (Schraml, Recklinghausen) A note of caution is appropriate here. The widespread view to the contrary notwithstanding, collective wage agreements in Germany have in recent years significantly widened the scope for flexible time management. Just as for the interviewee cited above, employers in general often lack knowledge of the provisions laid out in these agreements. We are faced here with a collective reinterpretation and negation of the facts which serves as a justification to ‘go informal’. The fact that labour representatives within the firm go along with this demonstrates the extent to which the power geometry within the firms has changed and unions have been silenced. More generally, the weakening of IG Metall’s position is linked to additional factors. Crucially, there has been a significant drop in membership in recent years. At the local level IG Metall saw its membership in Gelsenkirchen decline from about 18 000 in the early 1980s to just over 15 000 in 1990 and 13 000 in 1996 (Int. IGM GE). While much of this reduction is commonly attributed to a growing dissatisfaction amongst workers, it is in fact a result of more complex processes. Undoubtedly, the significant reduction of employment in traditional manufacturing industries plays the major role. The decline was further exacerbated by reorgan-


ization measures, that is, the trend towards outsourcing and disintegration. As a result, many now independent or quasi-independent units no longer fall under the jurisdiction of IG Metall, belonging instead to less tightly regulated service sectors. As pointed out earlier, it is important to note that this also affects labour at large firms. What is striking is that, once unemployed, most members appear to decide to leave the labour union (Int. IGM GE). Since membership fees are linked to income and membership is not dependent on permanent employment, the fact that so many workers opt for exit suggests a crisis of representation, workers apparently feeling that their interests are not adequately represented once they are made redundant. Consequently, faced with the pressures outlined earlier and with the fear of redundancy, the IG Metall works councillors, like the individual employers, exerted pressure on their representatives to change their negotiation positions. In contrast to the employers, however, IG Metall was forced to adopt a more conciliatory policy. These changes are a reflection of the shifting power geometry between capital and labour. But these processes do not stop at the local or regional level; I will now turn to national, interregional dimensions of the transformation process. 7.4.2 ‘You can’t get people on sundays’: reunification and the East as laboratory for ‘flexible’ regulation The plant engineering firm Fähmel is an interesting example as to the extent to which reunification influenced developments in the Ruhr Area. This successful firm acquired production facilities in East Germany in October 1990 and has continuously expanded its workforce there. More recently, a modest decline of the Ruhr workforce during the period 1996–8 was accompanied by an increase from 35 to 41 in the East during the same period. At the time of interviewing the owner-manager had mentioned internal competition from the production site in the East, hinting at lower wages (at the time of interviewing 85 per cent of the West German equivalent) and a longer working week (40 instead of 35 hours). He regarded these conditions as competitive advantages and argued that workers in the East have got a completely different degree of motivation, the people have a need to make up. This is different [in the Ruhr Area]. Here leisure time counts as much [as time at work], you can’t get people on Sunday. The next step is, if we could decide this again, we would move 100 km further [east]. (Fähmel, Essen) There is an emerging division of tasks between regional production systems such as the Ruhr Area and those in the new Länder, space and scale playing a crucial role in all this. Space is on the one hand used ‘practically’, that is new opportunities for restructuring in space are exploited by relocating


parts of the production and purchases of inputs to the New Länder and Eastern Europe. But space is also used rhetorically as a device to secure concessions from labour. New spatial mobility constitutes a power resource, considerably increasing the potential power of capital vis-à-vis relatively immobile parts of the workforce. Practical exploitation of the new situation is of course particularly characteristic of those firms which have established production subsidiaries and joint ventures in those areas which were opened up after the ‘frontier of capitalism’ was pushed to the east. Table 7.4 gives an overview of those firms which have established production capacity either by founding 100 per cent subsidiaries or by entering joint ventures. Not surprisingly, the firms involved are all relatively large, only Schraml employing less than 100 employees in 1995. But solely focusing on those firms which have actually taken steps away from the Ruhr Area is not enough. For the majority of the sample firms, establishment of new production sites and relocation has by and large not been an option. This does not, however, mean that owners and managers of spatially less mobile firms have not used the changing political–economic context to force through change within their own businesses. Firms have thus often used external pressure to persuade labour representatives to cooperate in far-reaching reorganization measures in their Ruhr operations. The interviewees all framed their in situ strategies in a discourse stressing the need for regional labour to adapt to the conditions in the New Länder Table 7.4

Relocation of production to East Germany and Eastern Europe

Firm

Production facilities New Länder

Eastern Europe

Papke Schraml

Subsidiary (Triptis) –

Gagsteiger

Subsidiary (Finsterwalde) Subsidiaries Subsidiary (Halle) Subsidiary (Rudolstadt) – Subsidiary (Leipzig) Subsidiaries (Landsberg, Frankfurt/Oder, Dresden, Allstedt) Subsidiary (Dresden)

– Subsidiary (Czech Republic) –

Scholsdorff Pfeifer Stiller Roßmann Kroner Meck

Mair

– – – Joint venture (Poland) Subsidiary (Hungary) –


and Eastern Europe. By confronting labour representatives with exit threats (nationally or internationally), firm decision-makers have been able to gain the consent to profoundly restructure and reorganize their operations, reducing and segmenting the workforce, relying on contingent labour, introducing new production concepts and so on. Put differently, the ‘divide et impera’ strategies outlined earlier have a profound spatial component, policies of scale (that is, measures and counter-measures of, and resistance against rescaling) transforming the situation at the regional level. From the perspective of the regional economy this has severe implications, recent labour market developments pointing to an accelerated decoupling of the Ruhr Area vis-à-vis the rest of NRW and Germany (compare Figure 1.1 in Chapter 1, p. 10). But while this may also be a result of the cyclical downturn, cyclical swings normally affecting the Ruhr more than the rest of the country, there is strong evidence for deeper, structural changes in the regional labour market. As firms shed ‘dispensable’ labour, partly because of external pressures, partly as a result of jumping on the bandwagon and following popular recipes such as ‘downsizing’ or ‘lean production’, they increase the regional supply of low-skilled labour. This regional ‘reserve army of labour’ in turn is recycled through the various temporary agencies which have begun to operate nationally and regionally in recent years. The interviewee at Morgott, for instance, reported up to seven calls per months from temporary agencies offering employees. As shown earlier, numbers for Germany and for Nordrhein-Westfalen suggest a steep increase from 1976 onwards, interrupted only during the early 1980s and 1992–3 recessions. West German firms in general have relocated production to Eastern Germany and appear to use the East as laboratory for labour conditions and production methods which would have been resisted in the West. Accordingly, as smaller firms suddenly had the option of pursuing cheap competition strategies at the domestic level, this fed back to the old Länder. For instance, while 65.3 per cent of West German employees across industries are covered by collective wage agreements, this holds only for 43.9 per cent in the East (numbers for 1997, Bispinck, 1999: 82). The mass exit of existing and the refusal of new firms to join forced employers’ associations in the East to revert to ‘voice’, Gesamtmetall in 1993 being the first association to terminate a collective bargaining agreement without giving notice (Müller-Jentsch, 1998: 147). This conscious breach of rules by the employers’ constituted a clear sign of the changing situation. What is important in this context is that many sample firms would be able to make this move eastwards only with high financial and social costs. Those firms instead actively used this option as a threat to discipline their local workforces. This qualifies some of the statements made by the interviewees and sheds light into the extent to which labour has been weakened. Overall, for many regional production systems in the


West, unification therefore meant a profound change of the position in the inter-regional division of labour. The crisis of representation within NRW and Ruhr intermediaries outlined above is thus symptomatic for problems nation-wide. The organization rate in the metal and electronics industry, decreasing only slightly by 2 percentage points from 1964 to 1984, has subsequently fallen from 74.4 per cent in 1984 to 64.3 per cent in 1997 (Schroeder and Ruppert cited in Heinze, 1998: 135; Gesamtmetall 1999). Membership trends illustrate that this decline has accelerated since the mid-1980s (see Table 7.5). Similarly, between 1991 and 1997 the DGB lost almost 3.2 million members or about 27 per cent of its membership base, IG Metall suffering an equally dramatic decline of almost 1 million (26.5 per cent, Statistical Yearbook of the Federal Republic of Germany, various volumes). Although this decline has to be seen in connection with an inflated membership size in the wake of unification, it has profound consequences, not least with regard to union finances. This was the context in which the national leadership of IG Metall proposed a national alliance for employment plan in November 1995. Originally, this proposal aimed at a national-level contract between labour unions, employers’ associations and the state and as such effectively at the restoration of the power of the collective bargaining institutions in the face of the erosion portrayed earlier (for a detailed account of this, see Bispinck, 1996). Within the employers’ camp this proposal caused friction and revealed conflicts of interest. Put simply, the BDA cautiously welcomed the idea of a national-level alliance for employment. This is not surprising if one recalls the fact that the BDA has a vested interest in maintaining the collective bargaining mechanism. Industrial pressure groups and sectoral business associations18 (for instance, the Bundesverband der Deutschen Industrie, BDI), however, clearly campaigned for an overhaul and shake-up of the traditional system. It was because of the pressure from individual firms and their Table 7.5 Organization rates within the metal and electronics industry, West Germany, 1980–97 Year 1980 1985 1990 1994 19971

Percentage share of all firms

Percentage share of all employees

57.4 54.6 46.4 43.1 35.2

72.7 73.8 69.4 64.9 64.3

Note: 1 Preliminary figures. Data sources: Müller-Jentsch (1998: 145); Gesamtmetall (1999); own calculations.


sectoral interest groups that Gesamtmetall, the metal employers’ association, rejected this ambitious plan, advocating instead a more decentralized and flexible system, a move justified by expected positive employment effects (see Hundt, 1996). As the experience of the sample firms and general trends in NRW and the Ruhr Area after the collapse of national talks illustrate, the firms appear to have got their way. The Gelsenkirchen IGM representative confirmed the decentralization of industrial relations, arguing that after the failure of the alliance for employment at the national level unions are forced to seek regional and local deals (Int. IGM GE). Again, this further trend towards flexibilization and decentralization of wage bargaining was not solely owing to the employers. Parts of the labour union movement appear to have changed their attitude as well. Strikingly, the apparently traditionalist Ruhr and NRW IG Metall played an active role in this strategic repositioning, as indicated by the interviewee at IGM Gelsenkirchen who commented on the future of collective wage bargaining: Well, I think there will be more [but] regulated options for different areas. The labour unions are not always the ones which have to be pushed, we accept the need for change. Besides, our members demand this … The metal industry is extremely differentiated. One could envisage to introduce … options for single sectors and regions. (IGM GE) At the regional level, the former leader of the Dortmund District and current head of the NRW IG Metall, Harald Schartau, has in recent years acquired a reputation as a reformer within the national IGM executive, arguing in favour of – controlled – decentralization and flexibilization (see Schartau, 1995; Zeit, 18 April 1997). In sum, there are conflicts and tensions between traditionalists and modernizers at all scale levels, IG Metall undergoing a period of decisive change. Gradual as they may be, these changes in the national and regional regulatory landscape further aggravate the impact of individual firm strategies on vulnerable segments of the labour force. As a result, there appears to be a shift from a dual to a ‘triadic’ labour market, with a very mobile global elite (the actors making up global expert systems, for instance, managers in transnational firms), a more or less regionally bound group of producers of goods and services in secure employment (including both capital owners, for instance in small firms, and labour) and, finally, those who are marginalized, either suffering from unemployment or able to find only casual employment. Ruhr and German labour market trends support this assumption. A closer look at the recent development and composition of temporary employment reveals that this particularly affects unskilled manual workers, in Germany and in NRW in particular. With a view to the whole economy, temporary workers throughout the skill categories have since

182 Corporate Germany Figure 7.2 Temporary labour, total and unskilled, West Germany and NordrheinWestfalen, 1976–96

4500 4000 3500 3000

Germany NRW Germany (unskilled) NRW (unskilled)

2500 2000 1500 1000 500

19

76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96

0

Note: Index 1976 = 100 Data source: ANBA, various volumes; own calculations.

1980 seen their share of average monthly income significantly eroded. And, what is more, there is a striking gender dimension to this, the male share of temporary labour during the period 1976–95 increasing from 68.9 to 80.8 per cent (compare Figure 7.2, and Tables 7.6 and 7.7). A similar pattern holds for the position of disadvantaged segments of the unemployed in the Ruhr Area, NRW and Germany. Overall, the long-term unemployed, older workers and ‘Gastarbeiter’ fared particularly badly. What is important in this context is that in addition to having seen much legal protection removed by the state, marginalized workers also lack adequate institutionalized representation of their interests. The increasing number of union members made redundant who resigned their membership testifies to the fact that, for the unemployed, unions such as IG Metall are not regarded as representing their interests. After all, with their emphasis on striking contracts with employers the unions primarily aim at securing existing employment but do little to improve the position of people out of work. Consequently, there has been a response by alternative social movements, which for instance formed the Bundesarbeitsgruppen der Initiativen gegen Arbeitslosigkeit und Armut (federations of initiatives against unemployment and poverty = BAG-Erwerbslose). Arguing that people

183 Table 7.6

1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Structure of temporary laboura in West Germany, 1976–95 Total temporary workers

Temporary labour quotient*

Male

Female

Percentage share male

16 858 21 186 26 408 36 318 47 021 43 058 29 117 25 702 32 976 48 707 70 376 73 083 87 743 104 930 123 378 133 734 135 827 115 058 128 577 161 995

0.08 0.11 0.13 0.18 0.22 0.21 0.14 0.13 0.16 0.24 0.34 0.35 0.41 0.49 0.55 0.58 0.58 0.50 0.57 0.72

11 618 14 952 18 625 26 712 34 819 31 921 19 280 17 582 23 652 36 731 56 059 58 427 71 380 85 761 99 755 107 698 108 830 91 983 104 351 130 845

5 240 6 234 7 783 9 606 12 202 11 137 9 837 8 120 9 324 11 976 14 317 14 656 16 363 19 169 23 623 26 036 26 997 23 075 24 226 31 150

68.9 70.6 70.5 73.6 74.0 74.1 66.2 68.4 71.7 75.4 79.7 79.9 81.4 81.7 80.9 80.5 80.1 79.9 81.2 80.8

Notes: a Note that differences between Figures 7.1 and 7.2 and Table 7.6 are due to different ways of measuring temporary labour. * = Defined as share of temporary labour against all employees within the social insurance system. Source: Rudolph and Schröder (1997: 106).

Table 7.7 1980–95

Temporary workers, share of average monthly income, Germany,

Position

1980

1990

1995

Total blue-collar workers Low-skilled workers *Facharbeiter Total white-collar workers Low-skilled Skilled All employees/workers

79.3 74.3 82.8 89.2 73.4 82.3 77.4

73.2 67.6 77.5 85.8 67.7 76.5 71.7

65.4 59.7 71.4 78.2 59.4 70.0 63.4

Source: Rudolph and Schröder (1997: 117).


without jobs are regularly bypassed and have no voice, criticism is in addition to the state and capital also directed towards the official unions (BAGErwerbslose, 1996). While neglect of marginalized workers by labour unions in corporatism is not a new phenomenon (for an earlier critique, see Offe and Hinrichs, 1977), their recent rise in absolute numbers and the simultaneous cuts into the national welfare system by the government clearly makes the representation issue a particular critical one today. 7.4.3 Defending the German model against globalization: societal contracts in the name of competitiveness Finally, from an international perspective, the national alliance for employment proposal was seen by the traditional corporatist actors as a device to respond to the challenges of globalization. The IG Metall leader linked his proposal to international competitive pressure on working conditions and labour regulation in Germany, seeking a national societal contract against globalization (see Altvater and Mahnkopf, 1997: 59; Bispinck, 1996). This means that labour representatives explicitly based their strategic efforts on territorialized resistance within national ‘container’ space. This attitude is in stark contrast to the one in the employers’ camp. The president of the BDA, for instance, pointedly refers to an ‘alliance for employment and competitiveness’ (Hundt, 1998, my translation and emphasis). Consequently, the various groups representing the interests of capital have exerted pressure on the Federal Government to adopt regulatory changes which aim at a US- and UK-style ‘flexibilization’ of the labour market. These policy changes were seen as essential in the light of international competitive pressure and global integration (for instance, see Henkel, 1997) The Kohl Government always regarded the alliance for employment as a programme for employment and growth (see Deutsche Bundesregierung, 1996). After the collapse of the alliance for employment at the national level, the Conservative–Liberal Federal Government implemented first steps in this direction. In September 1996 the Government majority in the Bundestag finally passed the so-called Wachstums- und Beschäftigungsförderungsgesetz (= law for the promotion of growth and employment) which in addition to cuts in the social insurance system (for instance, an increased female retirement age, cuts in health care) included three laws directly related to labour market regulation. The first reduced the legal sick pay requirement from 100 to 80 per cent of the nominal wage. Secondly, the rules governing temporary work were further relaxed, especially for newly established small firms. Thirdly, from October 1997 the threshold at which employees enjoy legal protection against dismissal (Kündigungsschutz) was raised from firms with five to those with 10 employees. The proportion of companies excluded from this regulation thus increased from 67 to 83 per cent and the numbers of employees from 6.8m (24 per cent of


total employment) to 8.4m (30 per cent) (SZ, 8 June 1996), with profound implications for the labour market. Federal Government deregulation was mainly directed at enabling numerical flexibilization strategies and at reducing labour costs. In other words, regulatory change followed the logic put forward by business interests, further contributing to the shift in the power geometry between labour and capital. Again, those workers which are at the ‘long side’ of the labour market are particularly disadvantaged. The role of the state is obviously a complex and an ambiguous one. While austerity policies and decisions to ‘renovate’ the German welfare system, as it is euphemistically put, contribute to an erosion of the state’s regulatory capacities, the state at the same time reasserts itself, for instance, all but abolishing the right for asylum and limiting immigration. As an aside, recent events illustrate that there are only small differences between the new ‘centre-left’ and the old, conservative–liberal government in this regard (compare the current problems regarding the ‘new’ national alliance for employment, asylum and ‘immigration’ policy or tax policy). Yet, both contradictory trends are in fact two sides of the same coin. The state needs to make up for sovereignty lost to mobile (large) capital, both by tightening its grip over those ‘insiders’ who are relatively less mobile (for instance, domestic workers, small firms) and by reducing the freedom of movement of undesired ‘outsiders’. All these dilemmas testify to the increasing difficulties in maintaining a ‘territorial container’ in the context of globalization and in my view are far too complex to be reduced to either simple ‘death of the nation-state’ theses or routine evocations of a continuing salience of the national level. In the face of these developments, what future is there for codetermination and collective bargaining in Germany? Is Germany simply catching up with the Anglo–American example, entering a completely new institutional trajectory? Although there are differences in opinion between optimists and pessimists, observers generally agree that the situation in Germany cannot be compared to the one in the UK or in the US (Dörre, 1998; Kern and Sabel, 1994; Müller-Jentsch, 1998): capital–labour relations in Germany will continue to be regulated by distinct institutional compromises. It is important here to point at the still considerable strength of the labour movement and to the fact that the situation is still more stable within large firms. Moreover, the regionalized nature of the ‘German Model’, and a general mistrust of the neoliberal market dogma further militate against full convergence. On the other hand, the case studies show that the German Model of industrial relations is clearly under pressure to adjust and the rules of the game have in my view already been ‘reworked’ considerably. This concerns above all the rescaling of labour regulation. The simultaneous decentralization and individualization (that is, personalization) of the rules and norms governing codetermination and collective bargaining in Germany have enabled capital to adjust to the requirements imposed by


a world of free markets and competition. Ironically and paradoxically in the light of the developments outlined above, codetermination has thus continued to play a decisive role in safeguarding productivity and competitiveness of German capital, at a time when many employers appear to believe they could dispense with institutionalized representation. At the time of writing it is not at all clear how codetermination and collective bargaining will look in the future. What changes and adjustment will be necessary to enable these institutions to survive in an increasingly hostile context? And will the ‘result’ still justify the label codetermination and collective bargaining (without pretending the existence of a somehow ‘golden scenario’ in the past)? Optimists like Müller-Jentsch (1998: 152) appear to envisage a ‘flexible three-tier system of governance’, where (i) labour unions and employers’ associations will continue to negotiate and agree upon sectoral framework agreements, with regional wage bargaining continuing to play an important role; (ii) detailed regulation of pay and working conditions will increasingly be negotiated at the individual firm level, the legal framework underpinning codetermination being changed accordingly; and (iii) this may be accompanied by more direct participation, for instance through team work, for workers in day-to-day affairs. Whatever the outcome, any new configuration will be the result of negotiation and mediation between individual and collective actors, with the degree of asymmetry in underlying power relations playing a crucial role. This scenario would leave it mainly to the unions to resist potentially regressive policies which appear to aggravate the spatial incongruence between regulation and accumulation by scaling down the geography of labour institutions to the level of the business firm, creating an ‘intra-firm welfare state’ to borrow a phrase coined by Esping-Andersen (1992: 145, see Figure 7.3). The extent to which IG Metall and other unions will continue to play a progressive role in the coordination of capital–labour relations will, however, depend on their ability to change their policies. We have seen that unions and worker representatives applied their considerable power predominantly in a defensive and exclusive manner, at all scale levels, be it the firm, the region or the nation-state. As such labour representatives routinely reverted to and fell back on the strategies which have become institutionalized throughout the successful post-war era. In their efforts to counter this downscaling process, union representatives must, however, look beyond defensive protection solely based on national or regional affiliation and beyond exclusionary policies serving only the narrow interests of those already in employment. Inter-regional and international cooperation of labour representatives plays a crucial role here. And there is evidence of a rethinking. German unionists in 1997 institutionalized annual meetings with colleagues in neighboring Netherlands, Belgium and Luxembourg, aiming at countering the spatial arbitrage strategies on the part of capital. Interestingly, while the remaining

The Regional Responses by Mittelstand Firms 187 Figure 7.3

The re-regulation of capital–labour relations in Germany

CROSSSECTORAL

SECTORAL

FIRM

INTERNATIONAL (EUROPEAN)

European framework agreements

European works councils

NATIONAL, REGIONAL

National alliances, Sectoral Flächentarifverträge Bündnis für Arbeit

National wage agreements

Individualization, plant specific deals, firm-level alliances

FIRM

ACTORS

Employers and Sectoral employers union federations; associations and state unions

Individual works councillors, owner/managers, workers

Source: Adapted from Schulten (1948: 491).

single union delegates at a meeting on 4–5 September 1998 were affiliated with the respective national headquarters, the IG Metall was represented by their regional NRW leader Schartau. This illustrates the crucial role of the NRW branch in initiating the cooperation (DGB, 1998). Even earlier, a similar scheme was established in 1995 between the Bavarian IG Metall and colleagues from the Czech metal union KOVO (SZ, 11 August 1998). And at


the level of larger companies there is an increasing role of European works councils, not so much for direct representation and involvement, but as facilitators and mediators of informal transnational contacts and networks.19

7.5

Conclusions

The main finding of this chapter is that, like the regional conglomerates and in contrast to their own neoliberal globalization rhetoric, Mittelstand firms regularly revert to traditional contacts and relations in the face of political–economic turbulence, supplementing market regulation with noneconomic, socio–cultural modes of coordination. This was mainly due to the utilization of favourable power positions and of contacts at the regional level. In addition to efforts to restructure in space, firms predominantly reproduced and transformed existing regional relations, building on traditionally evolved and institutionally close ties. To a large extent, power was used to cushion particular firms against environmental changes and thus against internationalization. In summary, embeddedness in traditional interaction contexts plays an important role in shaping business strategies, non-economic, socio–cultural factors at the regional and local level being deeply implicated in and mediating wider systemic ones (for instance, the role of the national political–economic context). Closer investigation of how regional embeddedness influenced inter-firm and capital–labour relations revealed a complex pattern, cooperative and competitive–authoritarian elements existing side by side. On the one hand, firms actively embedded relations to traditional regional clients and fostered cooperative relations to the workforce in the face of an increasingly hostile political–economic environment. On the other, external pressure and the costs of embedding were transmitted to traditional regional suppliers and the workforce, with formerly more cooperative relations assuming an increasingly competitive and authoritarian character. I was able to shed some light into underlying mechanisms and causes by linking the protagonists’ strategies and counter-strategies to the power resources at their disposal and to a changing power geometry as a result of dynamic change. In the case of intra-firm relations, different positions within the firm hierarchy and within the labour market have led to different consequences with regard to the labour strategies mentioned above. With regard to inter-firm relations the different positions which the firms occupied within the social division of labour have had similar effects. What is crucial is not any functionalist distinction between skilled and unskilled labour, or between (allpowerful) large and (powerless) small firms, but the degree to which individual and organizational actors are dispensable or indispensable for a given interaction partner. Restructuring strategies therefore owe much to subjective and reflexive interpretations on the part of owners and managers.


What this chapter also illustrates is that instability and turbulence originating in systemic contexts may result in affinity of interests and institutional proximity as much as increase institutional distance, resulting in a need to refine and extend a point made in Chapter 2. Examples of cooperation and similar frameworks of action in the face of external pressure should, however, not be misinterpreted as evidence for harmonious and unproblematic relations. On the contrary, cooperation between organizations and between capital and labour can be enforced, cooperation often being a result of the changing power geometry between the actors as the political–economic environment changes, above all in the light of incidents where the potentially stronger actor was able to exploit the fragmentation of weaker ones. This is as true for those sample firms which utilized the fragmentation of their workforce just as for large conglomerates which elicited cooperation from sample firms by taking advantage of inter-firm competition. On the one hand, ‘divide et impera’ strategies by more powerful actors can be interpreted as measures to minimize interaction between actors in situ, for instance, by giving unequal information to regional suppliers, on the other, as exploitation of different degrees of organizational power and command over space. Finally, by demonstrating that individual strategic action can be linked with systemic transformation, this chapter closes a gap in the argument of this book. As the discussion of the re-regulation of capital–labour relations has illustrated, dynamic change does not arise out of thin air but rather is the outcome of subjective responses to the ‘objective’ structures faced by individual actors, and the dual relation between both. By ‘objective’ I mean norms, structures and values which are pre-given and can therefore not be influenced immediately by individual actors. This should not be read as a strict separation between structure and agency; rather, my understanding is that these pre-given norms have to be enacted and translated into individual and collective action, with the result that these reference points are never static but change constantly. This will be further elaborated in Chapter 8.

8 Making the (Re)connections: Governance Dilemmas, Discursive Regulation and the Scaling of Organizational Space

Having repeatedly abstracted from the concrete and theorized the processes and mechanisms identified in the preceding chapters, I will now go a step further and critically refine the discussion in Chapters 2 and 3 in the light of the empirical findings. In order to be able to do this, I believe, it is necessary to rethink the basic propositions and assumptions underlying and guiding empirical analysis, reconnecting what has been artificially separated. This concerns the two inter-related analytical dichotomies at the heart of this book, namely the conceptual distinction between the economic and non-economic, and the relationship between social and spatial processes.

8.1 Connecting the economic and the non-economic: the negotiation of governance dilemmas 8.1.1

Competitive pressures, cooperative impulses

Starting with the first conceptual distinction, a central finding has been that overall the firms – large and small – have responded to changes in their environment by putting their faith in embedding and demarketization and thus in non-economic forms of governance. Orthodox economics by and large sees institutional proximity, tradition and embeddedness as obstacles, non-economic ‘irrationalities’ watering down instrumental economic rationality. ‘Classical’ economic thought is full of such reasoning, for instance, Adam Smith’s (1986/1776: 119) assertion that in exchange we do not address the humanity of our counterparts but their own interests and self-love, or the passage from the Eighteenth Brumaire where Marx (1985: 97) equates traditions with ‘an Alp on the brains of the living’, spirits of the past obstructing revolution and change. This contrasts 190

Making the (Re)connections 191

with the more positive notion of embeddedness found in the socio– economic literature and discussed in Chapter 2. It seems that the more complex and confusing the social division of labour, the more important processes of institutionalization and embedding become for the actors. This cooperative impulse results in a closing of ranks between employers and employees and leads to the creation of social capital with competitors, clients or suppliers. The crucial point here is the acknowledgement that in the context of business restructuring, traditional personalized and institutionally close ties may have constraining and enabling effects, empirical findings clearly confirming the ambivalent nature of institutions theorized in Chapter 2. In other words, institutional proximity can be both a precondition for and obstacle to adjustment at the same time. While on the one hand responsible for path dependence and lock-in, and thus obstructing adjustment and change, the same institutional rigidities and constraints may be functional for successful adjustment strategies. Overall this alerts us to the fact that, first, institutional proximity and place dependence can protect and enable firms as much as it can constrain adjustment; and that, second, engagement based on traditional ties can have a defensive protection as well as an offensive assertion rationale. The important role of non-economic forces notwithstanding, it would be wrong, and this should have become clear in the preceding chapters, to neglect what I have termed ‘economic imperatives’. Whether looking at the large conglomerates, the more successful Mittelstand firms, those segments of the workforce witnessing an improvement of their position within the complex power geometry, or the ‘losers’ of globalization and restructuring, each actor has – to different degrees – been faced with increasing uncertainty linked to market efficiency, transmitted via clients, financial capital and competitors, associated with variation of prizes and quantities and resulting in tremendous pressure to cut costs and streamline internal organization. In other words, alongside the ‘cooperative impulse’ there exists a contrasting trend, namely the continuing importance of markets, and thus of ‘hard’ economic regulation. As a result of ‘competitive pressures’, traditional relations are questioned and interaction structures are getting ‘disembedded’, that is the norms and rules of interaction are redefined and interpreted from a short-term, cost and prize perspective. Repeated and routinized interaction, as Storper and Salais put it (1997), has to pass the market test. As a result of this actors are necessarily faced with governance dilemmas as they adjust their relationships. These dilemmas between enabling and constraining effects of restructuring strategies, between economic and noneconomic modes of coordination and between cooperation and competition are summarized for the Mittelstand firms in Table 8.1. Governance dilemmas are particularly important with regard to a firm’s innovative

Organizational interaction, dynamic change and structural persistence

Organizational interaction

Processes of dynamic change (adjustment)

Dominant scale origin of external pressure

Strategic response

International/global ● INDUSTRIAL VS Conglomerates FINANCIAL CAPITAL increasingly ● dependent on financial capital because of internationalization/ diversification

CAPITAL–CAPITAL (1) Large–small

Large firms National/regional restructure and put Mittelstand firm under pressures

192

Table 8.1

Dominant mode of coordination

Americanization of ● Disembedding, markets corporate governance Financial integration as opposed to functional integration; holding structure profit centres

Local/regional persistence (place dependence) ●

Dependence on regional interaction structures; regional interdependencies

●

Regional interdependence; protective engagement

●

Embedding, informal or formal networks

●

Mittelstand firms comply, adjust; cheaper products, more responsibility Mittelstand firms restructure in space

●

Forced cooperation markets, disembedding

●

Non-substitutable regional ties to smaller firms; regional place dependence

●

Small firms make themselves indispensable

●

Bilateral networking, re-embedding

●

‘Tried and tested relations’; building on traditional contacts

●

Large firms acquire small firms (e.g. in ET)

●

Hierarchies

●

Table 8.1

Organizational interaction, dynamic change and structural persistence (continued) Dominant scale origin of external pressure



(2) Small–small

Regional/national Adjustment of Mittelstand firms puts competitors, suppliers and small clients under pressure

STATE–CAPITAL

CAPITAL-LABOUR

The state withdraws from active management; paradigm shift (the state as moderator, broker); fiscal crisis leads to disinvestment

Regional/national

Firms transmit pressure to labour force

Firm/regional

Strategic response

Dominant mode of coordination

Local/regional persistence (place dependence)

Cut-throat competition, race to the bottom Transmission of pressure to suppliers

●

Disembedding, markets

●

Non-substitutable regional ties to smaller firms; regional place dependence

●

Protective engagement, cartels, cooperation, business groups

●

Embedding, networks, quasiintegration

●

‘Tried and tested relations’; building on traditional contacts

●

Protective engage● Associations, ment; pooling of new corporatism resources State and semi-state agencies, intermediaries employ associational policies to assist firms

●

Based on old corporatist interaction structures, regional place dependence

Labour flexibilization strategies, casualization, intensification

●

Resistance by workforce; firms went too far

●

●

●

●

● ●

Authority, hierarchy Forced cooperation

193

194

Table 8.1

Organizational interaction, dynamic change and structural persistence (continued)



Dominant scale origin of external pressure

Strategic response

Firms get more dependent on skilled labour

Regional/firm

● ● ●

Segmentation, closing of ranks, skilling Steps to bind labour to the firm Poaching

Dominant mode of coordination ●

●

Democratic, flattening of hierarchies ‘Going informal’

Local/regional persistence (place dependence) ●

●

Dependence on labour power, tacit skills, nonsubstitutability Regional labour market structures


capacities. On the one hand, short-term protection against environmental pressure through reliance on local and regional relations may, in the long run, result in the reproduction of stable interaction structures and possibly constrain the firm’s development. On the other hand, however, the casestudy firms have shown that overlooking and discarding persistent institutional structures in the name of dynamic change runs the risk of destroying the very basis and foundation of innovation. Stable and cooperative interand intra-firm relations can be preconditions for learning. Throughout the book we have seen various examples of the tightrope walk the actors have to perform. The sample firms’ ambivalent relations to regional conglomerates lie at the heart of this paradoxical situation. Making themselves partly indispensable and being able to learn, Mittelstand firms at the same time became more dependent on their large clients, and were forced to accept the competitive pressure exerted by large capital. This in turn filtered down to their own supplier firms and to the workforce, leading to a partial transformation of their relations with key firm stakeholders. Recall the observation that the firms often appear to have gone too far and disembedded the ties to their regional partner firms and have eroded the trust of parts of the workforce precisely at a time when they have become potentially more dependent on these actors. Overall, for me the coordination of governance dilemmas, of ongoing conflicts between competition and cooperation constitutes a key problem for both the individual business firm and for the whole political-economy. It is therefore that while reliance on ‘tried and tested’ relations and traditional interaction structures has been a pervasive feature, this is by no means to argue that ‘economic imperatives’ disappear or that firms and groups of firms are able to totally isolate themselves from these pressures. And it is largely because of this that firm owners and managers constantly face difficult decisions of whether to build trust and cooperative ties to the workforce, that is to internalize the conflicts in coordinating capital–labour relations, or to rely on numerical flexibility strategies in order to minimize and externalize labour costs (see also Storper, 1995b). The same could be said with regard to inter-firm relations and the extent to which market forces cut through efforts to build social capital. Finally, the extent to which ‘economic imperatives’ may even be able to change corporate culture and organization practices is illustrated by the ‘Americanization’ trends depicted in Chapter 4. In summary, the important role of the various social and cultural factors notwithstanding, all players ultimately have to follow the rules of the game, which determine who succeeds in a capitalist market system. It is important to note that both impulses are linked together. Cooperation can be enforced, an aspect which is often absent in the debate on embeddedness and collective action. This holds for capital–labour and inter-firm relations and illustrates that organizational changes are the outcome of struggles and conflicts between interactants.


While this may in principle affect all those actors who take part in collective efforts to solve these governance dilemmas, a further crucial question concerns the distribution of the benefits associated with cooperation. We have seen that attempts to privately appropriate social capital lead to tensions and contradictions with respect to the strategies of other actors (labour, other firms, but also the state operating at various spatial levels, or the consumer) which may have different interests. Here, it is the relative power positions of the various participating actors which determine the extent to which any agent is able to influence the course of action. Overall, there are always power asymmetries in intra-firm and inter-firm relations, despite trends which may, for instance, involve more cooperative and less hierarchical structures. Furthermore, investigation of the ‘re-regulation’ of capital–labour relations shows that while power asymmetries may ultimately depend on the unequal distribution of the means of production, that is class differences in the narrow sense, there are further asymmetries within the workforce which bring about the fragmentation and segmentation processes outlined in Chapter 7. One often neglected but crucial source of power which figures prominently in this book concerns the division of labour and the position of different actors within it.1 Strategies are on the other hand influenced by the capacity of actors to produce social capital, that is sources of power which enhance the scope of potentially weaker actors to resist reorganization. Accordingly, sample firms have improved their power position vis-à-vis large clients and competitors, either by generating social capital and power resources between actors at the level of the business firm or through inter-firm cooperation. We have seen that the more successful firms were able to coordinate institutional distance and that weaker actors were in part able to enhance their power positions through cooperation, supporting propositions made in Chapter 2. Overall, the duality between competitive and cooperative impulses manifests itself in the observation that decision-makers within the firm are always confronted with governance dilemmas – or, to put is differently, with problems in coordinating crucial inter-relations with other actors. Capital owners, managers, workers and union representatives are constantly confronted with changing realities. As concrete manifestations of different solutions to governance dilemmas, ‘adjustment’ strategies are in fact realities renegotiated again and again by these actors. 8.1.2 Discursive regulation: partial representations and hegemonic rhetoric It is important to stress that all this should not be read as simply (re)reducing the social to the economic. Rather, economic institutions and conventions such as the market or price norms have themselves to be seen as being socially and culturally constructed. This brings me to the difficult


issue of representation and discourse. The scope of this book does not permit an extended discussion of what might be termed ‘cultural’ as opposed to ‘social’ turn. 2 It should suffice here to point out that critical engagement with the latter was found to be more productive for the issues at the heart of this book and therefore constitutes the conceptual underpinning of this research. Bearing in mind conceptual differences, there nevertheless are issues in the material which link up with the concerns of the ‘cultural turn’ literature and which are important for the understanding of the argument presented here. First, I would claim that the individual representations of problems and strategies are closely connected with dominant collective representations of the German social economy, or what in Germany is referred to as ‘Standortdebatte’. This holds for capital representatives in particular, as the discourse on the problems of producing in the Ruhr and in Germany testifies. Recall, for instance, the metaphorical construction of labour as ‘millstones’ around the neck of capital seeking to get more flexible and leaner. This metaphor was used frequently by the interviewees (see the quotes from the interviews with Kleefeld in Section 6.3.2 and Böckler in Section 7.3). Or the fact that, contrary to the claims made by the interviewees, collective wage agreements in Germany have in recent years significantly widened the scope for flexible time management. These collective reinterpretations of the facts then served as a justification to ‘go informal’. What the material in my view illustrates is the extent to which the hegemonic neoliberal representation of the German social economy (for instance, the discourse of overregulation and inflexible labour markets) filters down to the firm level and gets reproduced as owner-managers act according to this logic. In the specific way in which the actors make sense of the changes they take part in a wider redefinition of the Ruhr economy and the German Model more generally. Strikingly, a discursive reproduction of the economic/non-economic dualism plays an important role in this project. Both owners and/or managers as well as union representatives and works councillors legitimized their actions with ‘economic imperatives’, that is with quasi-natural competitive forces leaving an ever more limited room for manoeuvre. It is very difficult to disentangle imaginary and real pressures here, but governance dilemmas are also constituted discursively. ‘Discursive regulation’, to adopt a term used by Peet (1997), is then ultimately a question of the power of certain groups to impose their particular and partial interpretations of the processes at work on other actors. Second, both at the level of the business firm and with regard to interfirm cooperation, interviewees framed their ‘all-in-one-boat strategies’ with family metaphors. The role of ‘the other’ against which collective identities are being constructed has alternately been played by labour unions, com-


petitors, suppliers or the state. And there is an obvious instrumental logic underlying these processes of inclusion and exclusion. Produced against apparently external economic pressures, social capital is then utilized to adjust to the very standards and norms ‘dictated’ and imposed by this environment (for instance, prices, return on capital ratios, labour regulation). Although this is by no means to say that capital in its relation vis-à-vis labour, for instance, is exclusively motivated by an instrumental rationality (that is, exploiting cooperative impulses on the part of labour as a means to achieve a better competitive situation, rather than also valuing harmony and cooperation as desirable goal in itself), the fact that consent can be produced and enforced discursively is important for the argument presented here. 8.1.3 The role of wider systemic contexts: reunification and the nation-state The deliberate decision on my part to adopt a ‘bottom-up’ approach should not be interpreted as a strong ontological statement in the sense that one can neglect more far-reaching structures. While I continue to insist that an investigation like this has to take individual and collective actors and interaction seriously, I chose to represent and reconstruct the processes in the way I did mainly for analytical reasons. Approaching the issues in this way allowed me to better come to terms with what are very complex and multifaceted processes. This decision notwithstanding, the case studies clearly show the extent to which changes at the macro level left their mark on the decisions and strategies of capital and labour representatives. Globalization and more specifically reunification marked the beginning of a period of considerable uncertainty and structural change in Germany, a period which at the time of writing has not come to an end. This includes the fact that the state has in certain areas witnessed an erosion of its power to influence the course of developments (see, for instance Mahnkopf, 1997: 225). Accordingly, the environment for German capital in general was during the 1990s one of intensified competitive pressure, pressures which are, as we have seen from the perspective of small and medium-sized companies, linked to the internationalization strategies of large capital. It is in this context that what Beck (1998, my translation) termed a more general transition from ‘a political economy of security to a political economy of insecurity’ had direct implications for the sample firms. The findings of the research presented here, however, also support the argument that actors in renegotiating realities transform or reproduce wider social structures. Although the strategies investigated are to a large extent reactive subjective responses to a seemingly objective environment, one needs to go further than this. Organizational solutions to governance dilemmas and various feedback loops (transformation, reproduction) provide the link to wider systemic macro-institutional structures. In their


efforts to solve the dilemmas between reliance on traditional ‘ways of doing things’ and adjustment to economic imperatives actors always contribute to a transformation of their environment. Individual and organizational actors thus alter the systemic context at the same time as they are responding to change. And here, discursive representation plays a crucial role. Powerful representations of globalization and how the Standort Deutschland should adapt are without any doubt capable of shaping and influencing economic and political decisions. This is perhaps illustrated most clearly by the ongoing decentralization of capital–labour relations and the responses of labour market intermediaries portrayed in Chapter 7. Overall, strategic responses, whether active or relatively reactive, are shaped by a complex interplay of ‘non-economic’ and ‘economic’ forces, confronting actors with a multitude of competing frameworks. Formal and informal rules and norms, economic and socio–cultural ‘rules of the game’ do not exist independently from each other, the dilemmas and contradictions always having to be translated subjectively and being negotiated in interaction. While I would insist that building analytical categories such as the ‘economic’ and the ‘non-economic’ can be extremely fruitful, it is at the same time imperative at the end to attempt to reconnect what has been separated. With the notion of governance dilemmas and the open and subjective way in which these dilemmas may be negotiated I sought to do this. This brings me to the second analytical distinction informing the research presented in this book, namely the relation between the processes discussed above and space.

8.2 Scaling the social: spatial abstractions, organizational space and place dependence In this final section I seek to show that the processes and contradictions identified and discussed above are inherently spatial in character and can fully be accounted for only if this dimension is made visible. For this to work it is necessary to adopt a conceptualization of space which goes beyond everyday notions depicting space as a geometrical surface, a topographical extension of real material things and people. Following from the discussion in Chapter 3 we need to think through how different actors have different ways of conceiving and making sense of our world and how these powerful spatial abstractions structure and influence the strategies of the actors at the heart of the book. I will attempt to do this in three analytical steps. First, I argue that underlying the strategies and complex dilemmas of the firm stakeholders are contradictory spatial abstractions which help us to understand the seemingly heterogeneous and disorganized picture. The second step involves the question of how different spatial abstractions connect with the strategic decisions and the concrete empirical outcomes analyzed throughout the book.


Third, the notion of power asymmetry, and different abilities to control and move in space are discussed as final link in the argument. 8.2.1 Spatial abstractions: distance, proximity and the spatiality of governance dilemmas To begin with, the two conflicting forces giving rise to what I have termed ‘governance dilemmas’ can be connected with ideal-type conceptions of space. Increasing competitive pressure and ‘economic imperatives’ depicted in the interview material often appear to originate out of thin air, pressures stemming from an abstract world organized according to economic principles. This is a world of flows, of mobile capital (financial and productive) in which everything – individual products, state policies, labour standards and so on – is tested against objective market criteria. Ultimately, we are confronted with a world of distanced relations, that is, made up of acts of exchange between rational agents who act according to objective standards, a world consisting of an abstract network of flows of capital, goods and information which – in this ideal version – does away with barriers to movement and difference. In short, this is the space of flows discussed earlier, seen by the interviewees from a particular angle which justifies the label economic space. The second conception is more closely connected to concrete experience and more openly ‘visible’ in the interview texts. This concerns discourses of fencing off the other, of staking and protecting claims in an unregulated and disorganized world of flows. Here, respondents evoked common interests, proximity, the feeling of being territorially bound. Recall, for instance, evidence for cooperative efforts on the part of corporate representatives to improve the external image of the Ruhr Area (the example of the Initiativkreis Ruhr given in Chapter 5). Although these efforts can to a considerable extent be explained with ‘hard’ economic interests in the region there is more to this than simple instrumental economic rationality. Strikingly, the interviewees have frequently talked about their emotional feelings which tie them to the region. This has often been framed in a discourse complaining about the ‘negative’ image of the Ruhr Area elsewhere. The following interview excerpts illustrate this very well: We have got forests here. I could spend hours walking through forests. We have castles surrounded by water, things that catch the eye. A lot of things are represented [German: dargestellt] falsely. I notice this whenever I have got foreign business partners around. They say ‘you really have got something like this here?’ These people are looking for blast furnaces. For me this is a question of representation [German: Darstellung]. (Bauer, Gelsenkirchen) Well … let me put it provocatively: It will last another 100 years until people [from outside the Ruhr Area] find out that it is not raining soot


here anymore. Those people who come … well, I would do it this way whenever people visit me: I put them in my car and I give them the ‘Tour de Ruhr’. All my employees know that I know the Ruhr Area very, very well. I bring them to ‘Schimanski-Town’ [sic],3 I drive them to a Thyssen blast furnace and so on, but I also drive into the Ruhr Valley. (Castorp, Recklinghausen) Although little evidence exists in the Ruhr literature on the particular perceptions of entrepreneurs and managers, identity formation against negative external perceptions is a well researched feature within the Ruhr Area (see Aring et al., 1989, Ch.4). The reason for briefly raising these issues here is to point to multiple identities on the part of economic actors, the interviewees switching frequently between work-related economic rationality and more emotional everyday identification with the region. The contradictions assume a spatial quality insofar as homogeneous economic space is confronted by a feeling of being different and of living in bounded space. This is why at different spatial scales cooperation between insiders often aims at protection against outsiders. Examples given in the book include alliances between capital and labour at the firm level against other firms, price cartels of regional firms against powerful transnationals, affinity of interests between the regional state, capital and labour to prevent a hostile take-over of a traditional regional conglomerate (Thyssen) as well as societal contracts in the name of international competitiveness at the national level (Chapters 5 and 7). At the same time, however, actors expand their organizational space and accept tensions and conflicts within their traditional environment. In the Ruhr Area, conglomerates ‘disinvest’ regionally, look for new suppliers in Eastern Europe and build strategic alliances with other international players. This leads to increasing tensions with their regional workforce, traditional suppliers and state authorities. And this pressure is subsequently transmitted down the regional production chain (Chapters 4 and 6). I would therefore like to claim, following Aring et al. (1989), that the construction of individual regional realities has as profound an impact on firm owners and managers as on other members of the regional population. But to this I would like to add that decision-makers within the business firm are faced with considerable tension between different spatial abstractions, tensions which may explain the often contradictory nature of adjustment strategies. For instance, this may provide further explanation for the observation that actors embedded in traditional relations of production often go too far in their efforts to respond to pressure. This holds both for excessive disembedding and competition (leading to a destruction of valuable social capital) and for defensive cushioning from change (leading to inertia and lock-in). The finding here is that particular spatial abstractions structure strategies and frameworks of action and that


the governance dilemmas identified earlier have a particular spatial dimension. 8.2.2 Organizational space: strategic responses and upscaling conflicts Just as the heuristic distinction between the economic and non-economic, the stylized opposition between a homogeneous, globalized economic and a bounded regional space must be conceptually mediated. This can be achieved by rethinking the concept of organizational space introduced in Chapter 3. I have defined a firm’s organizational space as a conceptual shorthand for those aspects of its environment which can be actively influenced – or, to put it differently, organizational control over crucial relations with other actors in space. The ‘institutional glue’ holding organizational space together normally includes a mixture of one-sided hierarchical structures, more egalitarian network-type relations and those mediated by the market mechanism. Yet, the link between institutionalization and space deserves more scrutiny. The ambivalent nature of processes of institutionalization means that they help to define both a sense of ‘togetherness’ and identity as well as ‘outsider images of the other’, drawing and redrawing boundaries (material–territorial, social or cognitive) between insiders and outsiders (Newman and Paasi, 1998: 196). It is exactly this dialectic which helps us to understand the Janus-faced nature of organizational responses, namely a diminishing importance of boundaries and territorialization on the one hand, and a simultaneous reassertion of difference, the production of new boundaries on the other. Boundaries conceptualized in this way are at the same time the product and the symbol of power relations and processes of institutionalization. Returning to the case-study firms the question of who acquires insider and outsider status assumes a new quality at times of increasing global competition. Who belongs to the firm and to inter-firm networks? Who is covered by collective bargaining agreements? Who profits from re-regulation of capital–labour and inter-firm relations? And who loses out? By building social capital with ‘friendly’ firms, by fending off outside attacks, by laying off segments of the regular workforce, by hiring temporary labour or by restructuring the labour force qualitatively, decision-makers constantly draw and redraw boundaries at different spatial scales, and in doing so loosen or strengthen personal ties. Evidence from the Ruhr Area, but also from other regional contexts, illustrates that these processes clearly have profound repercussions for everyday life and consequently for the way spatial representations of the ‘region’ are constituted socially and culturally (see, for instance, Aring et al., 1989, or the collection of essays in Kreibich et al., 1994). This holds especially for the marginalized and the forgotten losers of these processes: the relatively ‘unskilled’, the


unemployed, people who are permanently or temporarily excluded from the labour market. Following from this, a further, and in my view important finding is that this allows a conceptualization of globalization which goes beyond notions of a quasi-natural force external to the actors involved, seeing it instead as a deeply contradictory and endogenous process. This also allows to question one-sided interpretations on the part of the interviewees, who in their discourse frequently confined the economic to the global, and the noneconomic to traditional scale levels (the region, the nation-state). ‘Scaling up’, a frequent spatial–organizational response to governance dilemmas within the sample, is therefore vexed with contradictions. On the one hand we have seen that this involves conflicts at traditional scale levels, as durable ties are becoming loosened, as well as difficulties in establishing new contacts and relations. Another crucial source of uncertainty and tension as firms attempt to expand organizational space concerns conflicts with the spaces of influence and power controlled by other actors. The case-study conglomerates, for instance, attempted to broaden the scale of their organizational space and took steps to diversify and internationalize. Even these apparently powerful firms, however, had to accept the rules of the game and standards set by the predominantly Anglo–American financial community and – as the aborted hostile take-over bid illustrates – had to revert to traditional territorial ties, interaction structures in the Rhine–Ruhr agglomeration playing a crucial role. Not surprisingly, territorial entrapment and place dependence was even more accentuated in the case of the Ruhr Mittelstand, most firms having particular difficulties in surmounting the barriers set and defined by the nation-state. As the frequent complaints about barriers to move across national borders illustrate there are further ‘organizational spaces’ which play a role here. For instance, the scale level defined by the nation-state which functions as a ‘refractor’ for upscaling strategies. At the same time firms also frequently relied on the state – national and regional – to shield markets from outside competition. Accordingly, firms are rooted in and dependent on distinct territorialized institutional contexts, that is, they are always bound regionally and nationally. In my view this should serve as a reminder that the spatial abstraction underpinning the nation-state, the Newtonian container space, which has rightly had its day as regards a theoretical geographical explanation, lingers on and still has profound implications for everyday life. 8.2.3 Spatial incongruence, power asymmetries and place dependence We have seen that the negotiation of governance dilemmas stretches across different socio–spatial scales. The emerging ‘new’ power geometry between the actors involved is linked to different abilities to move in space, to


control organizational space and to surmount mobility barriers. While firms, above all large companies, increase their organizational reach and create new economic spaces which go beyond the territory of the nationstate, place-bound and more immobile actors desperately look for ways to stem the tide. In this context, concerted efforts, be it the national alliance for employment or firm-level productivity coalitions, are too often confined to the formation of defensive coalitions, seeking to protect and conserve traditional benefits. Power resources of certain individual or collective actors are more place dependent and as such more difficult to substitute than those of others. As the spatial reach of decisions and activities differs increasingly in the wake of globalization, this ‘spatial incongruence’ disadvantages those actors whose social relations make them more place dependent. In this context, the case studies show that it is often enough to rhetorically invoke the threat of movement in order to enforce concessions in situ. The organizational capacity to control space allows dominant actors to impose social practices, norms and rules at a particular spatial scale (Swyngedouw, 1997: 146–7). Crucially, the wider social division of labour isolates less mobile actors (for instance, the unsuccessful Mittelstand firms, certain labour force segments, the unemployed) and makes even potentially more powerful ones dependent on distant invisible actors (for instance, the case-study conglomerates). A special variant of this are the ‘divide et impera’ strategies identified in Chapter 7. Thus, we have two reasons for being cautious about uncritically accepting the use of proximity implicit in much of the literature. First, while there is nothing wrong in the claim that spatial proximity in principle leads to institutional proximity, the quasi-automatic positive connotations of proximity (spatial and institutional) prominent in parts of the regional innovation system literature is challenged by the observation that institutional persistence may have regressive effects on the capacity for adjustment. One should, however, not to fall into the other extreme of uncritically generalizing the institutional persistence or sclerosis thesis. Rather, the case studies illustrate that there is an extremely thin line between constraining (that is, sclerosis) and enabling effects of institutionally close ties. This holds in particular for those at traditional scale levels. Second, the findings should additionally alert us to the fact that the ability to order and arrange time and space in order to minimize interaction or even render one group of actors invisible to another, and as such ‘production’ of distance, may be as important as the capacity to create proximity in social relations. However, it would be wrong to simply reduce these complex processes to questions of large-firm dominance over small firms or indeed capital’s hegemony over labour. The empirical findings make evident the extent to which actors in seemingly similar positions may react differently to institutional ‘constraints’ and shifting power relations. The


crucial difference between the actors is the ability to choose the combination of cooperation and competition deemed the most advantageous. Power asymmetries which can be linked to mobility differences play a major part in accounting for these differences. All this links restructuring of traditional relations and thus traditional organizational space with re-scaling. The case-study firms illustrate that processes at ‘higher’ spatial scales play an important part in the formulation of strategic responses. From a local or regional perspective globalization and inter-regional competition is used to elicit favourable conditions in situ, even if these threats only rarely translate into practice. To take up a point made by Swyngedouw (1997: 142): At the same time as businesses restructure in space and change the importance and role of certain geographical scales (for example, the reduction of regional sales; the movement across national borders), the importance and role of the same spatial scales are being re-asserted in other areas (for example, the active use of existing regional ties, or the regional and local restructuring of capitallabour relations). At the same time we have seen that strategies dealing with governance dilemmas locally and regionally feed back to wider systemic contexts. Individual actors and groups of actors interpret and ‘translate’ globalization processes and changes in their environment. In doing so, they ‘regionalize’ processes of dynamic change, be it for production and consumption reasons (for instance, location of production facilities), for ‘normative–political’ reasons (for instance, territorialized policies by the nation-state or regional governments) or for emotional, social and cultural reasons (for instance, regional identity, personal ties, the existence of social capital) (see Werlen, 1997, Ch.6). Processes of regionalization at different spatial scales in turn conflict with the ‘boundaries’ and constraints set politically–administratively, market–economically or socio-culturally and these conflicts often result in a partial transformation of the systemic environment as actors are forced to adjust. It makes sense therefore to conceptualize institutionalization as a finely articulated compromise between inclusion and exclusion, a power compromise which is linked to mobility differences and to the capacity to influence the movement of labour, capital or information. Some of the spatial scale contexts produced by these institutionalization processes are relatively ‘fixed’ (for instance, the nation-state) others are more porous and flexible, for instance corporate organizational spaces or spaces produced by movements of people or ideas. All of them are, however, deeply intertwined with each other, individual and collective actors being embedded in a complex configuration of spatial scales in which firm owners, managers and workers interact and draw upon different power resources.

Appendixes Appendix A: the sampling process, data collection and data analysis After a preparatory visit to the Ruhr in spring 1995 and pilot interviews in June 1995, interviewing started in September 1995 (see Appendix B, p. 214, for a list of the interviews). Empirical investigation started from the perspective of selected firms in the region and followed their strategic responses to changes in their environment. This involved three crucial sets of relations: inter-firm, capital–labour and firms/noneconomic organizations (for instance, associations, state agencies). As pointed out in Chapter 3, empirical research needs a precise definition of the scales it intends to work on. While the national and international level provided few difficulties, the definition of the regional and local was more problematic. The conceptualization of the former is discussed in detail in Chapter 3. The question of what constitutes the local scale was solved by concentrating empirical research on three localities in the Ruhr: the cities of Essen and Gelsenkirchen, and the county of Recklinghausen (see Map A.1). Limiting empirical inquiry to this ‘sub-region’ had the advantage of allowing coherent sampling and reference to a limited number of local authorities and local intermediaries. These localities were selected according to the following criteria. In the light of the north-south divide in the Ruhr I wanted to include firms from both the ‘prosperous’ Hellweg and the less well off Emscher-Lippe regions. The choice of the central Ruhr Area (that is, Essen, Gelsenkirchen), as opposed to the east (that is, Dortmund) and the west (that is, Duisburg) was made mainly for pragmatic reasons. On the one hand, the majority of large regional firms have their headquarters in Essen, on the other, Gelsenkirchen has been one of the foci of recent regional regeneration initiatives in the Emscher-Lippe region.

Sampling the regional Mittelstand The regional *Mittelstand constitutes the core of empirical investigation. To start with, I used detailed quantitative employment data to specify the weight of single industries and sectors both in the Ruhr Area as defined by the *Kommunalverband Ruhrgebiet and in the three localities. For this purpose, I drew from the most recent figures available in the Sozialversicherungsstatistik (social insurance statistics), constituting the most reliable and comprehensive data source for the study of the sectoral distribution of employment (see Keeble et al., 1990, for a discussion of advantages and disadvantages of this data source). Table A.1 summarizes the employment distribution according to main industries, distinguishing between the Ruhr Area and Essen, Gelsenkirchen and Recklinghausen, respectively. The overall picture within ‘manufacturing’ shows a dominance of the traditional core industries, namely ‘energy and mining’, ‘chemicals’ and ‘iron and steel’. This illustrates the continuing importance of the coal, iron and steel complex for the region, with the consequence that restructuring of inter-firm and capital–labour relations in the Montancluster still has a profound impact on the regional political economy. Because of the weight of these sectors both in terms of total employment and turnover I selected Mittelstand firms from the ‘metal industry’, with special 206

Map A.1

The Ruhr Area, counties and cities

Haltern Kreis Recklinghausen

Dorsten

Hamminkeln Schermbeck Xanten Sonsbeck

Wesel

Marl

Honxe Kreis Wesel Voerde Alpen Rheinberg Karnp-Lintford

NeukIrchenVluyn Moers

Bottrop

OerErkenschwick

Lünen

hausen

Oberhausen

Molheim

Bergkamen

Bönen Kamen Kreis Unna Unna

CastropRauxel

Heme Dortmund

HolzFröndenburg wickede

Bochum Duisburg

Weme Hamm

Waltrop

Herten Reckling-

Gladbeck Gelsenkirchen

Dinslaken

Selm

Datteln

Essen

Wilten Ennepe-Ruhr

Hattingen

Kreis

ke ec

rd He

Schwerte

Wetter

Hagen

Sprock- Gevelshövel berg

Schwelm

Ennepetal

Breckerfeld

207

Table A.1

Regional and local employment distribution, according to main industries, 1994

1994 Agriculture Energy, mining Chemicals, plastics Iron, steel, metal Mechanical engineering Vehicles Electrical technology, engineering Optics, precision instruments Wood-processing, paper, printing Textiles, shoes, leather Food, tobacco Construction Trade Transport, media Banks, insurance Hotels, restaurants Cleaning Science, arts Health, veterinary Legal advice Other services Organizations Public service Total

Essen Share

1994

Gelsenkirchen

Recklinghausen

1994

Share

1994

Share

9 463 100 146 68 055 129 612 60 013 35 712 48 914

0.62 6.54 4.45 8.47 3.92 2.33 3.20

1 233 10 632 7 375 6 410 3 552 2 486 11 207

0.55 4.77 3.31 2.88 1.59 1.12 5.03

925 20 968 11 575 7 341 3 792 2 161 2 783

0.67 15.24 8.41 5.33 2.76 1.57 2.02

1 303 21 593 17 859 6 000 2 317 2 280 2 189

0.86 14.31 11.83 3.98 1.54 1.51 1.45

24 617

1.61

3 059

1.37

1 516

1.10

1 405

0.93

28 781

1.88

5 507

2.47

2 475

1.80

1 686

1.12

11 643 35 224 107 860 236 685 84 232 47 116 24 163 30 926 63 658 113 872 28 792 110 773 46 542 84 037 1 530 836

0.76 2.30 7.05 15.46 5.50 3.08 1.58 2.02 4.16 7.44 1.88 7.24 3.04 5.49 100.00

1 140 3 270 18 567 40 236 12 709 9 017 4 040 4 081 13 138 16 365 7 173 24 249 8 522 8 912 222 880

0.51 1.47 8.33 18.05 5.70 4.05 1.81 1.83 5.89 7.34 3.22 10.88 3.82 4.00 100.00

1 665 4 044 9 175 18 480 5 863 3 115 2 172 2 801 4 442 9 944 1 705 8 564 4 112 8 009 137 627

1.21 2.94 6.67 13.43 4.26 2.26 1.58 2.04 3.23 7.23 1.24 6.22 2.99 5.82 100.00

1 124 5 261 11 731 20 844 5 027 3 521 2 014 2 384 4 832 13 150 2 567 10 045 3 100 8 683 150 915

0.74 3.49 7.77 13.81 3.33 2.33 1.33 1.58 3.20 8.71 1.70 6.66 2.05 5.75 100.00

Share

Data source: Sozialversicherungsstatistik (unpublished); regional break-down according to Labour office districts.

208

Ruhr Area

Appendixes 209 emphasis on engineering. In the light of these findings my first intention was to focus solely on manufacturing and to leave out ‘service’ firms. However, during my introductionary interviews with regional experts I was additionally alerted to the fact that large regional firms increasingly pursue vertical disintegration strategies and purchase inputs hitherto provided in-house from smaller Mittelstand firms. This in particular concerned small plant engineering firms and consultancies engaged in traditional planning and construction (‘engineering consultants’) and in computerized process technology for industrial use (‘computing consultants’). I therefore decided to include producer service firms with close links to the industrial core in the sample. In order to control for the fact that regional embeddedness can be expected to be closely linked to the age of the firms, I then set up two groups of firms, older traditional businesses and ‘young’ ones. With the exception of the electrical engineering firm Schrella and plant engineer Stiller in the second sample group I chose the year 1970 as the threshold for ‘old’ and 1980 for ‘younger’ firms. These thresholds were defined after consultation of officials at the local chambers of industry and commerce and other regional experts during a preparatory visit in April 1995. In order to provide for as representative a sample as possible, I chose the Hoppenstedt Directories of large and medium-sized firms as a comprehensive source from which to start the selection process. Only those firms were included as ‘Mittelstand’ firms which were independent and which had fewer than 500 employees in the Ruhr Area according to the data sources. Overall, sampling involved three procedural steps which I will illustrate by the example of Gelsenkirchen. First, I started with the most up-to-date source, the Hoppenstedt Directory of ‘large’ businesses from 1995. Here, only firms with 100 employees and more and/or a turnover of DM 10m and more are listed according to cities and counties, giving information about address, contact persons, sectoral focus, turnover and employment. After excluding all firms which did not belong to the metal industry and to mechanical and electrical engineering, or to the chosen producer services and which were dependent on other firms, this generated for Gelsenkirchen a frame of 14 firms, six firms ultimately agreeing to take part, five in group I (Papke, Kundmüller, Gagsteiger, Biberkopf, Meck) and one in group II (Pfeifer). The remaining firms were drawn from the Hoppenstedt Directory for ‘medium’ firms (20–100 employees and DM 2–10m turnover) and from the catalogue of the 1995 Europartenariat, which was held in the Ruhr Area. For Gelsenkirchen, the second Hoppenstedt Directory provided seven potential contacts (two successful in group II: Stiller and Bauer) and the Europartenariat catalogue the same number of candidates with two further successful contacts in group II (Trischler and Jäger). Note that the Europartenariat source was used only to fill the gaps left by the first two steps of sampling.

The regional conglomerates The Ruhr Area proper at the time of interviewing contained the headquarters of four of the 20 largest German industrial corporations, the number increasing to six if companies such as VEBA and Mannesmann are included which have their headquarters in neighboring Düsseldorf and conduct a considerable part of their activities in the Ruhr. In the course of my first interviews with owners and/or managers of Mittelstand firms and after consultation of experts from local chambers of industry and commerce, I identified four regional case-study conglomerates whose strategies have profound effects on the Mittelstand and the region: Ruhrkohle AG, Thyssen AG, RWE AG and Veba AG (see Table A.2)

210 Appendixes Table A.2

Mittelstand contacts to regional conglomerates, 1995–61 Regional conglomerates as

Thyssen RWE Ruhrkohle VEBA Krupp–Hoesch Mannesmann Babcock

Clients

Competitors

Total

13 11 9 10 9 10 2

2 2 0 0 1 1 1

15 13 9 10 9 11 3

Note: 1 As specified by interview partners. Note that some firms were unwilling to specify clients by name.

Historically, the destiny of these four regional conglomerates has been closely intertwined with the region’s economic development path, the companies following the general technological and industrial evolution of the regional economy and at the same time leaving their mark on the economic, political and social fabric of the region. This holds in principle also for Veba which has its roots in northern Germany and after the Second World War moved its headquarters to Düsseldorf. Important activities today can still be traced back to the early years of industrialization. This is true for steel, coal mining, electricity generation and distribution as well as chemicals, and for large parts of service activities (for example, trading, real estate). Information on recent developments was gathered using the following approach. Before conducting the interviews, I acquired an overview of the strategic development with emphasis on the four companies’ activities in the Ruhr and the Essen–Gelsenkirchen–Recklinghausen area, focusing on the time period since 1980. For this purpose, I used company reports and the newspaper archive of the Kommunalverband Ruhrgebiet, containing the main national and all regional and local newspapers. This general information was deepened in interviews with senior members of the central planning departments at the Ruhrkohle and RWE headquarters, and at Thyssen’s engineering and at Veba’s oil and chemicals division, all of them located in the Essen–Gelsenkirchen–Recklinghausen area. In a second step I identified key themes and issues which I pursued further by targeting and interviewing key experts from different divisions and departments. This concerned sourcing and relations to regional suppliers, and in-depth investigation of the strategic development in newer activities, namely telecommunications (TC) (Thyssen, RWE, Veba) and environmental technology (ET) (Ruhrkohle). A further crucial theme which emerged during empirical research on the regional conglomerates had to do with internationalization and the increasing influence of international financial actors on corporate governance. In order to investigate this issue, it was necessary to obtain information on how my companies were viewed and judged by the international financial community. Here, a CD-ROM investigation of the Financial Times and the Economist from 1987 onwards produced valuable data and information. The choice of these data sources appeared reasonable given the

Appendixes 211 importance of Anglo–American investors and the crucial role of both newspapers in shaping the perceptions and attitudes of the international financial community. Again, this background material was used as a base on which to ground two interviews with a member of corporate finance of DG Bank Frankfurt.

Capital–labour relations and labour market intermediaries The effects of restructuring on the relations between employers and employees and on the regional labour market were investigated, following a ‘scale-by-scale’ approach. This started at the level of the individual firm, conducting additional interviews with selected works council representatives at the Mittelstand firms and the conglomerates. With respect to the former, investigation was obviously limited to those firms which at the time of interviewing had set up a works council. Given the sensitivity of labour issues at a number of the more traditional firms, contacts were made via the local IG Metall (the metal workers’ union) offices, where I was provided with names and private phone numbers. I decided to conduct telephone interviews, calling works councillors privately after work. The situation at the conglomerates was much easier in this respect. According to the Betriebsverfassungsgesetz (= code on the constitution of companies) works councilors in companies with 300 employees and more are exempted from work, being able to devote their whole time for the representation of labour interests. In large companies labour representatives therefore have their own offices, with secretary and staff, and are thus more approachable. In order to get a critical perspective on recent diversification efforts and because of the absence of labour representatives in the newer service activities, I interviewed works council members from traditional divisions, that is, from the Thyssen steel, Ruhrkohle mining and RWE electricity generation divisions. At the next level I talked to the Essen and Gelsenkirchen IG Metall representatives, asking about their view of and experience with my sample firms and about more general developments. To this I added interviews with IG Metall, DGB and employers’ representatives at the Ruhr and the Land NRW level.

Experts, politicians, intermediaries In parallel with my investigation of businesses and in addition to experts from labour market intermediaries, I interviewed decision-makers within the spheres of administration, politics and economic development. Again, contact persons were drawn from different scale levels. At the local level this included the chambers of industry and commerce in Essen and Gelsenkirchen and economic development agencies. Regionally, I included intermediaries and development agencies covering the Ruhr Area (for instance, IKS or IR) and representatives of the Land government. Finally, I interviewed senior representatives at the Federal and European level, investigating vertical political relations and inquiring about the role of the Ruhr and NRW within the German and the European context.

Interviewing For the purpose of my project both extensive and intensive research was needed and this translated directly into a combination of qualitative and quantitative methods to generate data and information. The aim of the research underlying this book was to understand and explain the extent to which strategic responses to environmental turbulence are shaped by embeddedness in specific political–economic systems and

212 Appendixes in socio–cultural structures. In addition to aspects such as the percentage of local suppliers or export shares ‘non-economic’ ones such as production culture, nonmarket networks, channels of communication and shared conventions assume a crucial role. These issues can be tackled only with a qualitative research design. Qualitative methods, above all the semi-structured interview, therefore lie at the heart of this book. Overall, I prepared lists of guiding questions for four interview situations: (1) The regional Mittelstand; (2) Large-firm representatives; (3) Labour and works council representatives; (4) Regional experts. With regard to the time period covered, I generally focused on recent developments, covering the period 1990–5. This was complemented by extensive background reading and investigation of earlier periods and also by selected questions which probed further into the past where necessary. It should be noted that owners and managers of smaller firms often found it difficult to specify in detail incidents which had not occurred during the immediate past. This in particular involved questions on the role of personal ties and ‘non-economic’ governance. Interviews had a duration of between 90 minutes and 2 hours on average. The semi-structured interview was not used in isolation; rather, I used additional qualitative and quantitative methods. In this context, quantitative data served three purposes. First, as outlined earlier, extensive use was made of statistical data during the sampling process. Second, I drew upon various data sources in order to crosscheck claims by my respondents. With regard to the Mittelstand, for instance, this involved comparison of data on key indicators, such as turnover or employment. For this purpose, I used previous editions of the Hoppenstedt Directories, and – in some cases – data made available by my contact persons at the chambers of industry and commerce. With this I was able to make judgements on the reliability of my respondents. This is important given that from a certain firm size onwards one often ends up with specialized experts. Managers in charge of the personnel portfolio, for instance, often have limited knowledge about marketing or production organization. It should be added that this was a problem only at the larger Mittelstand firms and at the conglomerates. Finally, secondary data was used to put some of the main findings into a wider context. This involved quantitative information, but also selective case studies taken from newspaper coverage and from recent empirical research.

Data analysis The techniques with which to analyze the collected data differed according to the data sources. Quantitative statistical data was predominantly used in the form of time-series, setting individual case-study data, for instance data on the Ruhr Area or on the four conglomerates, in context. My extensive analyses of newspaper material took two forms. First, I collected relevant ‘context’ material, involving economic and political–regulatory developments at different spatial scales, distinguishing between regional (that is, Ruhr Area and NRW), national and international developments. Second, I gathered information according to crucial events, such as the Krupp–Thyssen hostile take-over bid, the debate around the Bündnis für Arbeit or the deregulation of the European telecommunications market. This material was then systematically analyzed connecting my interviewees’ specific experiences and judgements with developments at the macro level. Analyses of the qualitative data were far more complicated and required constant rethinking and refinement. After reviewing the extensive literature on qualitative research methods in sociology and anthropology (for instance, Lamnek, 1989; McCracken, 1988; Silverman, 1993; Strauss and Corbin, 1990), I decided to follow an

Appendixes 213 approach which analyzes the complete text of the interview transcripts in various stages, coding and categorizing the data, the codes stemming both from the theoretical literature and directly from the interviews. Finally, a few words about presentation of the interview data are necessary. Wherever possible, the interview material is used in as original a way as possible. This said, interview excerpts are of course translated into English, inevitably taking away some of their original meaning. It goes without saying that interviews did not always provide readily quotable material. In these cases I summarized the main points and indicated the data source at the end of the section. In order to deal with the problem that direct quotes inevitably have to bear a great weight of explanatory baggage I make extensive use of endnotes and include detailed additional firm-based information. I should additionally stress that interviews with Mittelstand owners and managers were conducted confidentially and that the names of the firms have therefore been altered.

Appendix B: list of interviews Mittelstand firms Owners and/or managers Papke Jäger Meck Kundmüller Stiller Biberkopf GKN–GWB* Gagsteiger Kleefeld Parsunke Mair Krokowski Bauer Morgott Scholsdorff Schraml Reinhold S. Kuhn Roßmann Behrens Kroner Schrella Trischler Fähmel Nettlinger Böckler Castorp Schlömer Pfeifer

Owner-manager, 13.9.95, Gelsenkirchen Owner-manager, 14.9.95, Gelsenkirchen Owner-manager, 18.9.95, Gelsenkirchen Manager, 19.9.95, Gelsenkirchen Owner-manager, 20.9.95, Gelsenkirchen Owner-manager, 20.9.95, Gelsenkirchen Manager, 26.9.95, Essen Owner-manager, 11.10.95, Gelsenkirchen Owner-manager, 12.10.95, Essen Owner-manager, 16.10.95, Essen Owner-manager, 17.10.95, Essen Owner-manager, 18.10.95, Essen Owner-manager, 18.10.95, Gelsenkirchen Manager, 23.10.95, Essen Owner-manager, 23.10.95, Essen Owner-manager, 26.10.95, Recklinghausen Owner-manager, 6.11.95, Recklinghausen Owner-manager, 9.11.95, Essen Manager, 14.11.95, Recklinghausen Owner-manager, 15.11.95, Recklinghausen Owner-manager, 17.11.95, Essen Manager, 17.11.95, Recklinghausen Owner-manager, 22.11.95, Gelsenkirchen Owner-manager, 23.11.95, Essen Owner-manager, 28.11.95, Recklinghausen Owner-manager, 30.11.95, Essen Owner-manager, 2.5.96, Recklinghausen Owner-manager, 3.5.96, Essen Owner-manager, 6.5.96, Gelsenkirchen

Works council representatives Morgott II* Reinhold II* Parsunke II* Kroner II* GKN–GWB II

IG Metall, 13.5.96, Essen IG Metall, 13.5.96, Recklinghausen IG Metall, 13.5.96, Essen Non-union, 29.5.96, Essen IG Metall, 11.6.96, Essen

Conglomerates Management RAG I

RAG II

(a) Senior member of Strategic Planning, Ruhrkohle AG and (b) Head of Macroeconomy and Energy, Ruhrkohle AG, 26.10.95, Essen Senior member of the Central Purchasing Division, Ruhrkohle Bergbau, AG, 6.5.96, Herne 214

Appendixes 215 RAG III RWE I RWE II RWE III* RWE V* THY I THY II VEBA I VEBA II*

Manager, Ruhrkohle Umwelt, 9.5.96, Bottrop Senior member of Group Development, RWE AG, 10.10.95, Essen Senior member of Public Relations, RWE Telliance AG, 10.6.96, Essen Head of Central Purchasing, RWE AG, 17.10.96, Essen Senior member of Personnel and Recruitment, RWE AG, 14.05.97, Essen Director, Thyssen Industrie AG, 17.10.95, Essen Assistant to the chief executive, Thyssen AG, 30.4.96, Düsseldorf Member of Group Development, Veba Oel, 16.11.95, Gelsenkirchen Member Public Relations, Veba AG, 07.05.97, Düsseldorf Requests for interviews with members of Vebacom, Veba’s telecommunications subsidiary were turned down.

Works council representatives RAG IV RWE IV* THY III

Head of *Gesamtbetriebsrat, Ruhrkohle Bergbau AG, and member of Supervisory Board, Ruhrkohle AG, 9.5.96, Essen Head of *Gesamtbetriebsrat, RWE Energie AG, 03.02.97, Biblis Member of Works Council, Thyssen Stahl AG, 03.05.96, Duisburg

Experts Financial markets FIN I Member of corporate finance, DG Bank Frankfurt, 8.11.96, London FIN II Member of corporate finance, DG Bank Frankfurt, 16.2.97, Nürnberg

Mittelstand firm consultants CONSULT IKS

Owner-manager of a private strategic consulting firm, 8.5.96, Essen Senior manager Innovations- und strukturpolitische Beratung für die Metallindustrie im Ruhrgebiet (IKS), 20.06.96, Bochum

Regional research institutions IAT RWI ZEUS

Senior Researcher Institut Arbeit und Technik, 19.4.95, Gelsenkirchen Senior Researcher, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, 9.11.95, Essen Representative of Zentrum für innovative Energieumwandlung und -speicherung GmbH, 13.05.96, Gelsenkirchen

Political decision-makers and intermediaries EU BUND

Senior official, European Commission DG 16/D (Operations in regions affected by industrial decline), 24.10.95, Brussels Member of the Federal Parliament and former Minister of the Land Government NRW, 21.11.95, Bonn

216 Appendixes LAND I

LAND II

EMPL NRW DGB NRW IGM RUHR IR ELA ZENIT CITY GE I CITY GE II IHK GE IGM GE EMPL GE CITY E IHK E IGM E BFZ HEG

Senior official Regional Structural Policy, Ministry for Economic Affairs, Mittelstand and Technology Land NRW, 25.09.95, Düsseldorf Senior official Mittelstandsförderung, Ministry for Economic Affairs, Mittelstand and Technology Land NRW, 06.09.95, Düsseldorf Official, Employers Association NRW, 30.4.96, Düsseldorf Official, Federation of German Labour Unions, 27.10.95, Düsseldorf Senior official of IG Metall District Dortmund, 7.5.96, Dortmund Managing Director Initiativkreis Ruhrgebiet (IR), 20.11.95, Essen Senior official Emscher-Lippe-Agentur (ELA), 05.09.95, Herten Head of Zentrum für Innovation und Technik (ZENIT), 29.11.95, Mülheim Senior official Economic Development Department City of Gelsenkirchen, 11.10.95, Gelsenkirchen Senior official Economic Development Department City of Gelsenkirchen, 26.10.95, Gelsenkirchen Managing Director IHK Gelsenkirchen, 18.10.95, Gelsenkirchen Senior official IG Metall Gelsenkirchen 10.6.96 Owner-manager Gagsteiger and head of the Employers’ Association Gelsenkirchen, 11.10.95, Gelsenkirchen Senior official Essener Wirtschaftsförderungsgesellschaft (EWG), 01.09.95, Essen Senior official IHK Essen, 12.9.95, Essen Official IG Metall Essen 7.5.96 Manager Berufsförderungszentrum Essen, 8.5.96 Head of Hertener Entwicklungsgesellschaft (HEG), 16.10.95, Herten

* Telephone interviews.

Appendixes 217

Appendix C: external pressure and the role of regional conglomerates Firm

External pressure

Regional conglomerates

Bauer

Restructuring of regional and national clients

Clients: Thyssen RWE VEBA Krupp–Hoesch Mannesmann

Behrens

recession restructuring of regional large clients regional competition

Biberkopf

‘Standort Deutschland’ (labour, tax) DM revaluation international competition

Böckler

international and national competition Clients: recession Thyssen ‘Standort Deutschland’ (red tape, labour costs) Ruhrkohle national and regional competition Æ concentration Mannesmann restructuring of clients

Castorp

recession national competition ‘Standort Deutschland’ (labour, finance)

Clients: Thyssen RWE Mannesmann

Fähmel

restructuring of clients recession ‘Standort Deutschland’ (tax, labour)

Clients: Ruhrkohle

Gagsteiger

‘Standort Deutschland’ (labour costs) recession International competition restructuring of national and regional large clients

Jäger

restructuring of regional large clients recession

Clients: Thyssen VEBA

Kleefeld

restructuring of national large clients recession ‘Standort Deutschland’ (tax)

Clients: Thyssen Krupp–Hoesch Mannesmann

Krokowski

international competition recession restructuring of regional and national large clients international relocation of large clients ‘Standort Deutschland’ (labour costs)

Clients: Ruhrkohle

218 Appendixes

Appendix C

continued

Firm

External pressure


Kroner

national clients Æ demand recession restructuring of regional large clients international competition

Clients: Thyssen RWE Krupp–Hoesch Babcock Mannesmann

Kundmüller

international and national competition ‘Standort Deutschland’ (labour costs)

Mair

recession national competition ‘Standort Deutschland’ (labour costs)

Meck

‘Standort Deutschland’ (labour costs) restructuring of regional large clients Æ firm death, international relocation Demand Æ recession

Morgott

‘Standort Deutschland’ (interest rates, labour costs) restructuring of clients regional competition

Clients: VEBA Competitors: Mannesmann Clients: RWE

Clients: Thyssen Ruhrkohle

Nettlinger

recession regional large clients Æ firm death, international relocation restructuring of clients

Clients: Thyssen RWE Ruhrkohle VEBA

Papke

‘Standort Deutschland’ (labour costs, tax, red tape) Clients: recession Thyssen national and international competition

Parsunke

national demand, recession restructuring of regional large clients Æ international relocation international and national competition ‘Standort Deutschland’ (labour costs)

Clients: RWE VEBA

Pfeifer

recession restructuring of regional large clients ‘Standort Deutschland’ (labour)

Clients: VEBA Krupp–Hoesch Babcock Competitors: Krupp–Hoesch

Appendixes 219

Appendix C

continued

Firm

External pressure


Reinhold

recession ‘Standort Deutschland’ (labour regulation) restructuring of large clients regional competition

Clients: RWE Ruhrkohle VEBA

Roßmann

‘Standort Deutschland’ (labour costs, tax) restructuring of national large clients international and national competition Æ concentration

Clients: RWE Competitors: RWE Ruhrkohle Babcock

S. Kuhn

National and international competitors buy SMEs; concentration international and national competition international relocation/death of large clients DM revaluation ‘Standort Deutschland’ (labour costs)

Clients: Thyssen RWE Krupp–Hoesch Mannesmann

Schlömer

regional competition large competitors restructuring of regional large clients demand Æ recession

Clients: Thyssen Ruhrkohle VEBA Krupp–Hoesch Mannesmann

Scholsdorff

‘Standort Deutschland’ (red tape, labour regulation) national competition restructuring of national large clients

Clients: RWE Mannesmann

Schraml

‘Standort Deutschland’ (labour regulation) DM revaluation international and national competition

Clients: Ruhrkohle VEBA Competitors: Thyssen

Schrella

national and regional competition recession restructuring of regional large clients

Clients: RWE Ruhrkohle Krupp–Hoesch

Stiller

recession national and regional competition ‘Standort Deutschland’ (labour) DM revaluation restructuring of regional and national large clients Æ internationalization, relocation

Clients: Thyssen Krupp–Hoesch Mannesmann

220 Appendixes

Appendix C

continued

Firm

External pressure


Trischler

restructuring of regional large clients recession regional competition

Clients: Thyssen Krupp–Hoesch Mannesmann VEBA

Appendix D: performance indicators of the Mittelstand sample firm, 1995 (I) Group I

Traditional core firms, founded 1970 and earlier

Firm

Location

Activity

Year of foundation

S. Kuhn

Essen

Mechanical Engineering

1955

Reinhold

Recklinghausen

Mechanical Engineering

1955

Employment 1995 1990–5

62 3

140

+24% +33%

4

Profits (+) and Losses (–) 1990–5

Turnover (m DM) 1995 1990–5

International inputs

Regional Sales1 (% of turnover)

Exports (% of turnover)

20

ca.30%

40–50%2

40%

+

+

+

+

+

+

ca.10%

60–70%

10%

+

+

+

+

+

+

22

+18% +83%

4 5

7

Meck

Gelsenkirchen

Metal Processing

1889

150

±0

30

+67%

70–80%

10%

+

+

+

+

+

+

Schraml

Recklinghausen

Metal Products

1920

86

–9%

20

+33%

ca.50%5

20–30%

40–50%

+

+

–

–

+

+

Gagsteiger

Gelsenkirchen

Machinery Equipment, Parts

1884

205

–33%

63

+24%

ca.40%

30–40%

25%

+

+

–

–

+

+

Kundmüller Parsunke

Gelsenkirchen Essen

Plant Engineering Electrical Engineering

1945 1922

700 390

–13% –14%

60 60

–8% +28%

ca.5% ca.5%

80–90%2 50–60%

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Europe Inc.: Regional and Global Restructuring and the Rise of Corporate Power

Europe Inc.: Regional and Global Restructuring and the Rise of Corporate Power

The Globalization of Corporate Governance

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Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany

Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany

Balkan as Metaphor: Between Globalization and Fragmentation

Mergers and Acquisitions Security: Corporate Restructuring and Security Management

Between a Clutch and a Hard Place

Between a Heart and a Rock Place

Between a Ridge and a Hard Place

Between a Ridge and a Hard Place

Between a Clutch and a Hard Place

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Corporate Germany Between Globalization and Regional Place Dependence: Business Restructuring in the Ruhr Area

Corporate Restructuring

The Place In Between

Mergers, Acquisitions and Corporate Restructuring

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Appalachia and America: autonomy and regional dependence

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Globalization and Educational Restructuring in Asia and the Pacific Region

Corporate Restructuring and Industrial Research and Development

Corporate Restructuring: Finance in Times of Crisis

Dependence Analysis (Loop Transformation for Restructuring Compilers)

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Contests for Corporate Control: Corporate Governance and Economic Performance in the United States and Germany

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Between a Ridge and a Hard Place

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